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

                                    FORM 10-Q

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

                  For the quarterly period ended March 31, 2005

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

                  For the transition period from ________ to __________

                         Commission File Number: 0-19684

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

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

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

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

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

                  YES |X|         NO |_|

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

                  YES |X|         NO |_|

      Indicate  the  number of shares  outstanding  of each of the  registrant's
classes of common stock, as of March 31, 2005.

Common Stock $.01 Par Value Per Share                         17,647,279 Shares
--------------------------------------------------------------------------------
(Class)                                                         (Outstanding)


                                       1
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2005

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

        Consolidated Statements of Financial Condition
        as of September 30, 2004 and March 31, 2005                               3

        Consolidated Statements of Operations for the three
        months ended March 31, 2004 and 2005                                      4

        Consolidated Statements of Operations for the six
        months ended March 31, 2004 and 2005                                      5

        Consolidated Statements of Stockholders' Equity
        and Comprehensive Income for the six months ended
        March 31, 2004 and 2005                                                   6

        Consolidated Statements of Cash Flows for the six
        months ended March 31, 2004 and 2005                                    7-8

        Notes to Consolidated Financial Statements                             9-14

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

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

     4. Controls and Procedures                                                  29

Part II - Other Information
Item
     1. Legal Proceedings                                                        30

     2. Unregistered Sales of Equity Securities and Use of Proceeds              30

     3. Defaults Upon Senior Securities                                          30

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

     5. Other Information                                                        30

     6. Exhibits                                                              30-31

Signatures                                                                       32

Exhibits

     31(a) Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer)      33

       (b) Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer)      34

     32(a) Section 1350 Certification (Chief Executive Officer)                  35

       (b) Section 1350 Certification (Chief Financial Officer)                  36
</TABLE>


                                       2
<PAGE>

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

<TABLE>
<CAPTION>
                                                            September 30,       March 31,
                                                                2004              2005
                                                                ----              ----
                                                                     (Unaudited)
                                                                   (In thousands,
                                                                 Except share data)
<S>                                                         <C>               <C>
ASSETS:
Cash and amounts due from banks                             $    28,401       $    35,356
Short-term interest-bearing deposits                              1,251             4,221
Investment securities available for sale                         23,449            21,775
Mortgage-backed securities available for sale                   374,283           437,682
Investment securities held to maturity                            7,840            10,000
Loans receivable (net of allowance for loan
  losses of $11,077 at September 30, 2004 and
  $11,768 at March 31, 2005)                                    790,730           857,988
Loans receivable held for sale                                    8,246             6,418
Real estate acquired through foreclosure                            785               534
Office property and equipment, net                               18,844            20,315
Federal Home Loan Bank stock, at cost                            16,900            16,367
Accrued interest receivable on loans                              2,877             3,369
Accrued interest receivable on securities                         2,473             2,277
Cash value of life insurance                                     21,627            22,101
Other assets                                                      7,779            10,943
                                                            -----------       -----------
                                                            $ 1,305,485       $ 1,449,346
                                                            ===========       ===========

LIABILITIES AND STOCKHOLDERS' EQUITY:

LIABILITIES:
Deposits                                                    $   753,379       $   891,469
Securities sold under agreements to repurchase                  107,173           136,000
Advances from Federal Home Loan Bank                            328,507           302,157
Junior subordinated debt                                         15,464            15,464
Drafts outstanding                                                2,792             4,279
Advances by borrowers for property taxes and insurance            1,750             1,069
Accrued interest payable                                          1,502             1,994
Other liabilities                                                 9,570             7,380
                                                            -----------       -----------
                                                              1,220,137         1,359,812
                                                            -----------       -----------

STOCKHOLDERS' EQUITY:
Serial preferred stock, 1,000,000 shares authorized
  and unissued                                                       --                --
Common stock, $.01 par value, 25,000,000 shares
  authorized; 17,486,784 shares at September 30, 2004
  and 17,647,279 shares at March 31, 2005 issued
  and outstanding                                                   175               176
Additional paid-in capital                                       10,624            10,971
Retained earnings, restricted                                    73,533            79,526
Treasury stock, at cost (108,557 shares at
  September 30, 2004 and zero at March 31, 2005)                 (1,182)               --
Accumulated other comprehensive income (loss),
  net of tax                                                      2,198            (1,139)
                                                            -----------       -----------
  Total stockholders' equity                                     85,348            89,534
                                                            -----------       -----------
                                                            $ 1,305,485       $ 1,449,346
                                                            ===========       ===========
</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 MARCH 31, 2004 AND 2005

<TABLE>
<CAPTION>
                                                                   2004                2005
                                                                   ----                ----
                                                                        (Unaudited)
                                                                       (In thousands,
                                                                     Except per share)
<S>                                                             <C>                <C>
Interest income:
   Loans receivable                                             $     11,320       $     13,364
   Investment securities                                                 833              1,231
   Mortgage-backed securities                                          3,982              4,250
   Other                                                                  20                 67
                                                                ------------       ------------
Total interest income                                                 16,155             18,912
                                                                ------------       ------------

Interest expense:
   Deposits                                                            2,471              2,939
   Securities sold under agreements to repurchase                        609                746
   Advances from Federal Home Loan Bank                                2,607              3,128
   Other borrowings                                                      161                203
                                                                ------------       ------------
Total interest expense                                                 5,848              7,016
                                                                ------------       ------------
   Net interest income                                                10,307             11,896
Provision for loan losses                                                500                625
                                                                ------------       ------------
   Net interest income after provision for loan losses                 9,807             11,271
                                                                ------------       ------------

Other income:
   Fees and service charges on loan and deposit accounts                 879              1,423
   Gain on sales of loans held for sale                                  359                244
   Gain (loss) on sales of investment securities available
     for sale and mortgage-backed securities available
     for sale                                                            (67)                88
   Gain on investment security held to maturity
     called by issuer                                                     --                160
   Loss from real estate owned                                           (52)                (6)
   Income from sales of non-depository products                          472                470
   Federal Home Loan Bank stock dividends                                121                213
   Other income                                                          718                744
                                                                ------------       ------------
                                                                       2,430              3,336
                                                                ------------       ------------

General and administrative expenses:
   Salaries and employee benefits                                      4,009              4,496
   Net occupancy, furniture and fixtures and data
     processing expenses                                               1,536              1,859
   FDIC insurance premium                                                 27                 26
   FHLB prepayment penalties                                              68                 --
   Marketing expenses                                                    197                482
   Other expense                                                         892              1,456
                                                                ------------       ------------
                                                                       6,729              8,319
                                                                ------------       ------------
Income before income taxes                                             5,508              6,288
Income taxes                                                           1,831              2,153
                                                                ------------       ------------
Net income                                                      $      3,677       $      4,135
                                                                ============       ============

Net income per common share:
   Basic                                                        $        .21       $        .23
                                                                ============       ============
   Diluted                                                      $        .20       $        .22
                                                                ============       ============

Weighted average common shares outstanding:
   Basic                                                          17,349,000         17,602,000
                                                                ============       ============
   Diluted                                                        18,323,000         18,658,000
                                                                ============       ============

Dividends per share                                             $       .041       $       .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 SIX MONTHS ENDED MARCH 31, 2004 AND 2005

<TABLE>
<CAPTION>
                                                                   2004                2005
                                                                   ----                ----
                                                                        (Unaudited)
                                                                       (In thousands,
                                                                     Except per share)
<S>                                                             <C>                <C>
Interest income:
   Loans receivable                                             $     22,398       $     26,104
   Investment securities                                               1,311              2,375
   Mortgage-backed securities                                          7,941              8,257
   Other                                                                  42                122
                                                                ------------       ------------
Total interest income                                                 31,692             36,858
                                                                ------------       ------------

Interest expense:
   Deposits                                                            5,065              5,435
   Securities sold under agreements to repurchase                      1,165              1,312
   Advances from Federal Home Loan Bank                                5,011              6,296
   Other borrowings                                                      333                403
                                                                ------------       ------------
Total interest expense                                                11,574             13,446
                                                                ------------       ------------
   Net interest income                                                20,118             23,412
Provision for loan losses                                              1,050                975
                                                                ------------       ------------
   Net interest income after provision for loan losses                19,068             22,437
                                                                ------------       ------------

Other income:
   Fees and service charges on loan and deposit accounts               1,782              2,513
   Gain on sales of loans held for sale                                  800                554
   Gain (loss) on sales of investment securities available
     for sale and mortgage-backed securities available
     for sale                                                           (267)               246
   Gain on investment security held to maturity
     called by issuer                                                     --                160
   Loss from real estate owned                                           (92)               (45)
   Income from sales of non-depository products                        1,025                930
   Federal Home Loan Bank stock dividends                                230                350
   Other income                                                        1,279              1,394
                                                                ------------       ------------
                                                                       4,757              6,102
                                                                ------------       ------------

General and administrative expenses:
   Salaries and employee benefits                                      8,003              8,920
   Net occupancy, furniture and fixtures and data
     processing expenses                                               3,065              3,599
   FDIC insurance premium                                                 53                 53
   FHLB prepayment penalties                                              77                 --
   Marketing expenses                                                    379                993
   Other expense                                                       1,768              2,535
                                                                ------------       ------------
                                                                      13,345             16,100
                                                                ------------       ------------
Income before income taxes                                            10,480             12,439
Income taxes                                                           3,484              4,260
                                                                ------------       ------------
Net income                                                      $      6,996       $      8,179
                                                                ============       ============

Net income per common share:
   Basic                                                        $        .41       $        .47
                                                                ============       ============
   Diluted                                                      $        .38       $        .44
                                                                ============       ============

Weighted average common shares outstanding:
   Basic                                                          17,247,000         17,525,000
                                                                ============       ============
   Diluted                                                        18,236,000         18,515,000
                                                                ============       ============

Dividends per share                                             $       .083       $        .09
                                                                ============       ============
</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 SIX MONTHS ENDED MARCH 31, 2004 AND 2005

<TABLE>
<CAPTION>
                                                                                                  Accumulated
                                                                                                     Other
                                                                                                    Compre-
                                                Additional                                          hensive          Total
                                   Common         Paid-In        Retained         Treasury          Income       Stockholders'
                                   Stock          Capital        Earnings          Stock            (Loss)           Equity
                                ----------      ----------      ----------       ----------       ----------       ----------
                                                                      (Unaudited)
                                                                     (In thousands)
<S>                             <C>             <C>             <C>              <C>              <C>              <C>
Balance at September
  30, 2003                      $      172      $   10,192      $   63,030       $   (3,375)      $    3,688       $   73,707
Net income                              --              --           6,996               --               --            6,996
Other comprehensive
 income:
 Unrealized gains arising
 during period, net of
 taxes of $468                          --              --              --               --              763               --
 Less: reclassification
 adjustment for gains
 included in net income,
 net of taxes of $101                   --              --              --               --              166               --
                                                                                                  ----------
Other comprehensive income              --              --              --               --              929              929
                                                                                                  ----------       ----------
Comprehensive income                    --              --              --               --               --            7,925
                                                                                                                   ----------
Exercise of stock
  options                                1             243            (990)           1,552               --              806
Cash dividends                          --              --          (1,432)              --               --           (1,432)
                                ----------      ----------      ----------       ----------       ----------       ----------
Balance at March
  31, 2004                      $      173      $   10,435      $   67,604       $   (1,823)      $    4,617       $   81,006
                                ==========      ==========      ==========       ==========       ==========       ==========

Balance at September
  30, 2004                      $      175      $   10,624      $   73,533       $   (1,182)      $    2,198       $   85,348
Net income                              --              --           8,179               --               --            8,179
Other comprehensive
 income:
 Unrealized losses arising
 during period, net of
 taxes of $2,139                        --              --              --               --           (3,490)              --
 Less: reclassification
 adjustment for gains
 included in net income,
 net of taxes of $93                    --              --              --               --              153               --
                                                                                                  ----------
Other comprehensive income              --              --              --               --           (3,337)          (3,337)
                                                                                                  ----------       ----------
Comprehensive income                    --              --              --               --               --            4,842
                                                                                                                   ----------
Exercise of stock
  options                                1             347            (602)           1,182               --              928
Cash dividends                          --              --          (1,584)              --               --           (1,584)
                                ----------      ----------      ----------       ----------       ----------       ----------
Balance at March
  31, 2005                      $      176      $   10,971      $   79,526       $       --       $   (1,139)      $   89,534
                                ==========      ==========      ==========       ==========       ==========       ==========
</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 SIX MONTHS ENDED MARCH 31, 2004 AND 2005

<TABLE>
<CAPTION>
                                                                     2004             2005
                                                                     ----             ----
                                                                         (Unaudited)
                                                                        (In thousands)
<S>                                                                <C>             <C>
Cash flows from operating activities:
   Net income                                                      $   6,996       $   8,179
   Adjustments to reconcile net income to net cash
     Used in operating activities:
     Depreciation                                                      1,081           1,271
     Provision for loan losses                                         1,050             975
     (Gain) loss on sale of investment securities
       available for sale and mortgage-backed securities
       available for sale                                                267            (246)
     Gain on call of investment security called
       by issuer                                                          --            (160)
     Loss on sale of real estate acquired through foreclosure             --              19
     Loss on disposal of office properties and equipment                  --             124
   Prepayment penalties on FHLB advances                                  77              --
   Origination of loans receivable held for sale                     (26,900)        (26,623)
   Proceeds from sales of loans receivable held for sale               9,158           8,371
   Impairment recovery from write-down of mortgage
     servicing rights                                                    (92)           (155)
   (Increase) decrease in:
       Cash value of life insurance                                     (481)           (474)
       Accrued interest receivable                                      (152)           (296)
       Other assets                                                   (1,733)         (3,009)
   Increase (decrease) in:
       Accrued interest payable                                          112             492
       Other liabilities                                                (911)            102
                                                                   ---------       ---------
Net cash used in operating activities                                (11,528)        (11,430)
                                                                   ---------       ---------

Cash flows from investing activities:
   Proceeds from sales of investment securities available
     for sale                                                          2,946           3,371
   Proceeds from issuer call of investment securities
     available for sale                                                2,000           1,950
   Proceeds from issuer call of investment securities held
     to maturity                                                          --           8,000
   Purchases of investment securities available for sale              (4,854)         (3,659)
   Purchases of investment securities held to maturity                    --         (10,000)
   Proceeds from sales of mortgage-backed securities
     available for sale                                              143,050          95,200
   Purchases of mortgage-backed securities available for sale       (188,843)       (186,568)
   Principal collected on mortgage-backed securities
     available for sale                                               57,049          42,678
   Origination of loans receivable, net                             (276,734)       (349,851)
   Proceeds from sale of commercial loan participations                   --          13,251
   Principal collected on loans receivable                           206,097         267,904
   Purchase of bank-owned life insurance                              (4,500)             --
   Proceeds from sales of real estate acquired through
     foreclosure, net                                                    873             695
   Purchases of office properties and equipment                       (1,750)         (2,866)
   Proceeds from sales of office properties and equipment                 57              --
   Change in FHLB stock, net                                            (751)            533
                                                                   ---------       ---------
Net cash used in investing activities                                (65,360)       (119,362)
                                                                   ---------       ---------
</TABLE>

                                                                     (CONTINUED)


                                       7
<PAGE>

PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2004 AND 2005 (CONTINUED)

<TABLE>
<CAPTION>
                                                                                2004              2005
                                                                                ----              ----
                                                                                      (Unaudited)
                                                                                     (In thousands)
<S>                                                                          <C>               <C>
Cash flows from financing activities:
   Increase (decrease) in deposits                                           $      (102)      $   138,090
   Increase in securities sold under agreements
     To repurchase, net                                                           30,475            28,827
   Proceeds from FHLB advances                                                   355,076           372,850
   Repayment of FHLB advances                                                   (311,748)         (399,200)
   Prepayment penalties on early extinguishment of debt                              (77)               --
   Decrease in advance payments by borrowers for
     Property taxes and insurance, net                                              (717)             (681)
   Increase in drafts outstanding, net                                             1,016             1,487
   Cash dividends to stockholders                                                 (1,432)           (1,584)
   Proceeds from exercise of stock options                                           806               928
                                                                             -----------       -----------
Net cash provided by financing activities                                         73,297           140,717
                                                                             -----------       -----------
Net increase (decrease) in cash and cash equivalents                              (3,591)            9,925
Cash and cash equivalents at beginning of period                                  21,575            29,652
                                                                             -----------       -----------
Cash and cash equivalents at end of period                                   $    17,984       $    39,577
                                                                             ===========       ===========

Supplemental information:
   Interest paid                                                             $    11,462       $    12,954
                                                                             ===========       ===========
   Income taxes paid                                                         $     3,261       $     3,492
                                                                             ===========       ===========

Supplemental schedule of non-cash investing and Financing transactions:

   Securitization of mortgage loans into mortgage-backed
     securities                                                              $    23,071       $    20,080
                                                                             ===========       ===========

   Transfer of mortgage loans to real estate acquired
     Through foreclosure                                                     $       515       $       463
                                                                             ===========       ===========

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

   Unrealized gain (loss) in investment securities and
     mortgage-backed securities available for sale,
     net of tax                                                              $       929       $    (3,337)
                                                                             ===========       ===========
</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
six-month  period  ended March 31, 2005 are not  necessarily  indicative  of the
results  that may be  expected  for the  entire  fiscal  year.  These  unaudited
consolidated  financial  statements  should be read in conjunction  with Coastal
Financial  Corporation and  Subsidiaries' (the "Company")  audited  consolidated
financial  statements  and related notes for the year ended  September 30, 2004,
included in the  Company's  2004 Annual  Report to  Stockholders.  The principal
business of the Company is conducted  by its  wholly-owned  subsidiary,  Coastal
Federal Bank (the "Bank"). The information presented herein, therefore,  relates
primarily to the Bank.

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

(2) INVESTMENT SECURITIES AVAILABLE FOR SALE

The unrealized losses on investment securities were attributable to increases in
interest rates, rather than credit quality.  The unrealized losses are comprised
of four securities  totaling $3,000 at September 30, 2004 and twelve  securities
totaling $118,000 at March 31, 2005 that have had continuous losses of less than
12 months.  There were ten securities totaling $81,000 at September 30, 2004 and
two  securities  totaling  $25,000 at March 31, 2005 with  continuous  losses 12
months or longer. None of the individual investment securities had an unrealized
loss that exceeded 5% of its amortized cost in either period.

(3) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE

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

<TABLE>
<CAPTION>
                                                                 September 30, 2004
                             ------------------------------------------------------------------------------------------
                                 Less than 12 Months             12 Months or Longer                   Total
                             --------------------------      ---------------------------     --------------------------
                                                                     (Unaudited)
                                                                (Dollars in thousands)

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

<CAPTION>
                                                                    March 31, 2005
                             ------------------------------------------------------------------------------------------
                                 Less than 12 Months             12 Months or Longer                   Total
                             --------------------------      ---------------------------     --------------------------
                                                                     (Unaudited)
                                                                (Dollars in thousands)

                               Fair          Unrealized        Fair          Unrealized        Fair         Unrealized
                               Value           Losses          Value           Losses          Value          Losses
                               -----           ------          -----           ------          -----          ------
<S>                          <C>                  <C>           <C>               <C>           <C>             <C>
Collateralized Mortgage      $  64,228            (847)         11,359            (399)         75,587          (1,246)
  Obligations
FNMA                            97,409          (1,384)         16,357            (446)        113,766          (1,830)
GNMA                            39,314            (298)             --              --          39,314            (298)
FHLMC                           60,084            (609)         26,646            (891)         86,730          (1,500)
                             ---------       ---------       ---------       ---------       ---------       ---------
                             $ 261,035          (3,138)         54,362          (1,736)        315,397          (4,874)
                             =========       =========       =========       =========       =========       =========
</TABLE>


                                       9
<PAGE>

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

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

The  unrealized  losses  on  mortgage-backed  securities  were  attributable  to
increases in interest rates,  rather than credit quality.  The unrealized losses
are  comprised of 25 securities at September 30, 2004 and 68 securities at March
31, 2005 that have had  continuous  losses of less than 12 months.  There were 8
securities  at September  30, 2004 and 14  securities  at March 31,  2005,  with
continuous  losses  12  months  or  longer.  None of the  individual  investment
securities  had an unrealized  loss that  exceeded 5% of its  amortized  cost in
either period.

(4) LOANS RECEIVABLE, NET

Loans receivable, net consists of the following:

                                                   September 30,      March 31,
                                                       2004             2005
                                                   -------------     -----------
                                                           (Unaudited)
                                                      (Dollars in thousands)
First mortgage loans:
   Single family to four family units                $ 329,287       $ 340,146
   Land and land development                            99,697          94,779
   Residential lots                                     29,839          33,558
   Other, primarily commercial real estate             182,924         216,568
   Construction loans on residential properties         82,789         102,738
   Construction loans on commercial properties          10,503           8,766

Consumer and commercial loans:
   Installment consumer loans                           18,024          19,802
   Mobile home loans                                     4,618           4,611
   Savings account loans                                 2,058           1,956
   Equity lines of credit                               30,906          33,042
   Commercial and other loans                           32,101          35,883
                                                     ---------       ---------
                                                       822,746         891,849
Less:
   Allowance for loan losses                            11,077          11,768
   Deferred loan costs, net                               (674)           (536)
   Undisbursed portion of loans in process              21,613          22,629
                                                     ---------       ---------

                                                     $ 790,730       $ 857,988
                                                     =========       =========

The changes in the allowance for loan losses consist of the following for the
six months ended:
                                                     Six Months Ended March 31,
                                                     --------------------------
                                                       2004             2005
                                                       ----             ----
                                                            (Unaudited)
                                                       (Dollars in thousands)

Allowance at beginning of period                     $   9,832       $  11,077
Provision for loan losses                                1,050             975
                                                     ---------       ---------
Recoveries:
 Residential loans                                          --              --
 Commercial loans                                          148              17
 Consumer loans                                             34              56
                                                     ---------       ---------
   Total recoveries                                        182              73
                                                     ---------       ---------
Charge-offs:
 Residential loans                                          --              --
 Commercial loans                                           52             158
 Consumer loans                                            254             199
                                                     ---------       ---------
   Total charge-offs                                       306             357
                                                     ---------       ---------
   Net charge-offs                                         124             284
                                                     ---------       ---------
 Allowance at end of period                          $  10,758       $  11,768
                                                     =========       =========


                                       10
<PAGE>

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

(4) LOANS RECEIVABLE, NET - CONTINUED
<TABLE>
<CAPTION>
                                                        Six Months Ended March 31,
                                                        --------------------------
                                                             2004       2005
                                                             ----       ----
                                                               (Unaudited)
<S>                                                          <C>        <C>
Ratio of allowance to total net loans
 outstanding at the end of the period                        1.41%      1.36%
                                                             ====       ====

Ratio of net charge-offs to average
 total loans outstanding during the period (annualized)       .03%       .07%
                                                             ====       ====
</TABLE>

Non-accrual  loans,  which are  primarily  loans over  ninety  days  delinquent,
totaled  approximately $6.1 million and $7.1 million at March 31, 2004 and 2005,
respectively. For the six months ended March 31, 2004 and 2005, interest income,
which  would have been  recorded,  would have been  approximately  $138,000  and
$243,000,  respectively,  had non-accruing loans been current in accordance with
their original terms.

At March 31, 2005, impaired loans totaled $5.1 million.  There were $3.8 million
in impaired  loans at March 31, 2004.  Included in the allowance for loan losses
at March 31, 2005 was $591,000 related to impaired loans compared to $300,000 at
March 31, 2004.  The average  recorded  investment in impaired loans for the six
months  ended March 31, 2005 was $4.1  million  compared to $4.3 million for the
six months  ended  March 31,  2004.  Interest  income of $65,000 and $98,000 was
recognized  on impaired  loans for the  quarter  and six months  ended March 31,
2005.  Interest  income of $71,000 and $180,000 was recognized on impaired loans
for the quarter and six months ended March 31, 2004.

(5) DEPOSITS

Deposits consist of the following:

<TABLE>
<CAPTION>
                                    September 30, 2004             March 31, 2005
                                    ------------------             --------------
                                                Weighted                     Weighted
                                                 Average                      Average
                                   Amount         Rate          Amount         Rate
                                   ------         ----          ------         ----
                                                      (Unaudited)
                                                (Dollars in thousands)
<S>                               <C>              <C>        <C>              <C>
Checking accounts                 $233,128         0.22%      $287,136         0.24%
Money market accounts              224,468         1.37        220,737         1.80
Statement savings accounts          55,205         0.80         67,561         0.89
Certificate accounts               240,578         2.49        316,035         2.75
                                  --------                    --------
                                  $753,379         1.33%      $891,469         1.57%
                                  ========                    ========
</TABLE>

Included in  certificate  accounts  ("CDs") are $85.6 million of brokered CDs at
March 31, 2005.  There were no brokered CDs at September  20, 2004.  The average
rate and  remaining  term of  brokered  CDs at March 31, 2005 was 2.91% and five
months, respectively.

(6) ADVANCES FROM FEDERAL HOME LOAN BANK

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

<TABLE>
<CAPTION>
                                    September 30, 2004             March 31, 2005
                                    ------------------             --------------
                                                Weighted                     Weighted
                                                 Average                      Average
                                   Amount         Rate          Amount         Rate
                                   ------         ----          ------         ----
                                                      (Unaudited)
                                                  (Dollars in thousands)
<S>                               <C>              <C>        <C>              <C>
Maturing within:
1 year                            $ 64,500         2.78%      $ 39,391         3.85%
2 years                              4,177         2.79          5,086         2.88
3 years                             11,560         2.23         11,160         2.82
4 years                              3,977         3.18         27,880         2.10
5 years                             31,803         2.36          7,150         3.84
After 5 years                      212,490         4.20        211,490         4.20
                                  --------                    --------
                                  $328,507         3.64%      $302,157         3.88%
                                  ========                    ========
</TABLE>


                                       11
<PAGE>

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

(6) ADVANCES FROM FEDERAL HOME LOAN BANK - CONTINUED

At September 30, 2004,  and March 31, 2005,  the Bank had pledged first mortgage
loans and  mortgage-backed  securities  with unpaid  balances  of  approximately
$357.3  million  and  $379.2  million,  respectively,  as  collateral  for  FHLB
advances.

At March 31,  2005,  included  in the one,  three,  four,  and after  five years
maturities  were  $218.0  million,  with a weighted  average  rate of 3.94%,  of
advances  subject to call  provisions.  Callable  advances at March 31, 2005 are
summarized as follows:  $10.0 million  callable in fiscal 2005,  with a weighted
average  rate of 6.31%;  $8.0 million  callable in fiscal 2007,  with a weighted
average rate of 2.67%;  $25.0 million  callable in fiscal 2008,  with a weighted
average rate of 1.99%;  and $175.0 million  callable  after fiscal 2009,  with a
weighted average rate of 4.14%.  Call provisions are more likely to be exercised
by the FHLB when interest rates rise.

(7) EARNINGS PER SHARE

Basic  earnings  per share for the six months  ended March 31, 2004 and 2005 are
computed  by  dividing  net  income  by  the  weighted   average  common  shares
outstanding  during the respective  periods.  Diluted earnings per share for the
six months  ended March 31, 2004 and 2005 are  computed by dividing net earnings
by the  weighted  average  dilutive  shares  outstanding  during the  respective
periods.

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

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

                                         2004                  2004      2005                  2005
                                         --------------------------      --------------------------
                                         BASIC              DILUTED      BASIC               DILUTED
                                         --------------------------      --------------------------
<S>                                      <C>             <C>             <C>             <C>
Weighted average shares outstanding      17,349,000      17,349,000      17,602,000      17,602,000

Effect of dilutive securities-
Stock options                                    --         974,000              --       1,056,000
                                         --------------------------      --------------------------
                                         17,349,000      18,323,000      17,602,000      18,658,000
                                         ===========================     ==========================

<CAPTION>
                                                      For the Six Months Ended March 31,
                                                                  (Unaudited)

                                         2004                  2004      2005                  2005
                                         --------------------------      --------------------------
                                         BASIC              DILUTED      BASIC              DILUTED
                                         --------------------------      --------------------------
<S>                                      <C>             <C>             <C>             <C>
Weighted average shares outstanding      17,247,000      17,247,000      17,525,000      17,525,000

Effect of dilutive securities-
Stock options                                    --         989,000              --         990,000
                                         --------------------------      --------------------------
                                         17,247,000      18,236,000      17,525,000      18,515,000
                                         ===========================     ==========================
</TABLE>

(8) STOCK BASED COMPENSATION

At March 31, 2005,  the Company had a stock option plan that  provides for stock
options to be granted primarily to directors, officers and other key Associates.
The  plan is more  fully  described  in Note  17 of the  Notes  to  Consolidated
Financial  Statements included in the Company's Annual Report for the year ended
September 30, 2004. The Company  accounts for the plan under the recognition and
measurement  principles of APB Opinion No. 25,  "Accounting  for Stock Issued to
Employees",  and related  interpretations.  No stock-based  employee or director
compensation  cost is reflected in net income,  as all options granted under the
plan had an exercise  price equal to the market value of the  underlying  common
stock on the date of grant.


                                       12
<PAGE>

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

(8) STOCK BASED COMPENSATION - CONTINUED

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

<TABLE>
<CAPTION>
                                                      Three Months Ended March 31,
                                                      ----------------------------
                                                         2004             2005
                                                         ----             ----

                                                               (Unaudited)
                                                         (Dollars in thousands)
<S>                                                   <C>              <C>
Net income, as reported                               $     3,677      $     4,135
Deduct: Total stock-based employee and director
         compensation expense determined under
         fair value based method for all awards,
         net of related tax effects                          (155)            (200)
                                                      -----------      -----------
Pro forma net income                                  $     3,522      $     3,935
                                                      ===========      ===========

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

Diluted earnings per share:
     As reported                                      $       .20      $       .22
                                                      ===========      ===========
     Pro forma                                        $       .19      $       .21
                                                      ===========      ===========

<CAPTION>
                                                        Six Months Ended March 31,
                                                        --------------------------
                                                          2004             2005
                                                          ----             ----
                                                              (Unaudited)
                                                         (Dollars in thousands)
<S>                                                   <C>              <C>
Net income, as reported                               $     6,996      $     8,179
Deduct: Total stock-based employee and director
         compensation expense determined under
         fair value based method for all awards,
         net of related tax effects                          (286)            (375)
                                                      -----------      -----------
Pro forma net income                                  $     6,710      $     7,804
                                                      ===========      ===========

Basic earnings per share:
     As reported                                      $       .41      $       .47
                                                      ===========      ===========
     Pro forma                                        $       .39      $       .44
                                                      ===========      ===========

Diluted earnings per share:
     As reported                                      $       .38      $       .44
                                                      ===========      ===========
     Pro forma                                        $       .37      $       .42
                                                      ===========      ===========
</TABLE>

(9) COMMON STOCK DIVIDEND

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


                                       13
<PAGE>

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

(10) GUARANTEES

Standby  letters  of credit  obligate  the  Company  to meet  certain  financial
obligations of its customers,  if, under the contractual terms of the agreement,
the  customers  are unable to do so.  Payment  is only  guaranteed  under  these
letters of credit upon the borrower's  failure to perform its obligations to the
beneficiary.  The  Company  can  seek  recovery  of the  amounts  paid  from the
borrower;   however,   these  standby   letters  of  credit  are  generally  not
collateralized. Commitments under standby letters of credit are usually one year
or less.  At March 31,  2005,  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 March 31,
2004 and 2005 was $3.1 million and $5.9 million, respectively.

(11) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITES

The Bank originates  certain fixed rate residential  loans with the intention of
selling these loans. Between the time that the Bank enters into an interest rate
lock or a commitment to originate a fixed rate residential loan with a potential
borrower  and the time the  closed  loan is sold,  the  Company  is  subject  to
variability  in the market  prices  related to these  commitments.  The  Company
believes that it is prudent to limit the  variability of expected  proceeds from
the sales through forward sales of "to be issued" mortgage-backed securities and
loans  ("forward  sales  commitments").  The commitment to originate  fixed rate
residential  loans and forward sales  commitments  are  freestanding  derivative
instruments.  Since  such  instruments  do  not  qualify  for  hedge  accounting
treatment,  their  fair  value  adjustments  are  recorded  through  the  income
statement  in net gains on sales of loans  held for  sale.  The  commitments  to
originate  fixed rate  conforming  loans totaled $4.5 million at March 31, 2005.
The fair value of the loan commitments was an asset of approximately  $19,000 at
March 31,  2005.  As of March 31,  2005,  the Company  had sold $5.0  million in
forward commitments to deliver fixed rate mortgage-backed securities, which were
recorded as a derivative asset of $42,000.


                                       14
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


                                       15
<PAGE>

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

OVERVIEW
--------

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

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

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

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

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

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

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


                                       16
<PAGE>

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

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

The second  initiative was Totally Free Checking With a Gift that was introduced
in  September  2004.  The  Bank  has  incurred,  and  will  continue  to  incur,
significant  marketing  costs  associated  with this campaign.  In the first two
fiscal quarters of 2005,  marketing  expenses were $993,000 compared to $379,000
in the comparable 2004 period. The Bank expects to realize significant  benefits
from this strategy consisting of increased Bank lobby traffic,  increased number
of  personal  checking  accounts  and  higher  fee  income  as a result of those
checking  accounts.  In the first two fiscal  quarters of fiscal 2005,  checking
account balances grew  approximately  23%. This rate of growth could necessitate
the hiring of additional Associates to open and service these accounts.

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

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

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

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

In the  normal  course of  operations,  the  Company  engages  in a  variety  of
financial  transactions that, in accordance with generally  accepted  accounting
principles, are recorded in amounts that differ from the notional amounts. These
transactions involve, to varying degrees, elements of credit, interest rate, and
liquidity risk. Such  transactions are used by the Company for general corporate
purposes or to satisfy customer needs.  Corporate purpose  transactions are used
to help manage  customers'  requests for funding.  The Bank's  off-balance sheet
arrangements, which principally include lending commitments and derivatives, are
described  below.  At March 31, 2005 and September 30, 2004,  the Company had no
interests in non-consolidated special purpose entities.

Lending  Commitments.  Lending  Commitments  include loan  commitments,  standby
letters of credit,  unused business and personal  credit card lines,  and unused
business and personal lines of credit. These instruments are not recorded in the
consolidated  balance sheet until funds are advanced under the commitments.  The
Bank  provides  these lending  commitments  to customers in the normal course of
business. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the  commitments  expire
without  being  drawn  upon,  the total  commitment  amounts do not  necessarily
represent  future cash  requirements.  The Company applies  essentially the same
credit  policies  and  standards  as it does in the lending  process when making
these loans. For business customers,  commercial loan commitments generally take
the form of revolving credit  arrangements to finance customers' working capital
requirements.  For personal  customers,  loan commitments are generally lines of
credit  that are  unsecured  or are  secured by  residential  property.  Standby
letters of credit obligate the Company to meet certain financial  obligations of
its customers,  if, under the contractual terms of the agreement,  the customers
are unable to do so.  Payment is only  guaranteed  under these letters of credit
upon the borrower's  failure to perform its obligations to the beneficiary.  The
Company can seek recovery of the amounts paid from the borrower. Standby letters
of credit are generally collateralized and are usually one year or less.


                                       17
<PAGE>

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

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

At March 31,  2005,  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 March 31,  2004 and 2005 was
$3.1 million and $5.9 million, respectively.

A summary of loans receivable with  undisbursed  commitments to extend credit at
March 31 follows:

<TABLE>
<CAPTION>
                                                                  2004             2005
                                                                  ----             ----
                                                                      (In thousands)
<S>                                                           <C>              <C>
Residential mortgage loans in process                         $    22,870      $    24,386
Business and consumer credit card lines                            13,367           14,455
Consumer home equity lines                                         36,792           42,591
Other consumer lines of credit                                      4,166            4,597
Commercial real estate and construction
     and land development                                          68,315           73,050
Other commercial lines of credit                                    3,782            3,618
                                                              -----------      -----------
     Total loans receivable with undisbursed commitments      $   149,292      $   162,697
                                                              ===========      ===========
</TABLE>

Derivatives  and Hedging  Activities.  The Bank  originates  certain  fixed rate
residential  loans with the intention of selling  these loans.  Between the time
that the Bank enters into an interest  rate lock or a commitment  to originate a
fixed rate  residential  loan with a potential  borrower and the time the closed
loan is sold, the Company is subject to variability in the market prices related
to these  commitments.  The  Company  believes  that it is  prudent to limit the
variability of expected  proceeds from the sales through forward sales of "to be
issued" mortgage-backed securities and loans ("forward sales commitments").  The
commitment  to  originate  fixed  rate  residential   loans  and  forward  sales
commitments are freestanding derivative  instruments.  Since such instruments do
not qualify for hedge  accounting  treatment,  their fair value  adjustments are
recorded  through  the  income  statement  in net  gains on sale of  loans.  The
commitments  to originate  fixed rate  conforming  loans totaled $4.5 million at
March  31,  2005.  The  fair  value  of the  loan  commitments  was an  asset of
approximately  $19,000 at March 31, 2005. As of March 31, 2005,  the Company had
sold $5.0 million in forward  commitments to deliver fixed rate  mortgage-backed
securities, which were recorded as a derivative asset of $42,000.

DISCUSSION OF FINANCIAL CONDITION CHANGES FROM SEPTEMBER 30, 2004 TO MARCH 31,
------------------------------------------------------------------------------
2005
----

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

Historically,  the Company has  maintained  its liquidity at levels  believed by
management  to be  adequate  to meet  the  requirements  of  normal  operations,
potential  deposit  out-flows and strong loan demand and still allow for optimal
investment of funds and return on assets. The principal sources of funds for the
Company  are cash flows from  operations,  consisting  mainly of loan  payments,
Customer  deposits,   advances  from  the  FHLB,  securitization  of  loans  and
subsequent sales, and loan sales.

The  principal  use of cash flows is the  origination  of loans  receivable  and
purchase of investment  securities.  The Company  originated loans receivable of
$303.6  million  for the six months  ended  March 31,  2004,  compared to $376.5
million  for the six months  ended March 31,  2005.  Loan  principal  repayments
amounted to $206.1  million in the first two quarters of 2004 compared to $267.9
million for the six months ended March 31, 2005. In addition,  the Company sells
certain loans in the secondary  market to finance future loan  originations.  In
the first two  quarters of fiscal  2004,  the  Company  sold  mortgage  loans or
securitized  and sold  mortgage  loans  totaling  $32.2 million that compares to
$28.4  million for the six months  ended March 31, 2005.  In addition,  the Bank
sold $13.3 million of  commercial  loan  participations  in the first six months
ended March 31, 2005. No  commercial  loan  participations  were sold in the six
months ended March 31, 2004.


                                       18
<PAGE>

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

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

During the six month period ended March 31, 2005, the Company  securitized $20.1
million of mortgage loans and concurrently sold these mortgage-backed securities
to outside  third parties and  recognized a net gain on sale of $466,000,  which
included $273,000 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 six month  period  ended March 31, 2005,  the Company  purchased  $200.2
million in investment and mortgage-backed  securities.  For the six month period
ended March 31, 2004,  the Company  purchased  $193.7  million in investment and
mortgage-backed  securities.  These purchases  during the six month period ended
March 31, 2005 were primarily funded by borrowings,  repayments of $42.7 million
within the securities portfolio and sales of mortgage-backed securities of $95.2
million.

During the six month  periods  ended March 31, 2005 the Company sold  commercial
loan  participations  totaling $13.3 million.  No commercial loan participations
were sold in 2004.

Total deposits increased $138.1 million between September 30, 2004 and March 31,
2005.  The Company  places  significant  emphasis on growth in money  market and
checking  accounts.  Money  market and checking  accounts  have  increased  from
approximately  $457.6  million at September 30, 2004 to $507.9  million at March
31, 2005, an increase of $50.3 million or 11.0%. Core deposits (defined as money
market  accounts,   checking  accounts  and  statement  savings  accounts)  have
increased  from $512.8  million at September 30, 2004 to $575.4 million at March
31, 2005, an increase of 12.2%.

At March 31, 2005,  the Company had $285.5 million of  certificates  of deposits
("CDs")  that were due to mature  within  one year.  Included  in these CDs were
brokered CDs  totaling  $85.6  million.  Based on past  experience,  the Company
believes  that the majority of the  non-brokered  certificates  of deposits will
renew with the  Company.  At March 31,  2005,  the  Company had  commitments  to
originate  $24.9  million  in  residential  mortgage  loans,  $50.8  million  in
undisbursed  business  and  retail  lines of  credit,  $14.5  million  in unused
business and personal  credit card lines,  and $73.0 million in commercial  real
estate and construction  and land development  which the Company expects to fund
from  normal  operations.  At March 31,  2005,  the  Company  had $67.6  million
available in FHLB advances.

Additionally, at March 31, 2005, the Company had outstanding available lines for
federal funds of $20.0 million.

As a result of $8.2  million  in net  income,  less the cash  dividends  paid to
stockholders of approximately $1.6 million,  proceeds of approximately  $928,000
from the  exercise of stock  options,  and the net decrease in  unrealized  gain
(loss) on  securities  available  for sale,  net of income tax of $3.3  million,
stockholders' equity increased from $85.3 million at September 30, 2004 to $89.5
million at March 31, 2005.

OTS  regulations  require  that  the  Bank  calculate  and  maintain  a  minimum
regulatory capital requirement on a quarterly basis and satisfy such requirement
as of the calculation  date and throughout the quarter.  The Bank's capital,  as
calculated under OTS regulations,  is approximately  $104.3 million at March 31,
2005,  exceeding the core capital  requirement  by $60.8  million.  At March 31,
2005, the Bank's risk-based capital of approximately $114.3 million exceeded its
current   risk-based  capital   requirement  by  $46.6  million.   (For  further
information see Regulatory Capital Matters).


                                       19
<PAGE>

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

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

The table below summarizes future contractual obligations as of March 31, 2005:

<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               $  316,035      $  285,534      $   27,264      $    2,423      $      814
Short-term borrowings          175,391         175,391              --              --              --
Long-term debt                 278,230              --          16,246          35,030         226,954
Operating leases                   613             140             172              76             225
                            ----------      ----------      ----------      ----------      ----------
Total contractual cash
     obligations            $  770,269      $  461,065      $   43,682      $   37,529      $  227,993
                            ==========      ==========      ==========      ==========      ==========
</TABLE>

Purchase commitments.  The Company has entered into a contract to purchase land.
The price for the property is  approximately  $1.3 million and will be purchased
in the third fiscal quarter of 2005.

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

Net income  increased from $7.0 million,  or $.38 per diluted share, for the six
months ended March 31, 2004 to $8.2  million,  or $.44 per diluted share for the
six months ended March 31, 2005. This 16.9% increase in net income resulted from
increased net interest income of $3.3 million, or 16.4%, decreased provision for
loan losses of $75,000,  an increase in other income of $1.3 million,  offset by
increased  general and  administrative  expenses of $2.8 million,  and increased
income taxes of $776,000.

As a result of growth in loans  receivable and  investments and an increased net
interest  margin,  net interest income  increased 16.4%. The net interest margin
increased  from 3.55% for the six months  ended  March 31, 2004 to 3.67% for the
six  months  ended  March 31,  2005.  The  increase  in net  interest  income is
primarily  attributable  to an  increase  in  average  earning  assets of $145.2
million, or 12.8%. Average loans receivable increased $108.4 million for the six
months  ended March 31, 2005  compared to March 31, 2004.  In addition,  average
balances of investment  securities  increased  approximately $36.8 million.  The
investment  securities were primarily  funded with FHLB advances.  The Company's
advances  increased  from $287.4  million at March 31, 2004 to $302.2 million at
March 31, 2005.

Provision  for loan losses  decreased  by $75,000 for the six months ended March
31, 2005 when  compared to the prior year  primarily  due to improving  economic
conditions and a change in the risk factors of the Bank's  criticized  loans and
loans delinquent ninety days or more at March 31, 2005, as compared to March 31,
2004.  The  allowance  for loan losses as a percentage of net loans was 1.36% at
March 31, 2005 compared to 1.41% at March 31, 2004.

Other income increased from $4.8 million for the six months ended March 31, 2004
to $6.1 million for the six months ended March 31, 2005. This was a result of an
increase  in fees and service  charges on loan and deposit  accounts of $731,000
and  increased  Federal Home Loan Bank stock  dividends of $120,000  offset by a
decrease in gains on sales of loans held for sale of $246,000.  The Company also
had  gains on sales  of  securities  available  for  sale  and  mortgage  backed
securities  available  for sale of $246,000  for the six months  ended March 31,
2005, compared to losses of $267,000 for the six months ended March 31, 2004. In
addition, the Company had gain on investment security held to maturity called by
issuer of  $160,000  for the six months  ended March 31, 2005 and $0 for the six
months ended March 31, 2004.

General and  administrative  expenses  increased  from $13.3 million for the six
months ended March 31, 2004 to $16.1  million for the six months ended March 31,
2005.  Compensation  increased  from $8.0  million for the first two quarters of
fiscal 2004 to $8.9 million in the first two quarters of fiscal 2005,  primarily
due to an increase  in the number of banking  Associates  in  business  banking,
Associates  in the  Company's  expanded  hours call  center,  Associates  in new
branches and normal salary increases.  Marketing  expenses were $379,000 for the
six months ended March 31,  2004,  compared to $993,000 for the six months ended
March 31, 2005.  In addition,  other expense was $1.8 million for the six months
ended March 31,  2004,  compared to $2.5  million for the six months ended March
31, 2005.


                                       20
<PAGE>

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

MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE THREE MONTHS ENDED
-----------------------------------------------------------------------------
MARCH 31, 2004 AND 2005
-----------------------

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

Interest  income for the three months  ended March 31, 2005,  increased to $18.9
million as compared to $16.2  million for the three months ended March 31, 2004.
The earning  asset yield for the three months  ended March 31,  2005,  was 5.83%
compared  to a yield of 5.63% for the three  months  ended March 31,  2004.  The
average yield on loans receivable for the three months ended March 31, 2005, was
6.34%  compared to 6.10% for three months ended March 31,  2004.  The  increased
yield on loans is primarily due to the increased yield on commercial  loans with
interest rates tied to the prime lending rate. The prime rate was 5.75% at March
31, 2005,  compared to 4.00% at March 31, 2004. Due to a decline in amortization
of premiums on investment  securities due to slower  prepayments in fiscal 2005,
the yield on investments increased to 4.88% for the three months ended March 31,
2005,  from 4.77% for the three  months  ended  March 31,  2004.  Total  average
interest-earning  assets were $1.3 billion for the quarter  ended March 31, 2005
as compared to $1.1 billion for the quarter  ended March 31, 2004.  The increase
in average  interest-earning  assets is primarily  due to an increase in average
loans receivable of approximately $101.0 million resulting primarily from growth
in the  commercial  loan  portfolio and an increase in investment  securities of
approximately $48.9 million, primarily funded by borrowings.

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

Interest expense on interest-bearing  liabilities was $7.0 million for the three
months  ended March 31,  2005,  as compared to $5.8 million for the three months
ended March 31,  2004.  The average  cost of deposits for the three months ended
March 31, 2005, was 1.43% compared to 1.45% for the three months ended March 31,
2004. The cost of  interest-bearing  liabilities  was 2.16% for the three months
ended March 31,  2005  compared  to 2.05% for the three  months  ended March 31,
2004.  The  cost of FHLB  advances,  reverse  repurchase  agreements  and  other
borrowings was 3.69%, 2.38% and 5.41%, respectively,  for the three months ended
March 31, 2005.  For the three  months  ended March 31,  2004,  the cost of FHLB
advances,  reverse  repurchase  agreements and other borrowings was 3.80%, 1.48%
and 4.32%, respectively.  The increased cost of funds on other borrowings is due
to the increased short-term interest rates. At March 31, 2005, the federal funds
rate  was  2.96%   compared  to  1.05%  at  March  31,   2004.   Total   average
interest-bearing  liabilities  increased  from $1.1 billion at March 31, 2004 to
$1.3  billion  at March 31,  2005.  The  increase  in  average  interest-bearing
liabilities is due to an increase in average  deposits of  approximately  $139.6
million,  increased average FHLB advances of $64.1 million used to fund loan and
investment   securities  growth  and  increased   average  Customer   repurchase
agreements of $13.3 million. This increase was partially offset by a decrease in
average reverse repurchase agreements of $54.5 million.

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

Net interest income was $11.9 million for the three months ended March 31, 2005,
as compared to $10.3 million for the three months ended March 31, 2004.  The net
interest margin was 3.68% for the three months ended March 31, 2005, compared to
3.58% for the three months ended March 31, 2004.

The following table  summarizes the average balance sheet and the related yields
on  interest-earning  assets and  deposits and  borrowings  for the three months
ended March 31, 2004 and 2005:


                                       21
<PAGE>

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

MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE THREE MONTHS ENDED
-----------------------------------------------------------------------------
MARCH 31, 2004 AND 2005 - CONTINUED
-----------------------------------

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

<TABLE>
<CAPTION>
                                                       Three Months Ended March 31,
                                                       ----------------------------
                                                2004                                     2005
                                                ----                                     ----
                              Average         Income/      Yield/        Average        Income/         Yield/
                            Balance (1)       Expense       Rate       Balance (1)      Expense         Rate
                            -----------       -------       ----       -----------      -------         ----
<S>                         <C>             <C>             <C>        <C>             <C>              <C>
Assets
Earning assets
  Loans (2)                 $  741,855      $   11,320      6.10%      $  842,846      $   13,364       6.34%
  Investment
    Securities, MBS
    Securities and
    Other (3)                  405,504           4,835      4.77%         454,434           5,548       4.88%
                            ----------      ----------                 ----------      ----------
Total earning assets        $1,147,359      $   16,155      5.63%       1,297,280      $   18,912       5.83%
                            ==========      ----------                 ==========      ----------

Liabilities
  Deposits                     681,160           2,471      1.45%         820,735           2,939       1.43%
  Borrowings                   457,929           3,377      2.95%         480,771           4,077       3.39%
                            ----------      ----------                 ----------      ----------
Total interest-bearing
  Liabilities               $1,139,089           5,848      2.05%      $1,301,506           7,016       2.16%
                            ==========      ----------                 ==========      ----------

Net interest income                         $   10,307                                 $   11,896
                                            ==========                                 ==========
Net interest margin                                         3.58%                                       3.68%
Net yield on earning                                        3.59%                                       3.67%
  Assets
</TABLE>

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

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

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

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

The Company's  provision for loan losses  increased  from $500,000 for the three
months  ended March 31,  2004,  to $625,000 for the three months ended March 31,
2005  primarily due to growth in loan balances at March 31, 2005.  The allowance
for loan losses as a percentage of loans was 1.36% at March 31, 2005 as compared
to 1.41% at March 31, 2004.  The allowance as a percentage of loans declined due
to improving economic  conditions and the risk factors related to the underlying
portfolio.  Loans  delinquent 90 days or more were $7.1 million or .82% of total
loans at March 31,  2005,  compared  to $6.1  million or .79% of total  loans at
March 31, 2004. The allowance for loan losses was 165% of loans  delinquent more
than 90 days at  March  31,  2005,  compared  to 177% at  March  31,  2004.  Net
charge-offs for the three months ended March 31, 2005 were $269,000  compared to
$59,000 for the three months ended March 31, 2004.  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.

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

For the three  months  ended  March 31,  2005,  other  income  was $3.3  million
compared to $2.4 million for the three  months  ended March 31,  2004.  Fees and
service charges from deposit accounts  increased $544,000 or 62% to $1.4 million
for the three months  ended March 31,  2005,  compared to $879,000 for the three
months ended March 31, 2004. The majority of this


                                       22
<PAGE>

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

MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE THREE MONTHS ENDED
-----------------------------------------------------------------------------
MARCH 31, 2004 AND 2005 - CONTINUED
-----------------------------------

OTHER INCOME, CONTINUED
-----------------------

increase is due to fee income from increased personal checking accounts.  In the
first two quarters of fiscal 2005,  checking account balances grew approximately
23%.  Gain on sale of loans was $244,000  for the quarter  ended March 31, 2005,
compared to $359,000  for the quarter  ended March 31,  2004.  Gains on sales of
securities available for sale were $88,000 for the quarter ended March 31, 2005,
compared to losses of $67,000 for the quarter ended March 31, 2004. Other income
was $744,000 for the three months ended March 31, 2005,  as compared to $718,000
for the three months ended March 31, 2004. In addition,  the Company had gain on
investment  security held to maturity called by issuer of $160,000 for the three
months  ended March 31, 2005 and $0 for the three  months  ended March 31, 2004.
The increase  was  primarily  due to increased  fee income from ATM activity and
debit card transaction fee income.

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

General and  administrative  expenses  were $6.7  million for the quarter  ended
March 31, 2004  compared to $8.3  million for the quarter  ended March 31, 2005.
Salaries  and  employee  benefits  were $4.0  million for the three months ended
March 31, 2004, as compared to $4.5 million for the three months ended March 31,
2005,  an  increase  of 12.1%,  primarily  due to an  increase  in the number of
banking  Associates in business  banking,  Associates in the Company's  expanded
hours call center,  Associates in new branches, and normal salary increases. The
Company  has added  several  Associates  in a Banking  Group  that is focused on
growing small to medium sized business banking  relationships.  Also as a result
of new  branches,  equipment  purchased  to  improve  Customer  convenience  and
increased  checking  activity,  net  occupancy,  furniture and fixtures and data
processing  expenses increased  $323,000,  including  increased  depreciation of
$145,000,  when comparing the two periods.  Marketing expenses were $197,000 for
the three months ended March 31, 2004, compared to $482,000 for the three months
ended March 31, 2005.  This is primarily  attributed to the Bank's "Totally Free
Checking With a Gift"  initiative;  introduction of Penny  Pavilion,  the Bank's
free coin counting  service;  marketing of the Bank's  expanded  banking  hours,
including Saturday banking at all Bank branches; and marketing of the Bank's new
branch in  Wilmington,  NC.  The  Bank's  "Totally  Free  Checking  With a Gift"
promotion  involves  significant direct mail advertising as well as direct media
advertising.  Other  expenses were $892,000 for the quarter ended March 31, 2004
compared to $1.5  million for the quarter  ended March 31, 2005.  Other  expense
increased due to increased debit card and ATM  transaction  expenses of $75,000,
loss on  write-off  of  signage  related to the  Bank's  re-branding  efforts in
conjunction with the initiation of "6 Day Branch Banking" of $122,000, increased
costs  incurred  related to  compliance  with  Sarbanes-Oxley  of  $130,000  and
increased deposit account losses of $111,000. The increase in net deposit losses
and increased debit card and ATM  transaction  expenses are tied directly to the
increased  number of  personal  checking  accounts.  The Bank  expects  to incur
similar  increased  professional  expenses  related  to  the  implementation  of
Sarbanes-Oxley compliance throughout the remainder of the year.

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

Income  taxes  were $1.8  million  for the three  months  ended  March 31,  2004
compared  to $2.2  million  for the  three  months  ended  March 31,  2005.  The
effective income tax rate as a percentage of pretax income was 33.24% and 34.24%
for the  quarters  ended March 31, 2004 and 2005,  respectively.  The  effective
income  tax rate  differs  from  the  statutory  rate  primarily  due to  income
generated by bank-owned  life  insurance,  municipal  securities that are exempt
from federal and certain  state taxes,  and the increase in the current  quarter
earnings  over the  comparable  prior year  earnings  that are subject to higher
incremental tax rates.

The  Company's  effective  income  tax  rates  take into  consideration  certain
assumptions  and estimates  made by  management.  No assurance can be given that
either the tax returns submitted by management or the income tax reported on the
consolidated financial statements will not be adjusted by either adverse rulings
by the U.S.  Tax court,  changes  in the tax code,  or  assessments  made by the
Internal  Revenue  Service.   The  Company  is  subject  to  potential   adverse
adjustments, including but not limited to: an increase in


                                       23
<PAGE>

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

MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE THREE MONTHS ENDED
-----------------------------------------------------------------------------
MARCH 31, 2004 AND 2005 - CONTINUED
-----------------------------------

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

The statutory federal or state income tax rates, the permanent non-deductibility
of amounts currently considered  deductible either now or in future periods, and
the  dependency on the  generation  of the future  taxable  income,  in order to
ultimately realize deferred income tax assets.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE SIX MONTHS ENDED
---------------------------------------------------------------------------
MARCH 31, 2004 AND 2005
-----------------------

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

Interest  income for the six months  ended March 31,  2005,  increased  to $36.9
million as compared to $31.7  million for the six months  ended March 31,  2004.
The earning  asset  yield for the six months  ended  March 31,  2005,  was 5.78%
compared  to a yield of 5.61%  for the six  months  ended  March 31,  2004.  The
average yield on loans  receivable  for the six months ended March 31, 2005, was
6.25%  compared to 6.16% for the six months ended March 31, 2004.  The increased
yield on loans is primarily due to the increased yield on commercial  loans with
interest rates tied to the prime lending rate. The prime rate was 5.75% at March
31, 2005,  compared to 4.00% at March 31, 2004. Due to a decline in amortization
of premiums on investment  securities due to slower  prepayments in fiscal 2005,
the yield on  investments  increased to 4.89% for the six months ended March 31,
2005,  from  4.61% for the six  months  ended  March  31,  2004.  Total  average
interest-earning  assets were $1.3  billion  for the six months  ended March 31,
2005 as compared to $1.1 billion for the six months  ended March 31,  2004.  The
increase in average  interest-earning  assets is primarily due to an increase in
average loans receivable of  approximately  $108.4 million  resulting  primarily
from growth in the  commercial  loan  portfolio  and an  increase in  investment
securities of approximately $36.8 million, primarily funded by borrowings.

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

Interest expense on  interest-bearing  liabilities was $13.4 million for the six
months  ended March 31,  2005,  as compared to $11.6  million for the six months
ended March 31,  2004.  The average  cost of deposits  for the six months  ended
March 31, 2005,  was 1.37%  compared to 1.47% for the six months ended March 31,
2004.  The cost of  interest-bearing  liabilities  was 2.11% for the six  months
ended March 31, 2005  compared to 2.06% for the six months ended March 31, 2004.
The cost of FHLB advances,  reverse  repurchase  agreements and other borrowings
was 3.68%,  2.15% and 5.37%,  respectively,  for the six months  ended March 31,
2005.  For the six  months  ended  March 31,  2004,  the cost of FHLB  advances,
reverse  repurchase  agreements and other borrowings was 3.89%, 1.51% and 4.31%,
respectively.  The  increased  cost of funds on other  borrowings  is due to the
increased  short-term  interest rates. At March 31, 2005, the federal funds rate
was 2.96%  compared to 1.05% at March 31, 2004.  Total average  interest-bearing
liabilities  increased  from $1.1  billion at March 31, 2004 to $1.3  billion at
March 31, 2005. The increase in average  interest-bearing  liabilities is due to
an increase in average deposits of  approximately  $101.5 million as a result of
the Company's focus on checking growth, increased average FHLB advances of $84.6
million used to fund loan and investment securities growth and increased average
Customer  repurchase  agreements  of $8.3  million.  This increase was partially
offset by a decrease in average reverse repurchase agreements of $51.4 million.

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

Net interest  income was $23.4  million for the six months ended March 31, 2005,
as compared to $20.1  million for the six months ended March 31,  2004.  The net
interest  margin was 3.67% for the six months ended March 31, 2005,  compared to
3.55% for the six months ended March 31, 2004.


                                       24
<PAGE>

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

MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE SIX MONTHS ENDED
---------------------------------------------------------------------------
MARCH 31, 2004 AND 2005 - CONTINUED
-----------------------------------

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

The following table  summarizes the average balance sheet and the related yields
on interest-earning  assets and deposits and borrowings for the six months ended
March 31, 2004 and 2005:

<TABLE>
<CAPTION>
                                                         Six Months Ended March 31,
                                                         --------------------------
                                                2004                                     2005
                                                ----                                     ----
                             Average          Income/      Yield/       Average         Income/       Yield/
                           Balance (1)        Expense       Rate       Balance (1)      Expense        Rate
                           -----------        -------       ----       -----------      -------        ----
<S>                         <C>             <C>             <C>        <C>             <C>             <C>
Assets
Earning assets
  Loans (2)                 $  727,430      $   22,398      6.16%      $  835,820      $   26,104      6.25%
  Investment
    Securities, MBS
    Securities and
    Other (3)                  403,023           9,294      4.61%         439,783          10,753      4.89%
                            ----------      ----------                 ----------      ----------
Total earning assets        $1,130,453      $   31,692      5.61%      $1,275,603      $   36,857      5.78%
                            ==========      ----------                 ==========      ----------

Liabilities
  Deposits                     691,148           5,065      1.47%         792,635           5,434      1.37%
  Borrowings                   431,753           6,509      3.02%         481,365           8,011      3.33%
                            ----------      ----------                 ----------      ----------
Total interest-bearing
  Liabilities               $1,122,901          11,574      2.06%      $1,274,000          13,445      2.11%
                            ==========      ----------                 ==========      ----------

Net interest income                         $   20,118                                 $   23,412
                                            ==========                                 ==========
Net interest margin                                         3.55%                                      3.67%
Net yield on earning                                        3.56%                                      3.67%
  Assets
</TABLE>

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

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

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

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

The Company's  provision for loan losses decreased $75,000 from $1.1 million for
the six months ended March 31, 2004,  to $975,000 for the six months ended March
31, 2005  primarily due to improving  economic  conditions  and the risk factors
related  to the  underlying  portfolio.  The  allowance  for  loan  losses  as a
percentage  of loans was 1.36% at March 31,  2005 as  compared to 1.41% at March
31, 2004.  Loans  delinquent  90 days or more were $7.1 million or .82% of total
loans at March 31,  2005,  compared  to $6.1  million or 0.79% of total loans at
March 31, 2004. The allowance for loan losses was 165% of loans  delinquent more
than 90 days at  March  31,  2005,  compared  to 177% at  March  31,  2004.  Net
charge-offs  for the six months ended March 31, 2005 were  $284,000  compared to
$124,000 for the six months ended March 31, 2004.  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.


                                       25
<PAGE>

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

MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE SIX MONTHS ENDED
---------------------------------------------------------------------------
MARCH 31, 2004 AND 2005 - CONTINUED
-----------------------------------

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

For the six months ended March 31, 2005,  other income was $6.1 million compared
to $4.8  million  for the six months  ended  March 31,  2004.  Fees and  service
charges from deposit accounts  increased $731,000 or 41% to $2.5 million for the
six months  ended March 31,  2005,  compared to $1.8  million for the six months
ended March 31, 2004.  The  majority of this  increase is due to fee income from
increased personal checking accounts.  In the first two quarters of fiscal 2005,
checking  account balances grew  approximately  23%. During the six months ended
March 31, 2004,  the Company  securitized  mortgage  loans into  mortgage-backed
securities  ("MBS")  and  then  sold the MBS and sold  loans  aggregating  $32.2
million  of loans held for sale  compared  to $28.5  million  for the six months
ended  March 31,  2005.  Gain on sale of loans was  $554,000  for the six months
ended March 31,  2005,  compared to $800,000  for the six months ended March 31,
2004.  Gains on sales of securities were $246,000 for the six months ended March
31,  2005,  compared  to losses of $267,000  for the six months  ended March 31,
2004. In addition,  the Company had gain on investment security held to maturity
called by issuer of $160,000  for the six months ended March 31, 2005 and $0 for
the six months ended March 31,  2004.  Other income was $1.4 million for the six
months  ended March 31,  2005,  as  compared to $1.3  million for the six months
ended March 31, 2004.  The increase was  primarily  due to increased  fee income
from ATM activity and debit card transaction fee income.

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

General and administrative  expenses were $13.3 million for the six months ended
March 31,  2004  compared to $16.1  million  for the six months  ended March 31,
2005.  Salaries and employee benefits were $8.0 million for the six months ended
March 31,  2004,  as compared to $8.9 million for the six months ended March 31,
2005,  an  increase  of 11.5%,  primarily  due to an  increase  in the number of
banking  Associates in business  banking,  Associates in the Company's  expanded
hours call center,  Associates in new branches and normal salary increases.  The
Company  has added  several  Associates  in a Banking  Group  that is focused on
growing small to medium sized business banking  relationships.  Also as a result
of new  branches,  equipment  purchased  to  improve  Customer  convenience  and
increased  checking  activity,  net  occupancy,  furniture and fixtures and data
processing  expenses increased  $534,000,  including  increased  depreciation of
$193,000,  when comparing the two periods.  Marketing expenses were $379,000 for
the six months  ended March 31,  2004,  compared to $993,000  for the six months
ended March 31, 2005.  This is primarily  attributed to the Bank's "Totally Free
Checking With a Gift"  initiative;  introduction of Penny  Pavilion,  the Bank's
free coin counting  service;  marketing of the Bank's  expanded  banking  hours,
including Saturday banking at all Bank branches; and marketing of the Bank's new
branch in  Wilmington,  NC.  The  Bank's  "Totally  Free  Checking  With a Gift"
promotion  involves  significant direct mail advertising as well as direct media
advertising. Other expenses were $1.8 million for the six months ended March 31,
2004  compared to $2.5 million for the six months  ended March 31,  2005.  Other
expense  increased due to increased debit card and ATM  transaction  expenses of
$160,000, loss on write-off of signage related to the Bank's re-branding efforts
in conjunction with the initiation of "6 Day Branch Banking" of $122,000,  costs
incurred  related to compliance  with  Sarbanes-Oxley  of $130,000 and increased
deposit account losses of $175,000.  The increase in net deposit losses are tied
directly to the increased number of personal checking accounts. The Bank expects
to incur similar increased  professional  expenses related to the implementation
of Sarbanes-Oxley compliance throughout the remainder of the year.

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

Income taxes were $3.5 million for the six months ended March 31, 2004  compared
to $4.3 million for the six months ended March 31, 2005.  The  effective  income
tax rate as a  percentage  of pretax  income  was  33.24% and 34.25% for the six
months ended March 31, 2004 and 2005,  respectively.  The  effective  income tax
rate  differs  from the  statutory  rate  primarily  due to income  generated by
bank-owned life insurance, municipal securities that are exempt from federal and
certain  state taxes,  and the increase in the current six months  earnings over
the comparable  prior year earnings that are subject to higher  incremental  tax
rates.


                                       26
<PAGE>

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

MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE SIX MONTHS ENDED
---------------------------------------------------------------------------
MARCH 31, 2004 AND 2005 - CONTINUED
-----------------------------------

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

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

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 March 31, 2005:
 Total Capital:                   $114,321      13.50%      $67,759       8.00%      $84,699      10.00%
   (To Risk Weighted Assets)
 Tier 1 Capital:                  $104,326      12.32%          N/A        N/A       $50,819       6.00%
   (To Risk Weighted Assets)
 Tier 1 Capital:                  $104,326       7.19%      $43,540       3.00%      $72,510       5.00%
   (To Total Assets)
 Tangible Capital:                $104,326       7.19%      $21,770       1.50%          N/A        N/A
   (To Total Assets)
</TABLE>

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

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

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

The  Company  adopted  the  guidance of EITF 03-1,  excluding  paragraphs  10-20
effective as of September  30, 2004. As a result of this  adoption,  the Company
provides additional


                                       27
<PAGE>

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

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

disclosures,  which  are  found in  Notes 2 and 3 of this  report.  The  initial
adoption of this issue, which excludes  paragraphs 10-20 did not have a material
impact on the financial condition or results of operations of the Company.

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

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

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

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

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



PART I. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

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

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

Net portfolio value (NPV) represents the market value of portfolio equity and is
equal to the market value of assets minus the market value of liabilities,  with
adjustments made for off-balance  sheet items over a range of assumed changes in
market  interest  rates.  The Bank's Board of Directors  has adopted an interest
rate risk policy which  establishes  maximum  allowable  decreases in NPV in the
event of a sudden and sustained one hundred to four hundred basis point increase
or decrease in market  interest  rates.  The following table presents the Bank's
change in NPV as computed by the OTS for various  rate shock  levels as of March
31, 2005.


                                       28
<PAGE>

PART I. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                             Board                 Board               Market           Market
                                             Limit                 Limit               Value            Value
                                          Minimum NPV             Maximum            Of Assets        Portfolio         NPV
     Change in interest rates                Ratio            Decline in NPV          03/31/05         03/31/05        Ratio
-------------------------------          -------------       -----------------      ------------      -----------      ------
<S>                                          <C>                  <C>                        <C>             <C>         <C>
300 basis point rise                         5.00%                400 BPS             $1,444,364         $133,513        9.24%
200 basis point rise                         6.00%                300 BPS             $1,469,666         $149,417       10.17%
100 basis point rise                         6.00%                250 BPS             $1,494,371         $161,914       10.83%
No change                                    6.00%                                    $1,516,427         $175,471       11.57%
100 basis point decline                      6.00%                250 BPS             $1,531,338         $181,937       11.88%
200 basis point decline                      6.00%                300 BPS                    N/A              N/A          N/A
300 basis point decline                      6.00%                350 BPS                    N/A              N/A          N/A
</TABLE>

The preceding  table  indicates that at March 31, 2005, in the event of a sudden
and sustained increase in prevailing market interest rates, the Bank's NPV would
be  expected  to  decrease,  and  that in the  event  of a  sudden  decrease  in
prevailing  market interest rates,  the Bank's NPV would be expected to increase
minimally.  Values for the 200 and 300 basis point decline are not indicated due
to the level of interest  rates at March 31, 2005. At March 31, 2005, the Bank's
estimated  changes in NPV were  within the  limits  established  by the Board of
Directors.

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

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

The Company's  management,  including the Company's  principal executive officer
and  principal  financial  officer,  have  evaluated  the  effectiveness  of the
Company's  "disclosure controls and procedures," as such term is defined in Rule
13a-15(e)  under the Securities  Exchange Act of 1934, as amended (the "Exchange
Act").  Based  upon  their  evaluation,  the  principal  executive  officer  and
principal  financial officer concluded that, as of the end of the period covered
by this report, the Company's  disclosure controls and procedures were effective
for the purpose of ensuring that the information required to be disclosed in the
reports  that the  Company  files or  submits  under the  Exchange  Act with the
Securities  and  Exchange  Commission  (the "SEC") (1) is  recorded,  processed,
summarized and reported within the time periods specified in the SEC's rules and
forms,  and (2) is accumulated  and  communicated  to the Company's  management,
including  its  principal  executive  and  principal   financial  officers,   as
appropriate  to  allow  timely  decisions  regarding  required  disclosure.   In
addition,  based  on that  evaluation,  no  material  changes  in the  Company's
internal  control over  financial  reporting  occurred  during the quarter ended
March  31,  2005  that has  materially  affected,  or is  reasonably  likely  to
materially affect, the Company's internal control over financial reporting.


                                       29
<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  the Company and its
subsidiaries in these matters,  the Company  believes none of the lawsuits would
have a material impact on the Company's financial condition.

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

      Not Applicable.

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

      Not Applicable.

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

      At the Company's annual stockholders' meeting held on January 25, 2005 the
following items were ratified:

      The election of directors of all  nominees:  E. Lawton Benton and James P.
      Creel.

      At the  meeting,  a total of  15,935,823  votes were  entitled to be cast.
      Votes for E. Lawton Benton were 13,619,108 with 58,734 withheld; votes for
      James P. Creel were 13,362,100 with 315,742 withheld.  The directors whose
      terms continued and the years their terms expire are as follows:  G. David
      Bishop (2006), James T. Clemmons (2006), Frank A. Thompson,  II (2006), J.
      Robert Calliham  (2007),  James H. Dusenbury  (2007) and Michael C. Gerald
      (2007).

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

      Not Applicable.

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

      Exhibits

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

            (b)       Certificate of Amendment to Certificate of Incorporation
                      of Coastal Financial Corporation (4)

            (c)       Bylaws of Coastal Financial Corporation (1)

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

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

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

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

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

            (f)       1990 Stock Option Plan (2)

            (g)       Directors Performance Plan (3)

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

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

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

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

            (b)       Section 1350 Certification (Chief Financial Officer)


                                       30
<PAGE>

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

Item 6. Exhibits, continued
        -------------------

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

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

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

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

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

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


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<PAGE>

                                   SIGNATURES

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

                                           COASTAL FINANCIAL CORPORATION


         May 10, 2005                       /s/ Michael C. Gerald
         ------------                      ----------------------
         Date                              Michael C. Gerald
                                           President and Chief Executive Officer


         May 10, 2005                       /s/ Jerry L. Rexroad
         ------------                      ---------------------
         Date                              Jerry L. Rexroad
                                           Executive Vice President and
                                           Chief Financial Officer


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