COASTAL FINANCIAL CORP /DE, 10-Q, 1999-05-14

COASTAL FINANCIAL CORP /DE
10-Q, 1999-05-14
SAVINGS INSTITUTION, FEDERALLY CHARTERED

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

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

FORM 10-Q

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

For the Quarter Ended March 31, 1999

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

Registrant's telephone number, including area code (843) 448-5151

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 [ ] NO [ X ]

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of March 31, 1999.

Common Stock $.01 Par Value Per Share 6,433,651 Shares
- ------------------------------------- ----------------
(Class) (Outstanding)
<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999

TABLE OF CONTENTS

PART I- Consolidated Financial Information

Item
1. Consolidated Financial Statements (unaudited):

Consolidated Statements of Financial Condition
as of September 30, 1998 and March 31, 1999

Consolidated Statements of Operations for the three
months ended March 31, 1998 and 1999

Consolidated Statements of Operations for the six
months ended March 31, 1998 and 1999

Consolidated Statements of Cash Flows for the six
months ended March 31, 1998 and 1999

Consolidated Statements of Stockholders' Equity
and Comprehensive Income

Notes to Consolidated Financial Statements

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

3. Quantitative and Qualitative Disclosures about
Market Risk

Part II - Other Information

Item
1.Legal Proceedings

2.Changes in Securities and Use of Proceeds

3.Default Upon Senior Securities

4.Submission of Matters to a Vote of Securities Holders

5.Other information

6.Exhibits and Reports on Form 8-K

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

September 30, March 31,
1998 1999
-------- --------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
ASSETS:
Cash & amounts due from banks .................... $ 11,978 $ 14,533
Short-term interest-bearing deposits ............. 3,688 10,290
Investment securities available for sale ......... 9,841 4,395
Mortgage-backed securities available for sale .... 170,181 164,854
Loans receivable (net of allowance for
loan losses of $5,668 at September 30,
1998 and $6,160 at March 31, 1999) ............ 414,264 428,120
Loans receivable held for sale ................... 10,486 24,817
Real estate acquired through foreclosure ......... 35 35
Office property and equipment, net ............... 9,001 9,867
Federal Home Loan Bank stock, at cost ............ 7,266 8,601
Accrued interest receivable on loans ............. 2,546 2,614
Accrued interest receivable on investments ....... 1,324 1,207
Other assets and deferred charges ................ 2,950 3,208
-------- --------
$643,560 $672,541
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY:

LIABILITIES:
Deposits ......................................... $386,321 $385,397
Securities sold under agreements to
repurchase .................................... 59,214 72,392
Advances from Federal Home Loan Bank ............. 144,909 162,013
Other borrowings ................................. 6,437 2,569
Drafts outstanding ............................... 1,615 1,514
Advances by borrowers for property taxes
and insurance .................................. 1,329 844
Accrued interest payable ......................... 1,352 1,252
Other liabilities ................................ 4,532 5,721
-------- --------
Total liabilities .............................. 605,709 631,702
-------- --------

STOCKHOLDERS' EQUITY:
Serial preferred stock, 1,000,000 shares
authorized and unissued ....................... -- --
Common stock, $.01 par value, 15,000,000
shares authorized; 6,263,777 shares at
September 30, 1998 and 6,433,651 shares
at March 31, 1999 issued and outstanding ...... 63 64
Additional paid-in capital ....................... 8,983 9,224
Retained earnings ................................ 28,369 31,204
Accumulated other comprehensive
income, net of tax ............................. 436 347
-------- --------
Total stockholders' equity ..................... 37,851 40,839
-------- --------
$643,560 $672,541
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999

1998 1999
----------- -----------
(Unaudited)
(Dollars in thousands,
except per share data)
<S> <C> <C>
Interest income:
Loans receivable ........................... $ 9,036 $ 9,800
Investment securities ...................... 387 398
Mortgage-backed securities ................ 1,287 2,177
Other ..................................... 63 77
----------- -----------
Total interest income ..................... 10,773 12,452
----------- -----------

Interest expense:
Deposits .................................... 3,431 3,631
Securities sold under agreements to
repurchase ................................ 901 896
Advances from Federal Home Loan Bank ........ 1,623 2,165
----------- -----------
Total interest expense .................... 5,955 6,692
----------- -----------
Net interest income ......................... 4,818 5,760
Provision for loan losses ...................... 250 225
----------- -----------
Net interest income after provision
for loan losses ........................... 4,568 5,535
----------- -----------

Other income:
Fees and service charges .................... 508 594
Income (loss) from real estate owned ........ (34) 3
Income from real estate held for investment .. 3 --
Gain on sale of loans receivable, net ....... 340 216
Gain on sale of securities available for sale 253 43
Other income ................................ 506 659
----------- -----------
1,576 1,515
----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 (continued)

1998 1999
----------- -----------
(Unaudited)
(Dollars in thousands,
except per share data)
<S> <C> <C>
General and administrative expenses:
Salaries and employee benefits .............. 1,823 2,131
Net occupancy, furniture and fixtures
and data processing expense ............... 769 909
FDIC insurance premium ...................... 54 54
Other expenses .............................. 858 900
----------- -----------
3,504 3,994
----------- -----------
Earnings before income taxes ................... 2,640 3,056

Income taxes ................................... 961 1,117
----------- -----------
Net income ..................................... $ 1,679 $ 1,939
=========== ===========

Earnings per common share
Basic ........................................ $ .27 $ .30
=========== ===========
Diluted ...................................... $ .26 $ .30
=========== ===========

Weighted average common shares
outstanding - basic .......................... 6,241,000 6,378,000
=========== ===========

Weighted average common shares
outstanding - diluted ........................ 6,552,000 6,543,000
=========== ===========

Dividends per share ............................ $ .07 $ .07
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999

1998 1999
----------- -----------
(Unaudited)
(Dollars in thousands,
except per share data)
<S> <C> <C>
Interest income:
Loans receivable ........................... $ 18,013 $ 19,139
Investment securities ...................... 854 566
Mortgage-backed securities ................ 1,939 4,499
Other ..................................... 145 180
----------- -----------
Total interest income ..................... 20,951 24,384
----------- -----------

Interest expense:
Deposits .................................... 7,033 7,484
Securities sold under agreements to
repurchase ................................ 1,270 1,651
Advances from Federal Home Loan Bank ........ 3,099 4,386
----------- -----------
Total interest expense .................... 11,402 13,521
----------- -----------
Net interest income ......................... 9,549 10,863
Provision for loan losses ...................... 440 410
----------- -----------
Net interest income after provision
for loan losses ........................... 9,109 10,453
----------- -----------

Other income:
Fees and service charges .................... 991 1,064
Loss from real estate owned ................. (54) (14)
Income from real estate held for investment .. 221 --
Gain on sale of loans receivable, net ....... 697 577
Gain on sale of securities available for sale 268 225
Other income ................................ 968 1,145
----------- -----------
3,091 2,997
----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999 (continued)

1998 1999
----------- -----------
(Unaudited)
(Dollars in thousands,
except per share data)
<S> <C> <C>
General and administrative expenses:
Salaries and employee benefits .............. 3,707 4,160
Net occupancy, furniture and fixtures
and data processing expense ............... 1,558 1,801
FDIC insurance premium ...................... 106 106
Other expenses .............................. 1,611 1,531
----------- -----------
6,982 7,598
----------- -----------
Earnings before income taxes ................... 5,218 5,852

Income taxes ................................... 1,911 2,123
----------- -----------
Net income ..................................... $ 3,307 $ 3,729
=========== ===========

Earnings per common share
Basic ........................................ $ .53 $ .59
=========== ===========
Diluted ...................................... $ .50 $ .57
=========== ===========

Weighted average common shares
outstanding - basic .......................... 6,228,000 6,322,000
=========== ===========

Weighted average common shares
outstanding - diluted ........................ 6,551,000 6,573,000
=========== ===========

Dividends per share ............................ $ .14 $ .14
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999

1998 1999
--------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings ................................. $ 3,307 $ 3,729
Adjustments to reconcile net earnings
to net cash provided by
operating activities:
Income from real estate
held for investment .................... (221) --
Depreciation ............................ 490 565
Provision for loan losses ............... 440 410
Origination of loans receivable
held for sale ......................... (26,599) (41,337)
Proceeds from sales of loans receivable
held for sale ......................... 30,241 27,006
(Increase) decrease in:
Other assets and deferred charges ........ (1,851) (258)
Accrued interest receivable .............. (152) 49
Increase (decrease) in:
Accrued interest payable ................. 375 (100)
Other liabilities ......................... (441) 1,189
--------- ---------
Net cash provided by (used in)
operating activities .............. 5,589 (8,747)
--------- ---------
Cash flows from investing activities:
Purchases of investment securities
available for sale ...................... (9,311) (4,718)
Proceeds from sales of investment
securities available for sale ........... 4,500 5,200
Proceeds from maturities of investment
securities available for sale ............ 18,422 4,895
Purchases of mortgage-backed securities
available for sale ...................... (133,022) (104,047)
Proceeds from sales of mortgage-backed
securities available for sale ........... 37,769 59,104
Origination of loans receivable, net ......... (76,113) (98,111)
Purchase of loans receivable ................. (2,068) (1,710)
Principal collected on loans receivable
and mortgage-backed securities, net ..... 70,105 135,308
Proceeds from sale of real estate
acquired through foreclosure, net ....... 23 --
Purchases of office properties and
equipment ................................ (932) (1,431)
Purchases of FHLB stock, net ................. (483) (1,335)
--------- ---------
Net cash used in
investing activities .............. (91,110) (6,845)
--------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999 (CONTINUED)

1998 1999
--------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
Cash flows from financing activities:
Increase (decrease) in deposits, net ......... $ 6,028 $ (924)
Increase (decrease) in securities sold
under agreement to repurchase, net .......... (236) 13,178
Proceeds from FHLB advances .................. 107,550 105,150
Repayment of FHLB advances ................... (94,009) (88,046)
Proceeds(repayments)from other
borrowings, net ............................ 68,390 (3,868)
Decrease in advance payments by borrowers
for property taxes and insurance, net ..... (591) (485)
Increase in drafts outstanding, net .......... (610) (101)
Dividend to stockholders ..................... (833) (894)
Other financing activities, net .............. 628 739
--------- ---------
Net cash provided by financing ............... 86,317 24,749
--------- ---------
activities

Net increase in cash and cash equivalents ...... 796 9,157
--------- ---------
Cash and cash equivalents at beginning
of the period ................................ 13,411 15,666
--------- ---------
Cash and cash equivalents at end
of the period ................................ $ 14,207 $ 24,823
========= =========

Supplemental information:
Interest paid ................................ $ 11,027 $ 13,621
========= =========

Income taxes paid ............................ $ 2,243 $ 1,076
========= =========

Supplemental schedule of non-cash investing
and financing transactions:

Transfer of mortgage loans to real estate
acquired through foreclosure .............. $ 8 $ --
========= =========

Securitization of mortgage loans into
mortgage-backed securities ................ $ -- $ 4,498
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME

Accumulated
Other
Additional Compre- Total
Common Paid-In Treasury Retained hensive Stockholders'
Stock Capital Stock Earnings Income Equity
----- ------- ----- -------- ------ ------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at September
30, 1997 ................... $ 46 $ 8,698 $ (182) $ 23,402 $ 427 $ 32,391
Net income ................... -- -- -- 3,307 -- 3,307
Other comprehensive
income, net of tax:
Unrealized gains arising
during period, net of
taxes of $103,600 ........... -- -- -- -- 259 --
Less: reclassification
adjustment for gains
included in net income,
net of taxes of $107,200 .... -- -- -- -- (161) --
--------
Other comprehensive income - - -- -- -- 98 98
-------- --------
Comprehensive income ......... -- -- -- -- -- 3,405
--------
Exercise of stock
options .................... -- 191 182 (165) -- 208
Cash dividends ............... -- -- -- (833) -- (833)

Balance at March
31, 1998 ................... $ 46 $ 8,889 $ 0 $ 25,711 $ 525 $ 35,171
======== ======== ======== ======== ======== ========

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(continued)

Accumulated
Other
Additional Compre- Total
Common Paid-In Treasury Retained hensive Stockholders'
Stock Capital Stock Earnings Income Equity
----- ------- ----- -------- ------ ------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at September
30, 1998 ................... $ 63 $ 8,983 $ 0 $ 28,369 $ 436 $ 37,851
Net income ................... -- -- -- 3,729 -- 3,729
Other comprehensive
income, net of tax:
Unrealized gains arising
during period, net of
taxes of $18,400 ............ -- -- -- -- 46 --
Less: reclassification
adjustment for gains
included in net income,
net of taxes of $90,000 ..... -- -- -- -- (135) --
--------
Other comprehensive loss ..... -- -- -- -- (89) (89)
-------- --------
Comprehensive income ......... -- -- -- -- -- 3,640
--------
Exercise of stock
options .................... 1 241 -- -- -- 242
Cash dividends ............... -- -- -- (894) -- (894)

Balance at March
31, 1999 ................... $ 64 $ 9,224 $ 0 $ 31,204 $ 347 $ 40,839
======== ======== ======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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 generally accepted accounting principles. All adjustments,
consisting only of normal recurring accruals, which in the opinion of management
are necessary for fair presentation of the interim financial statements, have
been included. The results of operations for the three and six month periods
ended March 31, 1999 are not necessarily indicative of the results which may be
expected for the entire fiscal year. These consolidated financial statements
should be read in conjunction with the Company's audited consolidated financial
statements and related notes for the year ended September 30, 1998, included in
the Company's 1998 Annual Report to Stockholders. The principal business of the
Company is conducted by its wholly-owned subsidiary, Coastal Federal Savings
Bank (the "Bank"). The information presented hereon, therefore, relates
primarily to the Bank.

(2) LOANS RECEIVABLE, NET

Loans receivable, net consists of the following:
<TABLE>
<CAPTION>
September 30, March 31,
1998 1999
--------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
First mortgage loans:
Single family to 4 family units ............. $ 248,781 $ 249,566
Other, primarily commercial
real estate ................................ 95,420 104,967
Construction loans .......................... 31,261 35,723
Consumer and commercial loans:
Installment consumer loans .................. 19,489 18,524
Mobile home loans ........................... 990 1,048
Deposit account loans ....................... 1,078 1,203
Equity lines of credit ...................... 18,655 19,196
Commercial and other loans .................. 14,848 18,586
--------- ---------
430,522 448,813
Less:
Allowance for loan losses ................... 5,668 6,160
Deferred loan fees (costs), net ............. (702) (434)
Undisbursed portion of loans in process ..... 11,292 14,967
--------- ---------
$ 414,264 $ 428,120
========= =========
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The changes in the allowance for loan losses consist of the following for the
six months ended:
<TABLE>
<CAPTION>
Six Months Ended March 31,
1998 1999
----- ------
(Dollars in thousands)
<S> <C> <C>
Allowance at beginning of
period........................................... $4,902 $5,668
Allowance recorded on
acquired loans................................... 29 21
Provision for loan losses......................... 440 410
----- ------
Recoveries:
Residential real estate.......................... -- --
Commercial real estate........................... - 137
Consumer......................................... 8 44
----- ------
Total recoveries............................... 8 181
----- ------
Charge-offs:
Residential real estate.......................... -- --
Commercial real estate........................... -- --
Consumer......................................... 149 120
------ ------
Total charge-offs.............................. 149 120
------ ------
Net charge-offs (recoveries) .................. 141 (61)
------ -------
Allowance at end of period....................... $5,230 $6,160
====== ======
Ratio of allowance to net
loans outstanding at the
end of the period................................ 1.24% 1.36%

Ratio of net charge-offs (recoveries)
to average loans outstanding
during the period................................ .07% (.03)%
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

At March 31, 1999
Percent of Loans in each
Balance at end of period applicable to: Amount category to total loans
------ -----------------------
<S> <C> <C>
Residential Real Estate $1,526 74.14%
Commercial Real Estate 4,015 27.11%
Consumer 619 1.25%
------ -----
$6,160 100.00%
====== ======
</TABLE>
Non-accrual loans which were over ninety days delinquent totaled approximately
$601,000 at March 31, 1999. For the six months ended March 31, 1999, interest
income which would have been recorded would have been approximately $7,000, had
non-accruing loans been current in accordance with their original terms.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(3) DEPOSITS
Deposits consist of the following:
<TABLE>
<CAPTION>
September 30, 1998 March 31, 1999
---------------------- ------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- ---- -------- ----
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Transaction accounts ....... $193,926 3.12% $207,173 2.99%
Passbook accounts .......... 37,242 2.52 36,866 2.57
Certificate accounts ....... 155,153 5.38 141,358 5.06
-------- ---- -------- ----
$386,321 3.96% $385,397 3.71%
======== ==== ======== ====
</TABLE>
(4) ADVANCES FROM FEDERAL HOME LOAN BANK

Advances from Federal Home Loan Bank ("FHLB") consist of the following:
<TABLE>
<CAPTION>
September 30, 1998 March 31, 1999
---------------------- ------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- ---- -------- ----
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Maturing within:
1 year $ 28,235 5.74% $ 46,926 5.11%
2 years 6,961 6.19 6,598 6.22
3 years 32,146 4.83 32,990 4.87
4 years 4,261 6.62 10,899 6.43
5 years and thereafter 73,306 5.21 64,600 5.05
-------- ------ -------- ----
$144,909 5.13% $162,013 5.17%
======== ====== ======= ====
</TABLE>

At September 30, 1998, and March 31, 1999, the Bank had pledged first mortgage
loans with unpaid balances of approximately $231.2 million and $223.9 million,
respectively, as collateral for FHLB advances.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(5) EARNINGS PER SHARE

Basic earnings per share for the three and six month periods ended March 31,
1998 and 1999, are computed by dividing net earnings by the weighted average
common equivalent shares outstanding during the respective periods. Diluted
earnings per share for the three and six month periods ended March 31, 1998 and
1999, are computed by dividing net earnings by the weighted average dilutive
equivalent shares outstanding during the respective periods. All share and per
share data have been retroactively restated for all common stock splits.

(6) COMMON STOCK DIVIDENDS

On May 6, 1998, the Company declared a four-for-three stock split, aggregating
approximately 1,562,000 shares. All share and per share data has been
retroactively restated to give effect to the common stock split.

(7) COMPREHENSIVE INCOME

In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income
(Statement 130). SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Enterprises are required to classify items of "other
comprehensive income" by their nature in the financial statement and display the
balance of other comprehensive income separately in the equity section of a
statement of financial position. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Earlier application is permitted. Comparative
financial statements provided for earlier periods are required to be
reclassified to reflect the provisions of this statement. The Company adopted
Statement 130 in the first quarter of fiscal 1999 and the required disclosure is
presented in the accompanying consolidated statements of stockholder's equity.
<PAGE>
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

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

This report may contain certain "forward-looking statements" within the meaning
of Section 27A of the Securities Exchange Act of 1934, as amended, that
represent the Company's expectations or beliefs concerning future events. Such
forward-looking statements are about matters that are inherently subject to
risks and uncertainties. Factors that could influence the matters discussed in
certain forward-looking statements include the timing and amount of revenues
that may be recognized by the Company, continuation of current revenue and
expense trends (including trends affecting charge-offs), absence of unforeseen
changes in the Company's markets, legal and regulatory changes, general changes
in the economy (particularly in the markets served by the Company), and the
impact of the Year 2000 computer issue.

DISCUSSION OF FINANCIAL CONDITION CHANGES FROM SEPTEMBER 30, 1998 TO MARCH 31,
1999
- --------------------------------------------------------------------------------

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

In accordance with Office of Thrift Supervision (OTS) regulations, the Company
is required to maintain specific levels of cash and "liquid" investments in
qualifying types of United States Treasury, Federal Agency Securities,
mortgage-backed securities, and certain other investments. The required level of
such investments is calculated on a "liquidity base" consisting of net
withdrawable accounts and short-term borrowings, and is currently equal to 4% of
such amount. At March 31, 1999, the company's regulatory liquidity level was
approximately 15%.

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 mortgage, consumer and commercial loan payments, retail
customer deposits, advances from the FHLB, and loan sales. The principal use of
cash flows is the origination of loans receivable and purchase of securities.
The Company originated loans receivable of $102.7 million for the six months
ended March 31, 1998, compared to $139.4 million for the six months ended March
31, 1999. The majority of these loan originations were financed through loan and
mortgage-backed securities principal repayments which amounted to $70.1 million
and $135.3 million for the six month periods ended March 31, 1998 and 1999,
respectively. In addition, the Company sells certain loans in the secondary
market to finance future loan originations. Generally, these loans have
consisted only of mortgage loans which have been originated in the current
period. For the six month period ended March 31, 1998, the Company sold $30.2
million in mortgage loans compared to $27.0 million sold for the six month
period ended March 31, 1999.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

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

For the six month period ended March 31, 1998, the Company purchased $142.3
million in investment and mortgage-backed securities. For the six month period
ended March 31, 1999, the Company purchased $108.8 million in investment and
mortgage-backed securities. These purchases were funded primarily by repayments
within the securities portfolio, short-term reverse repurchase agreements and
FHLB advances.

The Bank experienced a slight decrease of $924,000 in deposits for the six month
period ended March 31, 1999. For the six month period ended March 31, 1999,
transaction accounts increased $13.2 million. This was offset by a decrease in
passbook accounts of $376,000 and certificate accounts of $13.8 million.

At March 31, 1999, the Company had commitments to originate $9.3 million in
mortgage loans, and $30.2 million in undisbursed lines of credit, which the
Company expects to fund from normal operations.

At March 31, 1999, the Company had $113.8 million of certificates of deposits
which were due to mature within one year. Based upon previous experience, the
Company believes that a major portion of these certificates will be renewed.
Additionally, at March 31, 1999, the Company had repurchase agreement lines of
credit and available collateral consisting of investment securities and
mortgage-backed securities of $99.2 million as well as federal funds available
of $15.0 million.

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 $42.2 million at March 31,
1999, exceeding the core capital requirement by $15.3 million. At March 31,
1999, the Bank's risk-based capital of approximately $46.5 million exceeded its
current risk-based capital requirement by $16.4 million. (For further
information see Regulatory Capital Matters).

MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1999
- --------------------------------------------------------------------------------

GENERAL
- -------

Net income increased from $1.7 million for the three months ended March 31,
1998, to $1.9 million for three months ended March 31, 1999, or 15.5%. Net
interest income increased $942,000 primarily as a result of an increase of $1.7
million in interest income offset by a $737,000 increase in interest expense.
Provision for loan losses decreased slightly from $250,000 for three months
ended March 31, 1998, to $225,000 for the three months ended March 31, 1999.
General and administrative expense increased from $3.5 million for the quarter
ended March 31, 1998, to $4.0 million for the quarter ended March 31, 1999.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS - CONTINUED
COMPARISONS OF THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999

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

Interest income for the three months ended March 31, 1999, increased to $12.5
million as compared to $10.8 million for the three months ended March 31, 1998.
The earning asset yield for the three months ended March 31, 1999, was 7.86%
compared to a yield of 8.09% for the three months ended March 31, 1998. The
average yield on loans receivable for the three months ended March 31, 1999 and
1998 was 8.66%. The yield on investments decreased to 5.83% for the three months
ended March 31, 1999, from 6.55% for the three months ended March 31, 1998. The
yield on investment securities decreased due to increased amortization of
premiums on ARM mortgage-backed securities which had higher than expected
prepayments. The Bank expects that its yield on loans will continue to decline
as certain loans which adjust annually continue to reprice. Total average
interest-earning assets were $641.7 million for the quarter ended March 31, 1999
as compared to $538.7 million for the quarter ended March 31, 1998. The increase
in average interest-earning assets is due to an increase in average loans
receivable of approximately $35.2 million and securities of approximately $64.0
million.

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

Interest expense on interest-bearing liabilities was $6.7 million for the three
months ended March 31, 1999, as compared to $6.0 million for March 31, 1998. The
average cost of deposits for the three months ended March 31, 1999, was 3.77%
compared to 4.03% for the three months ended March 31, 1998.

The cost of interest-bearing liabilities was 4.33% for the three months ended
March 31, 1999, as compared to 4.58% for the three months ended March 31, 1998.
The cost of FHLB advances and reverse repurchase agreements was 5.19% and 5.46%,
respectively, for the three months ended March 31, 1999. For the three months
ended March 31, 1998, the cost was 5.54% and 5.97%, respectively. Total average
interest-bearing liabilities increased from $519.7 million at March 31, 1998 to
$619.0 million at March 31, 1999. The increase in average interest-bearing
liabilities is due to an increase in average deposits of approximately $43.9
million, FHLB advances of $49.7 million and reverse repurchase agreements of
$5.3 million.

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

Net interest income was $5.8 million for the three months ended March 31, 1999,
as compared to $4.8 million for the three months ended March 31, 1998. The net
interest margin was 3.54% for the three months ended March 31, 1999, and 3.50%
for the three months ended March 31, 1998.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS - CONTINUED
COMPARISONS OF THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999

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

The provision for loan losses decreased slightly from $250,000 for the period
ended March 31, 1998, to $225,000 for the three months ended March 31, 1999. For
the three months ended March 31, 1999, net recoveries were $119,000 compared to
net charge-offs of $92,000 for the three months ended March 31, 1998. During the
second quarter of fiscal 1999, the Company recovered from two loans previously
charged off amounting to $137,000. The allowance for loan losses as a percentage
of total loans was 1.36% at March 31, 1999, compared to 1.33% at September 30,
1998. Loans delinquent 90 days or more were .13% of total loans at March 31,
1999, compared to .54% at September 30, 1998. The allowance for loan losses was
1,025% of loans delinquent more than 90 days at March 31, 1999, as compared to
251% at September 30, 1998. Management believes that the current level of
allowances is adequate considering the Company's current loss experience and
delinquency trends, among other criteria.

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

For the three months ended March 31, 1999, other income was $1.5 million
compared to $1.6 million for the quarter ended March 31, 1998. Fees and service
charges on loan and deposit accounts was $594,000 for the three months ended
March 31, 1999 compared to $508,000 for the three months ended March 31, 1998
primarily due to growth in core checking accounts. Gain on sale of loans was
$216,000 for the quarter ended March 31, 1999 compared to $340,000 for the
quarter ended March 31, 1998. The Company experienced lower gains on sales as a
result of rising interest rates during the period and reduced sales. In the
quarter ended March 31, 1999, the Company sold $8.4 million compared to $16.0
million in the prior year period. Gain on sale of securities was $43,000 for the
three months ended March 31, 1999 compared to $253,000 for the three months
ended March 31, 1998. These were offset by other income of $659,000 for the
quarter ended March 31, 1999 compared to $506,000 for the quarter ended March
31, 1998.

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

General and administrative expenses increased from $3.5 million for the three
months ended March 31, 1998, to $4.0 million for the three months ended March
31, 1999. Salaries and employee benefits increased from $1.8 million for the
three months ended March 31, 1998, to $2.1 million for the three months ended
March 31, 1999 primarily due to increased lending Associates. Net occupancy,
furniture and fixtures and data processing expenses increased $140,000 when
comparing the two periods. This is primarily a result of increased maintenance,
lease expense and depreciation expense due to the addition of the Coastal
Federal University facility and the North Carolina Office in Sunset Beach, NC.
Other expenses were $900,000 for the quarter ended March 31, 1999, compared to
$858,000 for the quarter ended March 31, 1998, primarily due to normal growth.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS - CONTINUED
COMPARISONS OF THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999

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

Income taxes increased from $961,000 for the three months ended March 31, 1998,
to $1.1 million for the three months ended March 31, 1999, as a result of
increased income before taxes.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE SIX MONTHS ENDED
MARCH 31, 1998 AND 1999
- --------------------------------------------------------------------------------

GENERAL
- -------

Net income increased from $3.3 million for the six months ended March 31, 1998,
to $3.7 million for six months ended March 31, 1999, or 12.8%. Net interest
income increased $1.3 million primarily as a result of an increase in interest
income of $3.4 million offset by an increase of $2.1 million in interest
expense. Provision for loan losses decreased slightly from $440,000 for the six
months ended March 31, 1998, to $410,000 for the six months ended March 31,
1999. Other income decreased $94,000. General and administrative expenses
increased $616,000.

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

Interest income for the six months ended March 31, 1999, increased to $24.4
million as compared to $21.0 million for the six months ended March 31, 1998.
The earning asset yield for the six months ended March 31, 1999, was 7.79%
compared to a yield of 8.25% for the six months ended March 31, 1998. The
average yield on loans receivable for the six months ended March 31, 1999, was
8.65% compared to 8.70% for the six months ended March 31, 1998. The yield on
investments decreased to 5.68% for the six months ended March 31, 1999, from
6.63% for the six months ended March 31, 1998. Total average earning assets were
$634.0 million for the six month period ended March 31, 1999, as compared to
$513.0 million for the six month period ended March 31, 1998.

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

Interest expense on interest-bearing liabilities was $13.5 million for the six
months ended March 31, 1999, as compared to $11.4 million for the six months
ended March 31, 1998. The average cost of deposits for the six months ended
March 31, 1999, was 3.85% compared to 4.10% for the six months ended March 31,
1998. The cost of interest-bearing liabilities was 4.40% for the six months
ended March 31, 1999, as compared to 4.61% for the six months ended March 31,
1998. Total average interest-bearing liabilities increased from $495.1 million
at March 31, 1998 to $614.0 million at March 31, 1999.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS - CONTINUED
COMPARISONS OF THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999

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

Net interest income was $10.9 million for the six months ended March 31, 1999,
as compared to $9.5 million for the six months ended March 31, 1998. The net
interest margin decreased to 3.39% for the six months ended March 31, 1999, from
3.64% for the six months ended March 31, 1998. Since a high percentage of the
Company's assets are adjustable rate mortgage loans which reprice annually
versus many of the Company's liabilities which reprice more quickly, the Company
may experience a decrease in its interest rate spread should interest rates
increase rapidly.

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

The provision for loan losses decreased slightly from $440,000 for the period
ended March 31, 1998, to $410,000 for the six months ended March 31, 1999. For
the six months ended March 31, 1999, net recoveries were $61,000 compared to net
charge-offs of $141,000 for the six months ended March 31, 1998. The allowance
for loan losses as a percentage of total loans was 1.36% at March 31, 1999,
compared to 1.33% at September 30, 1998. Management believes that the current
level of allowances is inadequate considering the Company's current loss
experience and delinquency trends, among other criteria.

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

For the six months ended March 31, 1999, other income decreased $94,000 to $3.0
million compared to $3.1 million for the six months ended March 31, 1998. Fees
and service charges for the six months ended March 31, 1999 were $991,000
compared to $1.1 million for the six months ended March 31, 1999 primarily due
to growth in core checking accounts. Other income increased from $968,000 for
the six months ended March 31, 1998 compared to $1.1 million for the six months
ended March 31, 1999. Gain on sale of loans was $697,000 for the six months
ended March 31, 1998, compared to $577,000 for the six months ended March 31,
1999. The Company experienced lower gains on sales as a result of rising
interest rates during the period and reduced sales. Gain on sale of securities
was $268,000 for the six months ended March 31, 1999, compared to $225,000 for
the six months ended March 31, 1999.

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

General and administrative expenses increased from $7.0 million for the six
months ended March 31, 1998, to $7.6 million for the six months ended March 31,
1999. Salaries and employee benefits increased $453,000, or 12.2% primarily as a
result of increased lending personnel. Net occupancy, furniture and fixtures and
data processing expense increased $243,000 primarily as a result of increased
maintenance, lease expense and depreciation expense due to the addition of the
Coastal Federal University facility and the North Carolina Office in Sunset
Beach, NC. Other expense was $1.6 million for the six months ended March 31,
1998, compared to $1.5 million for the six months ended March 31, 1999.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999

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

Income taxes increased from $1.9 million for the six months ended March 31,
1998, to $2.1 million for the six months ended March 31, 1999, as a result of
increased income before taxes.

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, 1999:
Total Capital: $46,543 12.36% $30,127 8.00% $37,659 10.00%
(To Risk Weighted Assets)
Tier 1 Capital: $42,205 11.21% $N/A N/A% $22,595 6.00%
(To Risk Weighted Assets)
Tier 1 Capital: $42,205 6.28% $26,902 4.00% $33,627 5.00%
(To Total Assets)
Tangible Capital: $42,205 6.28% $10,088 1.50% $N/A N/A%
(To Total Assets)
</TABLE>
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information (Statement 131). SFAS No. 131 establishes
standards for the way public business enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders. SFAS No. 131 is effective for
financial statements for fiscal years beginning after December 15, 1997. Earlier
application is encouraged. In the initial year of application, comparative
information for earlier years is to be restated, unless it is impractical to do
so. SFAS No. 131 need not be applied to interim financial statements in the
initial year of its application, but comparative information for interim periods
in the initial year of application shall be reported in financial statements for
interim periods in the second year of application. The Company is reviewing the
standard to determine if additional disclosure is required.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999

SFAS 133, Accounting for Derivative Instruments and Hedging Activities
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position, and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset and liability or a firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign corporation.
This statement is effective for fiscal quarters of years beginning after June
15, 1999. It is not anticipated that this standard will materially affect the
Company.

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.

YEAR 2000 COMPLIANCE
- --------------------

The Company is a user of computers, computer software and equipment utilizing
embedded microprocessors that will be affected by the year 2000 issue. The year
2000 issue exists because many computer systems and applications use two-digit
date fields to designate a year. As the century date change occurs,
date-sensitive systems may recognize the year 2000 as 1900, or not at all. This
inability to recognize or properly treat the year 2000 may cause erroneous
results, ranging from system malfunctions to incorrect or incomplete processing.

The Company's year 2000 committee consists of the Chief Executive Officer, three
Executive Vice Presidents, two Vice Presidents, and one Associate from the
Internal Audit Group. The committee makes a monthly progress report to the Board
of Directors. The committee has developed and is implementing a comprehensive
plan to make all information and non-information technology assets year 2000
compliant. The plan is comprised of the following phases:
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999

1. Awareness - Educational initiatives on year 2000 issues and concerns. This
phase is ongoing, especially as it relates to informing customers of the
Company's year 2000 preparedness.

2. Assessment - Inventory of all technology assets and identification of
third-party vendors vendors and service providers. This phase was completed
as of August 31, 1998.

3. Renovation - Review of vendor and service providers responses to the
Company's year 2000 inquires and development of a follow-up plan and
timeline. This phase was completed as of October 15, 1998.

4. Validation - Testing all systems and third-party vendors for year 2000
compliance. The Company is currently in this phase of its plan. A third-
party service bureau processes all customer transactions and has completed
upgrades to its systems to be year 2000 compliant. The Company will test
the third-party systems by reviewing the results of transactions at six
different test dates before and after the year 2000 date change covering
all of the applications used by the Company. Testing was completed as of
November 16, 1998. The results of the test were all positive. In the
event that testing reveals that the third-party systems are not year 2000
compliant, the Company's service bureau intends to either transfer the
Company to other systems that are year 2000 compliant and provide
additional resources to resolve the year 2000 issues.

Other parties whose year 2000 compliance may effect the Company include the
FHLB of Atlanta, brokerage firms, the operator of the Company's ATM network
and the Company's 401K administrator. These third-parties have indicated
their compliance or intended compliance. Where it is possible to do so, the
Company has scheduled testing with these third-parties to be completed by
June 30, 1999. Where testing is not possible, the Company will rely on
certifications from vendors and service providers.

5. Implementation - Replacement or repair of non-compliant technology. As the
Company progresses through the validation phase, the Company expects to
determine necessary remedial actions and provide for their implementation.
The Company has already implemented a new year 2000 compliant computerized
teller system and has verified the year 2000 compliance of its computer
hardware and other equipment containing embedded microprocessors. The
Company's plan provides for year 2000 readiness to be completed by June
30, 1999.

The Company estimates its total cost to replace computer equipment,
software programs or other equipment containing embedded microprocessors
that were not year 2000 compliant to be $228,000, of which $116,677 has
been incurred as of March 31, 1999. System maintenance or modification
costs are charged to expense as incurred, while the cost of new hardware,
software or other equipment is capitalized and amortized over their
estimated useful lives. The Company does not separately track the internal
costs and time that its own Associates spend on year 2000 issues, which are
principally payroll costs.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATION- CONTINUED
COMPARISONS OF THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999

4. Validation (continued)

Because the Company depends substantially on its computer systems and those
of third-parties, the failure of these systems to be year 2000 compliant
could cause substantial disruption of the Company's business and could have
a material adverse financial impact on the Company. Failure to resolve year
2000 issues presents the following risks to the Company; (1) the Company
could lose customers to other financial institutions, resulting in a loss
of revenue, if the Company's third-party service bureau is unable to
properly process customer transactions; (2) governmental agencies, such as
the Federal Home Loan Company, and correspondent institutions could fail to
provide funds to the Company, which could materially impair the Company's
liquidity and affect the Company's ability to fund loans and deposit
withdrawals; (3) concern on the part of depositors that year 2000 issues
could impair access to their deposit account balances could result in the
Company experiencing deposit outflows prior to December 31, 1999; and (4)
the Company could incur increased personnel costs if additional staff is
required to perform functions that inoperative systems would have otherwise
performed. Management believes that it is not possible to estimate the
potential lost revenue due to the year 2000 issue, as the extent and
longevity of any potential problem cannot be predicted. Because
substantially all of the Company's loan portfolio consists of loans
primarily secured by real estate management believes that year 2000 issues
will not significantly impair the ability of the Company's borrowers to
repay their debt.

There can be no assurances that the Company's year 2000 plan will
effectively address the year 2000 issues, that the Company's estimates of
the timing and costs of completing the plan will ultimately be accurate or
that the impact of any failure of the Company or its third-party vendors
and service providers to be year 2000 compliant will not have a material
adverse effect on the Company's business, financial condition or results of
operations.

The Company has developed a contingency plan for year 2000 in the event
there is a malfunction in any of the critical application software. The
plan provides for alternative methods to conduct business until application
problems can be rectified.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At March 31, 1999, no material changes have occurred in market risk disclosures
included in the Company's Annual Report to Stockholders for the year ended
September 30, 1998.
<PAGE>
PART II. OTHER INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

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

The Company is not a party to any legal proceedings at this time. The Bank
is a defendant in one significant lawsuit. The action commenced on December 1,
1997, and the Plaintiffs are seeking approximately $1.5 million in actual
damages as well as punitive damages. The causes of action are breach of
fiduciary duties, negligence, fraud, civil conspiracy and breach of contract
arising out of a lending relationship. At this date, the Bank does not know if
or when the action will go to trial. The Bank will vigorously defend this suit
and does not anticipate any settlement discussions.

Item 2. Changes In 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, 1999, the
following items were ratified:

(a) The election as directors of all nominees: James C. Benton, James P.
Creel and Wilson B. Springs.

A total of 6,264,467 votes were entitled to be cast. Votes for Benton were
4,920,255 with 2,945 withheld; votes for James P. Creel were 4,914,387 with
8,813 votes withheld; and votes for Wilson B. Springs were 4,919,784 with
3,416 withheld.

G. David Bishop, Harold D. Clardy, J.T. Clemmons, James H. Dusenbury,
Michael C. Gerald and Samuel A. Smart are directors whose terms continued
after the meeting.

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

Not Applicable.

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

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

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

3 (b) Certificate of Amendment to Certificate of
Incorporation of Coastal Financial Corporation*******

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

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

(d) Employment Agreement with Allen W. Griffin***

(e) Employment Agreement with Jimmy R. Graham***

(f) Employment Agreement with Steven J. Sherry*******

(g) 1990 Stock Option Plan***

(h) Directors Performance Plan****

(i) Loan Agreement with Bankers Bank******

27 Financial Data Schedule

(b) No reports on Form 8-K have been filed during the quarter covered by this
report.
- -------------

* Incorporated by reference from the Annual Report to Stockholders
for the fiscal year ended September 30, 1997, attached as an
exhibit hereto.

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

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

**** Incorporated by reference to the proxy statement for the 1996
Annual Meeting of Stockholders.

***** Incorporated by reference to 1997 Form 10-K filed with the
Securities and Exchange Commission on January 2, 1998.
<PAGE>

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

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

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

<PAGE>

SIGNATURES

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

COASTAL FINANCIAL CORPORATION

May 14, 1999 /s/ Michael C. Gerald
Date Michael C. Gerald
President and Chief Executive Officer

May 14, 1999 /s/ Jerry L. Rexroad
Date Jerry L. Rexroad
Executive Vice President and
Chief Financial Officer

<ARTICLE> 9
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 14,533
<INT-BEARING-DEPOSITS> 10,290
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 169,249
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 452,937
<ALLOWANCE> 6,160
<TOTAL-ASSETS> 672,541
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<LONG-TERM> 115,087
0
0
<COMMON> 64
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<INTEREST-LOAN> 19,139
<INTEREST-INVEST> 5,065
<INTEREST-OTHER> 180
<INTEREST-TOTAL> 24,384
<INTEREST-DEPOSIT> 7,484
<INTEREST-EXPENSE> 13,521
<INTEREST-INCOME-NET> 10,863
<LOAN-LOSSES> (577)
<SECURITIES-GAINS> 225
<EXPENSE-OTHER> 7,598
<INCOME-PRETAX> 5,852
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<EPS-PRIMARY> .59
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<YIELD-ACTUAL> 0
<LOANS-NON> 601
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<ALLOWANCE-OPEN> 6,160
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<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 6,160
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0

</TABLE>