UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

|ý                                                                  | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934    
|------------------------------------------------------------------ | ----------------------------------------------------------------------------------------
|For the Fiscal Year Ended December 31, 2003                       
|OR                                                                
|o                                                                  | 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: 0-24526

Coastal Bancorp, Inc.(Exact name of Registrant as specified in its charter)


|Texas(State or other jurisdiction of
incorporation or organization) |  |                                                                                       |  | 76-0428727(IRS Employer
Identification No.)
|------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | -------------------------------------------
|                                                                    |  | 5718 Westheimer, Suite 600Houston, Texas 77057(Address of principal executive office) |  |                                            
|                                                                    |  | (713) 435-5000(Registrant's telephone number)                                         |  |                                            

Securities
registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registeredN/A

N/A


Securities
registered pursuant to section 12(g) of the Act:

Common Stock, $0.01 par value per share(Title of Class)


Indicate
by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and
(2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o

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

As of February 24, 2004, the aggregate market value of the 5,295,442 shares of Common Stock of the Registrant issued and outstanding on such date, excluding 1,123,397
shares held by all directors and executive officers of the Registrant as a group, was $172,013,415. This figure is based on the closing sale price of $41.23 per share of the Registrant's Common Stock
on February 24, 2004, as reported inThe Wall Street Journalon February 25, 2004.

Number
of shares of Common Stock outstanding as of February 24, 2004: 5,295,442

DOCUMENTS INCORPORATED BY REFERENCE

The following documents are incorporated by reference into the noted Parts of this Form 10-K:



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PART I.

Item 1.Business

In addition to historical information, this Annual Report on Form 10-K includes certain "forward-looking statements," as defined in the
Securities Act of 1933, as amended (the "Securities Act"), and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), based on current management expectations. Coastal
Bancorp, Inc.'s ("Bancorp" or the "Company") actual results could differ materially from those management expectations. Such forward-looking statements include statements regarding the
Company's intentions, beliefs or current expectations as well as the assumptions on which such statements are based. Stockholders and potential stockholders are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.
Factors that could cause future results to vary from current management expectations include, but are not limited to, the failure of the Company's merger with Hibernia Corporation ("Hibernia") to be
completed in accordance with the terms of the Agreement and Plan of Merger dated December 1, 2003 (the "Merger Agreement"), general economic conditions, legislative and regulatory changes,
monetary and fiscal policies of the Federal government, changes in tax policies, rates and regulations of Federal, state and local tax authorities, changes in interest rates, deposit flows, the cost
of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of the Company's loan and investment portfolios, changes in accounting principles,
policies or guidelines, the timing of repayments and prepayments of loans, loan default rates, changes in the volume of loan originations or purchases, interest rate margin compression and other
economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and fees. For a more detailed discussion of these risk factors, see
Exhibit 99.3. The Company undertakes no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future
operating results over time.



On December 2, 2003, the Company announced that it had signed a definitive merger agreement with Hibernia Corporation (NYSE:HIB) pursuant to which Hibernia
would acquire Coastal Bancorp, Inc. by means of a merger and pay cash in the amount of $41.50 per share for each outstanding share of Bancorp common stock and $41.50 less the exercise price for
each option to acquire a share of Bancorp common stock. The merger transaction is subject to regulatory approvals, the approval of Bancorp's shareholders and other customary conditions to closing. It
is expected to close in or about the second quarter of 2004.



Coastal Bancorp, Inc. is engaged primarily in the business of serving as the parent holding company for Coastal Banc ssb (the "Bank"). The Company was
incorporated in March 1994 in connection with the reorganization of Coastal Banc Savings Association, a Texas-chartered thrift institution (the "Association"), into the holding company form of
organization. In connection with the reorganization, which was completed in July 1994, the Association concurrently converted into a Texas-chartered savings bank and took its present name. In
November 1996, in order to minimize state taxes, the Company's corporate structure was again reorganized by forming Coastal Banc Holding Company, Inc. ("HoCo") as a Delaware holding
company. HoCo became a wholly-owned subsidiary of the Company, and the Bank became a subsidiary of HoCo. Each of these reorganizations was treated for accounting purposes as combinations similar to a
pooling-of-interests. The financial information and references presented herein have been restated to give effect where appropriate to the reorganizations as if they had
occurred at the earliest date presented.

1

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In
October 1997, the Company formed Coastal Banc Capital Corp. ("CBCC") as a wholly-owned subsidiary of HoCo. CBCC is a registered broker-dealer and was originally formed to trade
packages of whole loan assets, primarily for the Bank and for other institutional investors and did so until September 2002. Beginning in 2002, a corporate finance group was formed within CBCC
to act as an intermediary in raising capital for business customers and to provide merger and acquisition advisory services to buyers and sellers of small to mid-sized companies.
Management of the Company made the decision to discontinue the operations of CBCC effective March 31, 2003 due to the current economic climate. In July 2002, the Company formed Coastal
Banc Mortgage Corp. ("CBMC") as a wholly-owned subsidiary of HoCo. CBMC was formed to continue the function of trading whole loan assets for the Bank and for other institutional investors that had
been previously performed by CBCC.

In
June 2000, the Company acquired Coastal Banc Insurance Agency, Inc. ("CBIA") as a wholly-owned subsidiary of the Bank. CBIA was a former affiliate of the Bank and
receives fees related to insurance and investment product sales to the Bank's deposit and loan customers.

On
June 18, 2002, Bancorp, through Coastal Capital Trust I ("CCTI"), issued 2,000,000 trust preferred securities ("Trust Preferred Securities I") with a liquidation preference of
$25 per security. The Trust Preferred Securities I represent an interest in the related $51.5 million junior subordinated debentures of Bancorp, which were purchased by CCTI. The junior
subordinated debentures are the only assets of CCTI and interest payments from the debentures finance the distributions paid on the Trust Preferred Securities I. Distributions on the debentures are
payable quarterly at the annual rate of 9.0% and are included in interest expense in the consolidated statements of income. The Trust Preferred Securities I are subject to mandatory redemption at the
liquidation preference, in whole or in part, upon repayment of the junior subordinated debentures at maturity or their earlier redemption. The junior subordinated debentures are redeemable prior to
the maturity date of June 30, 2032, at the option of Bancorp on or after June 30, 2007, in whole at any time or in part from time to time. The junior subordinated debentures are also
redeemable at any time, in whole, but not in part, upon the occurrence of specific events defined with the trust indenture. Bancorp has the option to defer distributions on the junior subordinated
debentures from time to time for a period not to exceed 20 consecutive quarters.

A
portion of the proceeds from the issuance of the Trust Preferred Securities I were used to repurchase 500,000 shares of common stock for $15.0 million from a director of the
Company in June 2002. In addition, $28.8 million of the proceeds were used on July 15, 2002, to redeem the Bank's 9.0% Series A Noncumulative Preferred Stock (Nasdaq:CBSAP)
through a capital contribution.

On
June 23, 2003, Bancorp through Coastal Capital Trust II ("CCTII"), issued to a private institutional investor, 10,000 floating rate trust preferred securities ("Trust Preferred
Securities II") with a liquidation preference of $1,000 per security. The Trust Preferred Securities II represent an interest in the related $10.3 million junior subordinated debentures of
Bancorp, which were purchased by CCTII and have substantially the same payment terms as the Trust Preferred Securities II. The junior subordinated debentures are the only assets of CCTII and interest
payments from the debentures finance the distributions paid on the Trust Preferred Securities II. Distributions on the debentures are payable quarterly at a variable interest rate, reset quarterly,
equal to LIBOR plus 3.05%.

The
proceeds from the issuance of the Trust Preferred Securities II were used on July 31, 2003 in the redemption of Bancorp's 9.12% Series A Cumulative Preferred Stock
(Nasdaq:CBSAO).

On
August 27, 1998, December 21, 1998, February 25, 1999, April 27, 2000, July 27, 2000 and April 25, 2002, the Board of Directors authorized
six separate repurchase plans for up to 500,000 shares each of the outstanding shares of common stock of the Company through an open market repurchase program and privately negotiated repurchases, if
any. As of December 31, 2003, a total of 2,752,575 shares had been repurchased under all of the authorized repurchase plans.

2

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At
December 31, 2003, the Company had total consolidated assets of $2.7 billion, total deposits of $1.7 billion and common stockholders' equity of
$133.7 million.

The
Company is subject to examination and regulation by the Office of Thrift Supervision (the "OTS"), and the Company and the Bank are subject to examination and regulation by the Texas
Savings and Loan Department (the "Department"). The Bank is subject to examination and regulation by the Federal Deposit Insurance Corporation ("FDIC") and by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"). The Bank is a member of the Federal Home Loan Bank of Dallas (the "FHLB"), one of the 12 regional banks which comprise the Federal Home Loan Bank System.
See "RegulationRegulation of the Bank." The Company is also subject to various reporting and other requirements of the Securities and Exchange Commission (the "SEC"). See
"RegulationThe Company."

The
Company's executive offices are located at Coastal Banc Plaza, 5718 Westheimer, Suite 600, Houston, Texas 77057-5745, and its telephone number is
(713) 435-5000. The Bank operates a website on the Internet for business and marketing purposes at www.coastalbanc.com. (The website is not a part of this
Form 10-K.)



The Bank is a Texas-chartered, Federally insured state savings bank. It is headquartered in Houston, Texas and operates through 43 branch offices in metropolitan
Houston, Austin, Corpus Christi, the Rio Grande Valley and small cities in the southeast quadrant of Texas.

The
Bank, which was originally organized in 1954, was acquired in 1986 by an investor group (which includes a majority of the current members of the Board of Directors and the present
Chairman of the Board, President and Chief Executive Officer of the Company) as a vehicle to take advantage of the failures and consolidation in the Texas banking and thrift industries. At
February 28, 1986 (the date of change in ownership), the Bank had one full service office and total assets of approximately
$10.7 million. Since then, the Bank has acquired deposits and branch offices in transactions with the Federal government and other private institutions, and, in 1995, acquired an independent
national bank. By December 31, 2003, the Bank had total assets of $2.7 billion, total deposits of $1.7 billion and stockholders' equity of $187.1 million.

The
Bank attempts to maximize profitability through the generation of net interest income and fee income. To meet this objective, the Bank has implemented a strategy of building its core
deposit base while deploying its funds in assets, which provide an attractive return with acceptable credit risk. In carrying out this strategy, and to ultimately provide an attractive rate of return
to the Company's shareholders, the Bank adheres to four operating principles: (i) continuing to expand its low cost core deposit base; (ii) minimizing interest rate risk;
(iii) controlling credit risk, while increasing the emphasis on commercial business lending; and (iv) maintaining a low level of general overhead expense relative to its peers. These
operating principles are briefly discussed below.

Core Deposits.The Bank began to implement the first operating principle, developing and expanding a core deposit base, in
1988 through a series of transactions with the Federal government and competitively priced transactions with private sector financial institutions. In 1988, the Bank became the first acquiror of
failed or failing savings institutions under the Federal government's "Southwest Plan." In this transaction (the "Southwest Plan Acquisition"), the Bank acquired from the Federal Savings and Loan
Insurance Corporation ("FSLIC"), as receiver for four insolvent savings associations (the "Acquired Associations"), approximately $543.4 million of assets and assumed approximately
$543.4 million of deposits and other liabilities. The Bank acquired an aggregate of 14 branch offices from the Acquired Associations in new and existing markets in southwest Houston, west of
Houston along the Houston-San Antonio corridor and in the Rio Grande Valley.

3

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Since
completion of the Southwest Plan Acquisition, the Bank has entered into a series of branch office transactions (including three disposition transactions) and one whole bank
acquisition. All of these transactions resulted in the net assumption of $1.8 billion of primarily retail deposits and 58 branch offices. The Bank has also opened eight de novo branches since
its inception, six in the Houston metropolitan area, one in Rosenberg and one in Austin. The Bank will continue to pursue acquisitions in Texas as a vehicle for growth, although there can be no
assurance that the Bank will be able to continue to do so on an accretive basis in the future, or at all.

Interest Rate Risk.The Bank has implemented its second operating principle, minimizing interest rate risk, by matching, to
the extent possible, the repricing or maturity of its interest-earning assets to the repricing or expected terms of its interest-bearing liabilities. The Bank also tries to match the basis or index
(for example, the London Interbank Offered Rate ("LIBOR") or the 11th District Federal Home Loan Bank cost of funds index ("COFI") upon which these assets and liabilities reprice. Generally this
matching is achieved through management of the composition of the Bank's assets and liabilities. The Bank may also use interest rate swap and cap agreements to aid in minimizing exposure to interest
rate and price fluctuations. In November 2001, to strategically restructure a portion of its asset base to make
it less vulnerable to market interest rate and price fluctuations, the Company completed the sale of approximately $845 million of its mortgage-backed securities. The majority of the securities
sold were Collateralized Mortgage Obligations ("CMOs") tied to COFI and contained extension risk which caused, on average, high levels of price volatility. Also in November, the Company used a portion
of the proceeds of the sale to purchase approximately $512 million of primarily pass-thru mortgage-backed securities with an overall shorter expected duration. Coastal reduced
borrowings with the remainder of the proceeds from the sale. See "Management's Discussion and Analysis of Financial Condition and Results of OperationsAsset and Liability Management" set
forth in Item 7 hereof.

Credit Risk.The Bank has implemented the third operating principle, controlling credit risk, while increasing the emphasis
on its commercial business lending, by (i) taking a cautious approach to its direct lending operations, including the development of commercial business lending and (ii) holding a
substantial portion of its assets in primarily adjustable rate first lien (single family) residential mortgage loans and mortgage-backed securities. At December 31, 2003, the Company's total
loans receivable portfolio (excluding loans held for sale) amounted to $2.0 billion or 73.9% of total assets, $1.0 billion, or 50.8%, of which were comprised of first lien single family
residential mortgage loans. At December 31, 2003, of the Company's $2.7 billion in total assets, $504.4 million or 18.8% of total assets consisted of mortgage-backed securities.

Noninterest Expense.The Bank has implemented the fourth operating principle, maintaining a low level of general overhead
expense relative to its peers, by operating an efficiently staffed operations and branch office system which is able to economically administer and deliver its products and services. The Company's
ratio of noninterest expense to average total assets on a consolidated basis was 2.13% for the year ended December 31, 2003.

Lending Activities

General.Coastal is continuing to expand and diversify its loan portfolio in a manner consistent with the operating
principles discussed above by emphasizing the origination or purchase for retention in its portfolio of only those loans determined by management to have an acceptable credit risk and which provide a
positive interest rate spread over funding liabilities matched with similar maturities and other characteristics. This strategy is designed to achieve an acceptable risk adjusted rate of return, as
determined and continuously evaluated by the Board of Directors and management.

Since
1995, the Bank has attempted to re-align its lending products to compete with commercial banks in an effort to increase its net interest margin. In doing so, the Bank
continues to take a cautious

4

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approach
to the development and growth of its direct lending operations in its efforts to control credit risk. In November 1995, the Bank acquired its first commercial bank with
$103.3 million in loans including first lien residential, multifamily and commercial real estate, residential construction, real estate acquisition and development, commercial, financial and
industrial and consumer loans. In 1998, the Bank acquired twelve commercial bank branches (the "1998 Branch Acquisition") and designated them as the foundation for the Bank's Business Banking Centers,
which focus on the Bank's commercial banking customers. In an effort to enhance its ability to service its commercial customers, during the fourth quarter of 1997 the Bank implemented a more
centralized process for originating, underwriting and approving all loans over $1.0 million. The staff involved in this more centralized approach are able to incorporate more comprehensive
credit information than previously reviewed by the Bank by applying Internet and network computer technology to take a loan from application to closing in less time than before.

The
following table sets forth information concerning the composition of the Company's net loans receivable portfolio by type of loan at the dates indicated.

At December 31,2003

2002

2001

2000

1999(In thousands)Real estate mortgage loans:First lien residential

$
1,007,566

$
855,633

$
880,624

$
908,841

$
836,005Multifamily


107,903


116,020


124,616


224,361


163,059Residential construction


114,445


123,085


136,035


157,950


136,675Acquisition and development


134,179


143,463


140,009


133,005


103,357Commercial


360,858


317,692


319,377


347,921


314,292Commercial and multifamily construction


183,273


241,128


222,026


90,256


65,934Commercial secured by residential mortgage loans held for sale ("Warehouse")








11,508


8,518


60,372Commercial, financial and industrial


175,869


135,209


116,029


120,420


100,195Loans secured by deposits


13,019


14,465


21,238


13,681


13,094Consumer and other


32,594


33,430


43,384


56,522


63,383Total loans


2,129,706


1,980,125


2,014,846


2,061,475


1,856,366Loans in process


(132,072
)

(147,769
)

(131,064
)

(142,451
)

(108,561
)Allowance for loan losses


(19,389
)

(18,118
)

(15,385
)

(14,507
)

(10,493
)Unearned interest and loan fees


(3,134
)

(2,910
)

(2,959
)

(3,864
)

(2,947
)Net premium (discount) on purchased loans


6,813


1,457


(1,837
)

(4,425
)

716Total loans receivable, net

$
1,981,924

$
1,812,785

$
1,863,601

$
1,896,228

$
1,735,081


5

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Scheduled Maturities.The following table sets forth certain information at December 31, 2003
regarding the principal amount of loans maturing in the Company's loans receivable portfolio (excluding loans held for sale) based on their contractual terms to maturity assuming no periodic
amortization of principal. Demand loans, loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.

|                                        |             | At December 31, 2003
|--------------------------------------- | ----------- | --------------------
|
|
|First lien residential mortgage         |             | $                   
|Multifamily mortgage                    |             |                     
|Residential construction                |             |                     
|Real estate acquisition and development |             |                     
|Commercial real estate                  |             |                     
|Commercial and multifamily construction |             |                     
|Commercial, other                       |             |                     
|Consumer and other                      |             |                     
|                                        |             |                     
|                                        | Total loans |                     
|                                        |             |                     

The average life of loans is generally substantially less than their average contractual terms because of prepayments and, in the case of
conventional mortgage loans, due-on-sale clauses, which generally give the Bank the right to declare a loan immediately due and payable in the event, among other things, that
the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current mortgage loan rates are substantially higher
than rates on existing mortgage loans and, conversely, decrease when rates on current mortgages are substantially lower than existing mortgage loan rates (due to refinancings of
adjustable-rate and fixed-rate loans at lower rates). Under the latter circumstances, the weighted average yield on loans decreases as higher yielding loans are repaid or
refinanced at lower rates.

The
following table sets forth the amount of loans due after one year from December 31, 2003 by category and which have fixed or adjustable interest rates.

Interest RateFixed

Adjustable

Total(In thousands)First lien residential mortgage

$
112,251

$
890,785

$
1,003,036Multifamily mortgage


3,639


54,738


58,377Residential construction


319


14,438


14,757Real estate acquisition and development


313


41,763


42,076Commercial real estate


43,525


227,947


271,472Commercial and multifamily construction


5,280


94,789


100,069Commercial, other


35,745


54,837


90,582Consumer and other


32,500


556


33,056Total

$
233,572

$
1,379,853

$
1,613,425


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Origination, Purchase and Sale of Loans.The following table sets forth the loan origination, purchase
and sale activity of
the Bank during the periods indicated. The table does not reflect the activity of loans held for sale or of mortgage loans serviced for third party investors during the periods presented. See
"Mortgage Loan Servicing."

Year Ended December 31,2003

2002

2001(In thousands)Loan Originations:First lien residential mortgage

$
22,599

$
22,185

$
49,452Home equity


21,576


14,691


8,799Residential construction and acquisition and development


224,061


245,658


281,253Warehouse





65,409


159,595Multifamily mortgage


34,669


7,319


47,779Commercial real estate


109,020


99,208


151,016Commercial and multifamily construction


104,698


118,100


70,891Commercial, financial and industrial


262,821


246,359


141,600Consumer and other


29,357


38,569


44,641Total loan originations


808,801


857,498


955,026Purchase of residential mortgage loans


565,722


421,371


250,945Total loan originations and purchases


1,374,523


1,278,869


1,205,971Sale of residential mortgage loans





84,241


Loans reclassified to (from) held for sale category, net


(20,261
)

8,749


Foreclosures


2,906


6,260


5,450Principal repayments and reductions to principal balance


1,214,441


1,223,520


1,232,944Total foreclosures, repayments and reductions to principal balance


1,197,086


1,322,770


1,238,394Amortization of premiums, discounts and fees on loans


(4,998
)

(1,115
)

3,696Provision for loan losses


(3,300
)

(5,800
)

(3,900
)Net increase (decrease) in loans receivable

$
169,139

$
(50,816
)
$
(32,627
)


First Lien Residential Mortgage Loan Purchases, Sales and Originations.The Bank primarily purchases, and
also originates, loans secured by first lien mortgages on completed single family residences for its own portfolio. The majority of the Bank's residential mortgage loan portfolio has been acquired
through bulk purchases in the traditional secondary market and is secured by real estate located throughout the United States. During 2003, 2002 and 2001, the Bank purchased $565.7 million,
$421.4 million and $250.9 million of such loans, respectively. The Bank also originates these types of loans primarily in the geographic areas surrounding the Bank's branch locations.
During 2003, 2002 and 2001, the Bank originated residential mortgage loans for its portfolio totaling $22.6 million, $22.2 million and $49.5 million, respectively.

From
time to time, the Bank also sells residential mortgage loans. During 2002, the Bank's management made the decision to liquidate a portion of its mortgage loan portfolio through
sales to third party investors. The first sale was in March 2002 when the Bank sold $10.8 million of under-performing mortgage loans. Prior to the sale, the Bank wrote those loans down
to fair value and recorded a charge-off to the allowance for loan losses of $761,000. In addition, as of March 31, 2002, the Bank wrote down to fair value and reclassified
$9.1 million of other under-performing single-family mortgage loans to the held for sale category. The loans that were reclassified to the held for sale category were written down to fair value
as of March 31, 2002 through a charge-off to the allowance for loan losses of $691,000. During the second quarter of 2002, a total of $3.1 million of these under-performing
loans held for sale were sold to the same third party investor. As of December 31, 2002,

7

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the
Bank had reclassified the remaining $3.0 million of these loans held for sale back to the loans receivable portfolio.

The
second sale was in the fourth quarter of 2002 when the Bank entered into an agreement with a third party to sell approximately $77.0 million of single-family mortgage loans.
As of December 31, 2002, $74.4 million of these loans had been sold, $70.1 million of which were sold servicing retained and $4.3 million (which were considered
nonperforming loans) were sold servicing released. The remaining $2.6 million, which are under a contract for sale, were reclassified to the held for sale category at December 31, 2002.
In connection with this sale and the reclassification of the remaining loans to the held for sale category, the loans were written down to fair value through a charge-off to the allowance
for loan losses of $309,000. In addition, the Company recorded a gain of $359,000 on the sale of these loans receivable as a result of the Bank recording the estimated fair value of the mortgage
servicing rights retained. See "Mortgage Loan Servicing."

The
Bank acquires first lien residential mortgage loans for its portfolio through bulk purchases when the prices of these purchases are considered to be favorable. The acquisition of
first lien residential mortgage loans has been accomplished primarily through bulk purchases in the traditional secondary market (from mortgage companies, financial institutions, investment banks,
CBCC and beginning in 2002, from CBMC). Bulk purchases allow the Bank to obtain these residential mortgage loans without the direct cost of origination activities. Personnel from the Bank generally
analyze loan bid packages, as they become available from CBMC, CBCC (through September 2002) and from third parties, and the members of the Bank's Asset/Liability Subcommittee, along with the
Bank's Chief Executive Officer,
review the information in the loan packages to determine whether to bid (or make an offer) on a package and the price of such bid (or offer). The bid price with respect to such loan packages is based
on a number of factors, including the ability to create spread income with a funding source of comparable maturity, the pricing of alternative investments, particularly mortgage-backed securities,
which offer little or no credit risk, assumed prepayment speeds and the credit risk profile of the portfolio offered. The Bank analyzes credit risk in a whole loan package through its due diligence
investigation, which is designed to provide management with basic underwriting information on each loan or group of loans, including loan-to-value, payment history, insurance
and other documentation. Because the Bank is purchasing loans in bulk, the Bank prices the loan packages to take into consideration, among other things, delinquency and foreclosure assumptions based
on the risk characteristics of the loan packages. The Bank intends to continue to make competitive bids on loan packages that meet the Bank's purchase criteria.

During
the fourth quarter of 2003, Coastal entered into a mortgage loan program with a large, national mortgage banking company. Under this arrangement, loans are closed in the name of
Coastal by the mortgage banking company. Coastal receives a fee for the mortgage loans that are closed as a result of a referral made by a Bank officer or employee. In addition to the fee income
opportunities, this mortgage program allows Coastal to better serve its existing customer base and solicit new customers by offering a wide array of very competitively priced mortgage products. The
loan applications are reviewed by the mortgage company pursuant to its own underwriting guidelines and any loans closed under the referral program are typically owned by the mortgage company.

In
addition to the mortgage loan referral program, the Bank also makes available, but does not actively solicit, a variety of mortgage products designed to respond to consumer needs and
competitive factors. Conventional conforming loans that are secured by first liens on completed residential real estate are generally originated for amounts up to 95% of the appraised value or selling
price of the mortgaged property, whichever is less. All loans with loan-to-value ratios in excess of 80% generally require the borrower to purchase private mortgage insurance
from approved third party insurers. The Bank also originates conventional non-conforming mortgage loans (i.e., loans for single family homes with an original balance in excess of the
maximum loan balance amount set by the Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"),

8

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which
is presently $333,700, or loans that do not otherwise meet the criteria established by FNMA or FHLMC).

In
addition to 15-year and 30-year conventional mortgages, the Bank offers special products designed to provide to its customers lower rates of interest or lower
principal and interest payments. Borrowers may choose from a wide variety of combinations of interest rates and points on many products so that they may elect to pay higher points at closing and lower
interest over the life of the loan, or pay a higher interest rate and reduce the points payable at closing. In addition, from time to time mortgages are offered in the following categories: those
which allow the borrower to make lower monthly payments for the first one, two or three years of the loan; fixed rate mortgages;
and adjustable rate mortgages having interest rate adjustments every one, five or seven years based upon a specified independent index.

While
the Bank has the general authority to originate and purchase loans secured by real estate located anywhere in the United States, the largest concentrations of its first lien
residential mortgage and residential construction loan portfolios are secured by real estate located in California and Texas.

Residential Construction Lending.The Bank initiated a construction lending program with local builders in the latter part of
1989 which has grown considerably since its inception. At the initiation of the program, management of the Bank initially surveyed the members of the residential construction industry in the Bank's
Houston market area and targeted those companies. The Bank now has expanded its residential construction lending into the Dallas, Austin and Rio Grande Valley markets.    Loans are made
primarily to fund residential construction. Construction loans are made on pre-sold and speculative residential homes considered by management to be in well located, viable subdivisions
and planned unit developments.

Most
of the builders with whom the Bank does business generally apply for either a non-binding short-term line of credit or for an annual line of credit (subject
to covenants) from the Bank for a maximum amount of borrowing to be outstanding at any one time. Upon approval of the line of credit, the Bank issues a letter which indicates to the builder the
maximum amount which will be available under the line, the term of the line of credit (typically one year), the interest rate of the loans to be offered under the line (which is generally set at a
rate indexed toThe Wall Street Journalprime rate or LIBOR on the outstanding monthly loan balance) and the loan fees payable. When the builder desires
to draw upon a short-term line of credit, a separate loan application generally must be made under the line for a specific loan amount. Each loan commitment under a short-term
line of credit is separately verified to be in compliance with the terms previously approved with the line of credit.

The
terms of the Bank's construction loans are typically for one year or less, unless extended by the Bank. If a construction loan is extended, the borrower is generally charged a loan
fee for each 90 day extension period. The Bank reserves the right to extend any loan term, but generally does not permit the original term and all extensions to exceed 24 months without
amortization of principal either in monthly increments or a lump sum.

The
loan-to-value ratio (applied to the underlying property that collateralizes the loan) of any residential construction loan may not exceed the lesser of 85% of
appraised value or 100% of the actual cost. All individual loans are limited in dollar amount based upon the project proposed by the builder. Draws for lot purchases are generally limited to the
contracted sales price of the lot (to include escalations) not to exceed 100% of the lot's appraised value. Other special conditions which the Bank attaches to its construction loans include a
requirement that limits the number and dollar amount of loans which may be made based upon unsold inventory. The Bank may also, at its sole discretion, discontinue making any further loans if the
builder's unsold inventory exceeds a certain level from all lending sources or if the builder fails to pay its suppliers or subcontractors in a timely manner.

9

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The
Bank provides construction financing for homes that generally are priced below $450,000, with most homes priced between $125,000 and $300,000. In this price range, the Bank has
experienced the shortest duration of term, the highest annualized yield and the least likelihood of defaults because of the generally high number of pre-completion sales. The Bank will
also make individual construction loans to builders or individuals on single homes or groups of homes on substantially the same terms and conditions as loans granted under the Bank's line of credit
program.

At
December 31, 2003, the Bank had $61.6 million in outstanding residential construction loans (net of loans in process of $52.8 million) none of which were on
nonaccrual status. At the present time, the Bank has approved builders primarily domiciled in the Houston, Dallas, and Austin metropolitan areas, as well as the Rio Grande Valley area, and is
selectively soliciting new builders for its residential construction lending program. In addition, the Bank participates in the funding of residential construction loans with other institutions.
Through a participation, one of the Bank's approved builders is authorized for the funding of loans on properties located outside the state of Texas. The Bank intends to continue to do business with
the companies involved in its line of credit program and believes that it will continue to have construction loan demand from the builders with whom it currently has an established lending
relationship.

Construction
financing is generally considered to involve a higher degree of risk than long-term financing on improved, occupied residential real estate, due to the lender's
reliance on the borrower to add to the estimated value of the property through construction within the budget set forth in the loan application. The Bank attempts to limit its risk exposure by, among
other things: limiting the number of borrowers to whom it lends and establishing specific qualification requirements for borrowers generally; continually monitoring the general economic conditions in
the market, recent housing starts and sales; continually monitoring the financial position of its borrowers throughout the term of the loan; continually monitoring the progress of the development
through site inspections prior to loan disbursements; utilizing only qualified, approved appraisers; and requiring that the builder maintain a pre-approved ratio (generally not greater
than 60%) of speculative to pre-sold homes in the development.

Commercial Real Estate and Multifamily Mortgage Lending.The Bank initiated a program in 1993 to actively seek loans secured
by commercial or multifamily properties. Commercial real estate and multifamily mortgage loans typically involve higher principal amounts and repayment of the loans generally depends, in large part,
on sufficient cash flow being generated by the underlying properties to cover operating expenses and loan repayments. Market values may vary as a result of economic events or governmental regulations
which are outside the control of the borrower or lender and which can affect the future cash flow of the properties. The loans are generally for a short to medium term of between one to five years,
and have floating rates indexed to prime rate or LIBOR or fixed rates based on a spread over similarly fixed borrowings from the FHLB. The properties securing the loans originated by the Bank are
primarily located in Texas. The Bank attempts to limit its risk exposure by, among other things: lending to proven developers/owners, only considering properties with existing operating performance
which can be analyzed, requiring conservative debt coverage ratios and continually monitoring the operation of the collateral. At December 31, 2003, commercial real estate loans totaling
$360.9 million and multifamily mortgage loans of $107.9 million were outstanding. At December 31, 2003, the Bank had commercial real estate loans totaling approximately $714,000
that were on nonaccrual status and no multifamily mortgage loans that were on nonaccrual status.

The
Bank began originating commercial real estate and multifamily construction loans in 1996 primarily for the construction or renovation of income generating facilities. The Bank
generally underwrites these loans in the same way it underwrites its multifamily mortgage loans and attempts to manage the risk of such loans by lending to proven developers/owners, requiring that
each builder maintain a specified amount of equity in the project, continually monitoring the progress of the development through site inspections prior to loan disbursement and by monitoring other
financial

10

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strength
requirements. At December 31, 2003, commercial and multifamily construction loans totaling $154.2 million (net of loans in process of $29.0 million) were outstanding,
none of which were on nonaccrual status.

Warehouse Lending.Beginning in 1992 and through 2002, the Bank provided or participated in lines of credit to mortgage
companies generally for their origination of single family residential loans which are typically sold no more than 90 days from origination to FNMA, FHLMC, the Government National Mortgage
Association ("GNMA") or to private investors. The lines of credit were generally renewable annually. Borrowers paid interest on funds drawn at a floating rate. In addition, the Bank usually received a
fee for each loan file processed under these lines of credit, the Bank (or the lead lender in a participation) held the original mortgage loan notes and other documentation as collateral until
repayment of the related lines of credit, except when a third party lender was acting as the lead lender in the lending relationship.

Warehouse
loans were underwritten in accordance with Bank policies and procedures. Bank personnel attempted to minimize the risk of making Warehouse loans (excluding participations in
loans where a third party bank is acting as the lead bank) by, among other things, (i) taking physical possession of the originator's collateral, (ii) directly receiving payment from
secondary market investors when the loans are sold and remitting any balance to the borrower after deducting the amount borrowed for that particular loan, (iii) visiting the originator's office
from time to time to review its financial and other
records and (iv) monitoring each originator by periodically reviewing their financial statements, loan production delinquency and commitment reports and, on an annual basis, by reviewing their
audited financial statements and auditor's letter to its board of directors. In loan participations where a third party bank was acting as the lead bank, the Bank relied on the lead bank to perform
substantially the same procedures as noted above.

During
1999, the Bank experienced significant loan losses in Warehouse and mortgage servicing rights ("MSR") loans (described below) due to the default of two borrowers. The first loss
was related to the $10.0 million participation purchased in 1998 in a Warehouse loan aggregating $25.0 million to MCA Financial Corp., and certain of its affiliates, of Southfield,
Michigan (collectively "MCA"). In late January 1999, due to a lack of liquidity, MCA ceased operations and shortly thereafter was seized by the Michigan Bureau of Financial Institutions. A
conservator was appointed to take control of MCA's books and records, marshal its assets and continue its loan servicing operations. A voluntary petition under Chapter 11 of the U.S. Bankruptcy Code
was filed in the U.S. Bankruptcy Court for the Eastern District of Michigan for MCA on or about February 10, 1999, by the conservator.

Throughout
1999, the Bank worked with the lead lender and the bankruptcy trustee to determine the value of, and sell, the underlying collateral. As of December 31, 1999, the Bank
had received only $1.1 million in proceeds from the MCA loan. Due to the uncertainty of the value of the remaining collateral, the Bank charged-off the remaining $8.9 million
balance of this loan in 1999 resulting in the additional provision for loan losses of $6.8 million during 1999. During the years ended December 31, 2003, 2002 and 2001, Coastal received
$0, $288,000 and $267,000, respectively, in proceeds from the MCA loan which was recorded as a recovery in the allowance for loan losses in the period received. The Bank will continue to work with the
bankruptcy trustee to recover any funds, if possible, from the collateral or MCA.

In
the second situation, during 1999, the Bank purchased approximately $10.1 million of the underlying loans securing a $13.2 million Warehouse and servicing rights line of
credit due to default by the borrower. The remaining outstanding balance of $990,000 on this Warehouse and servicing rights line of credit was charged-off during 1999.

In
1999, the Bank began to decrease its emphasis on Warehouse lending. The Bank did not have any Warehouse loans outstanding at December 31, 2003 or 2002.

11

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MSR Lending.Beginning in 1992 and discontinued in 1999, the Bank loaned funds to mortgage companies for their purchase of
mortgage servicing rights or to finance the mortgage companies' ongoing operations to originate and retain mortgage servicing. Loans of this nature generally had terms of one to five years, and were
generally limited to 70.0% of the price paid by the mortgage company for servicing rights, or of the value of the originated servicing rights (subject to the regulatory
maximum for loans to one borrower). MSR loans were made at adjustable rates of interest tied to LIBOR or the Bank's borrowing rate plus a spread and a commitment fee. MSR loans were collateralized by
purchased or originated mortgage servicing rights to the remaining cash flows after remittance of payments to FNMA, FHLMC or other investors on the servicing portfolio. MSR loans were underwritten in
substantially the same manner as Warehouse loans, where Bank personnel closely monitored MSR borrowers by, among other things, reviewing the borrower's financial condition and operations in the same
manner as they did for Warehouse loans and by examining the value of the borrower's MSR portfolio (through evaluation of the estimated future net cash flows from the servicing rights) in order to
ensure that the loan-to-value ratio did not exceed 75.0% during the life of the loan. During 1999, the Bank incurred a loss on a Warehouse and servicing rights line of credit
due to default of the borrower as discussed previously. The Bank did not have any MSR loans outstanding at December 31, 2003 or 2002.

Real Estate Acquisition and Development Lending.The Bank originates loans to residential real estate builders and developers
as well as to major homebuilders for the acquisition and/or development of vacant land. The proceeds of the loans are generally used to acquire the land and make the site improvements necessary to
develop the land into residential lots to be sold to third parties or used by the homebuilders. The Bank generally lends only to developers with good track records and strong financial capacity and on
property where a substantial number of the lots to be developed are pre-sold. The term of the loans have generally been from 18 to 36 months at a spread over the prime rate, plus an
origination fee. Repayment on the loans is generally made as the lots are sold or used by homebuilders. Land acquisition and development loans involve additional risks when compared to loans on
existing residential properties, however, when lending directly to a major homebuilder the risk is mitigated by the strength of the borrower. These loans typically involve relatively large loan
balances to single borrowers, and the repayment experience is dependent upon the successful development of the land and the resale of the lots. These risks can be significantly impacted by supply and
demand conditions and the general economic conditions in the local market area. At December 31, 2003, the Bank had $84.0 million (net of loans in process of $50.2 million) of real
estate acquisition and development loans outstanding. At December 31, 2003, real estate acquisition and development loans of $5.5 million were on nonaccrual status, with two of those
loans totaling $5.4 million to one borrower.

Commercial Business Lending.Development of a commercial business lending program continues to be a strategic goal of Bank
management. The commercial bank acquisition in 1995 provided the Bank with an established commercial business lending program directed to small and medium sized companies primarily in the Houston and
Austin metropolitan areas. Since that acquisition, management has continued to develop the infrastructure for commercial business lending in most of the Bank's major markets. In addition, the Bank
acquired twelve commercial bank branches in the 1998 Branch Acquisition and significantly increased the Bank's commercial business loan origination capacity. The commercial, financial and industrial
loans ("Commercial Business loans") are typically made to provide working capital financing or asset acquisition financing to businesses and are generally secured by the borrower's working capital
assets (i.e., accounts receivable, inventory, etc.) or assets purchased by the borrower (i.e., operating assets, equipment, etc.). Commercial Business loans generally have shorter terms (one to five
years) which are indexed to prime rate, LIBOR or are fixed and are of greater risk than real estate secured loans because of the type and nature of the collateral. In addition, Commercial Business
loan collections are more dependent on the continuing financial stability of the borrower. The Bank intends to continue to expand its commercial business lending programs, while managing the
associated credit risk by continually monitoring borrowers' financial

12

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position
and underlying collateral securing the loans. At December 31, 2003, Commercial Business loans outstanding totaled $175.9 million, with $1.1 million of such loans on
nonaccrual status.

Consumer and Other Lending.The Bank makes available traditional consumer loans, such as home improvement, home equity, home
equity lines of credit "(HELOC"), new and used car financing, new and used boat and recreational vehicle financing and loans secured by savings deposits to consumers in the markets served by its
retail branches and business banking centers. For competitive reasons, the Bank's strategic emphasis has been on home equity loans and more recently, HELOCs. Texas voters approved HELOCs in September
of 2003 along with certain other changes to home equity law as set forth in the Texas Constitution. At December 31, 2003, the Bank had $32.6 million in consumer and other loans
outstanding, with $68,000 of such loans on nonaccrual status. Of the consumer and other loans outstanding, $18.1 million, or 55.6%, are second liens or home equity loans or lines of credit,
secured by residential property. The Bank had $13.0 million in loans secured by deposits outstanding at December 31, 2003. The interest rate on loans secured by savings deposits is
typically set at a rate above that paid on the underlying account and adjusts if the rate on the account changes.

Consumer
loans (other than deposit secured loans) generally have shorter terms and higher interest rates than mortgage loans, but usually involve greater credit risk than mortgage loans
because of the type and nature of the collateral. In addition, consumer lending collections are dependent on the borrower's continuing financial stability, and are thus likely to be adversely affected
by job loss, changes in marital status, illness and personal bankruptcy. In many cases, repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the
outstanding loan balance because of depreciation of the underlying collateral. The Bank believes that the generally higher yields earned on consumer loans compensate for the increased credit risk
associated with such loans and that consumer loans are important to its efforts to serve the credit needs of the communities that it serves. See "Regulation of the BankCommunity
Reinvestment Act."

Loans Receivable Held for Sale.From time to time, the Bank has loans classified as held for sale. These loans are generally
single-family loans purchased with the original intent to resell them or loans that have been reclassified from the loans receivable portfolio to held for sale due to the intent to sell. Loans
receivable held for sale are carried at the lower of cost or market value. At December 31, 2003, the Bank had $8.1 million in loans receivable held for sale, due to a loan package
purchased in December 2003 with the intent to sell the package to third party investors in the first quarter of 2004. The sale of this loan package to a third party investor was completed in
February of 2004.

Asset Quality.The Bank, like all financial institutions, is exposed to certain credit risks related to the value of the
collateral which secures loans held in its portfolio and the ability of borrowers to repay their loans during the term thereof. Management of the Bank monitors the loan portfolio and the Bank's real
estate acquired as a result of foreclosure ("REO") for potential problems on a weekly basis and reports to the Board of Directors on a monthly basis. When a borrower fails to make a required loan
payment or other weaknesses are detected in a borrower's financial condition, the Bank determines an appropriate course of action including contacting the borrower. Delinquencies are cured promptly in
most cases. If the delinquency on a mortgage loan exceeds 90 days and is not cured through the Bank's normal collection procedures, or an acceptable arrangement is not worked out with the
borrower, the Bank will institute measures to remedy the default, usually including commencing a foreclosure action. As a matter of policy, the Bank generally does not accept from the mortgagor a
voluntary deed of the secured property in lieu of foreclosure. If foreclosure is effected, the property is sold at a public auction in which the Bank may participate as a bidder. If the Bank is the
successful bidder, the foreclosed real estate is then included in the Bank's REO portfolio until it is sold.

13

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Upon acquisition, REO is recorded at the lower of unpaid principal balance adjusted for any remaining acquisition premiums or discounts less any applicable valuation allowance or
estimated fair value, based on an appraisal, less estimated selling costs. Subsequent to foreclosure, real estate owned is carried at the lower of the new cost basis or fair value, with any further
declines in fair value charged to operations. All costs incurred from the date of acquisition forward relating to maintaining the property are recorded as a current period expense.

It
is the Bank's general policy to stop accruing interest income and place the recognition of interest on a cash basis when a loan is past due more than 90 days. When a loan is
placed on nonaccrual status, previously accrued but unpaid interest is generally reversed against current interest income. A loan is returned to an accrual basis when all amounts due are reasonably
assured of repayment within a reasonable period and when the borrower has demonstrated payment performance history. On a loan-by-loan basis, Bank management may continue to
accrue interest on loans that are past due more than 90 days, particularly if management believes that the individual loan is well secured, in the process of collection or renewal and the
interest is fully collectible.

The
following table sets forth information regarding the Bank's nonperforming assets as of the dates shown.

At December 31,2003

2002

2001(Dollars in thousands)Nonaccrual loans:First lien residential mortgage

$
10,312

$
9,184

$
21,744Multifamily real estate








82Residential construction





49


218Commercial real estate


714


1,323


1,174Acquisition and development


5,497


5,485


6Commercial, financial and industrial


1,111


1,609


499Consumer and other


68


128


141Total nonaccrual loans


17,702


17,778


23,864Loans greater than 90 days delinquent and still accruing interest:First lien residential mortgage








62Multifamily real estate





282


Residential construction


136


83


755Commercial real estate


188


302


Acquisition and development


454


59


Commercial, financial and industrial


1,789


43


31Consumer and other








1Total loans greater than 90 days delinquent and still accruing interest


2,567


769


849Total nonperforming loans


20,269


18,547


24,713Total REO and repossessed assets


2,524


4,433


4,607Total nonperforming assets

$
22,793

$
22,980

$
29,320Ratio of nonaccrual loans to total loans receivable and loans held for sale


0.89
%

0.95
%

1.28
%Ratio of nonperforming loans to total loans receivable and loans held for sale


1.02
%

1.00
%

1.33
%Ratio of nonperforming assets to total assets


0.85
%

0.91
%

1.13
%


14

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Nonperforming
loans are those loans on nonaccrual status as well as those loans greater than ninety (90) days delinquent and still accruing interest. At
December 31, 2003, the Bank's nonperforming loans increased slightly, when compared to December 31, 2002, by $1.7 million or 9.3%, to $20.3 million.

At
December 31, 2003, nonperforming assets included REO with an aggregate book value of $2.5 million. At such date, the Bank's REO consisted of 17 single family residential
properties totaling $1.0 million, 6 commercial properties totaling $1.5 million and 1 residential construction property totaling $9,000. The Bank actively markets the REO properties
held. The Bank has historically incurred minimal losses on the sale of single family REO properties.

For
the year ended December 31, 2003, approximately $633,000 in additional interest income would have been recorded on the above loans accounted for on a nonaccrual basis if such
loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination if held for part of the period. Net income for 2003 included $471,000
in interest income for these same loans prior to the time they were placed on nonaccrual status.

The
Bank considers a loan to be impaired when, based upon current information and events, it is probable that the Bank will be unable to collect all amounts due according to the
contractual terms of the loan agreement. In determining impairment, the Bank considers, among other things, large non-homogeneous loans which may include nonaccrual loans or troubled debt
restructurings and performing loans which exhibit, among other characteristics, high loan-to-value ratios, low debt coverage ratios or indications that the borrowers are
experiencing increased levels of financial difficulty. The Bank bases the measurements of collateral-dependent impaired loans on the fair value of their collateral. The amount by which the recorded
investment in the loan exceeds the measure of the fair value of the collateral securing the loan is recognized by recording a valuation allowance. At December 31, 2003, the carrying value of
impaired loans totaled approximately $7.3 million and the related allowance for loan losses on those impaired loans totaled $1.9 million. Of these impaired loans outstanding at
December 31, 2003, three loans with a total balance of $332,000 did not have a specific portion of the allowance for loan losses allocated to them at such date. The average balance of impaired
loans during the year ended December 31, 2003 was approximately $7.6 million. For the year ended December 31, 2003, the Bank did not recognize interest income on loans considered
impaired.

The
Bank had loaned $114.4 million at December 31, 2003, under its residential construction lending program to multiple borrowers who are engaged in similar activities.
Certain of these borrowers could be similarly impacted by economic conditions in the Houston metropolitan area. See "Residential Construction Lending." The Bank had no other loan concentrations.

[This space intentionally left blank]

15

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Allowance for Loan Losses.Management analyzes the loan portfolio to determine the adequacy of the allowance for loan losses
in the appropriate provision required to maintain an adequate allowance to absorb probable losses on its loans receivable portfolio. The following table summarizes activity in the Bank's allowance for
loan losses during the periods indicated.

|                                                                                              |  | Year Ended December 31, |       
|--------------------------------------------------------------------------------------------- |  | ----------------------- | ------
|
|
|Balance at beginning of year                                                                  |  | $                       | 18,118
|Charge-offs                                                                                   |  |                         | (2,881
|Recoveries                                                                                    |  |                         | 852   
|Provision for loan losses                                                                     |  |                         | 3,300 
|                                                                                              |  |                         |       
|Balance at end of year                                                                        |  | $                       | 19,389
|                                                                                              |  |                         |       
|Ratio of net charge-offs during the period to average net loans outstanding during the period |  |                         | 0.11  
|                                                                                              |  |                         |       

The
following table sets forth the charge-offs by type of loan during the periods indicated.

|                                     |  | Year Ended December 31,
|------------------------------------ |  | -----------------------
|
|
|First lien residential mortgage(1)   |  | $                      
|Residential construction             |  |                        
|Commercial real estate               |  |                        
|Commercial, Warehouse and MSR(2)     |  |                        
|Commercial, financial and industrial |  |                        
|Consumer and other(3)                |  |                        
|                                     |  |                        
|Total charge-offs                    |  | $                      
|                                     |  |                        

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16

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The following table sets forth the allocation of the allowance for loan losses by type of loan outstanding at the dates indicated.

|                                        |  | At December 31,
|--------------------------------------- |  | ---------------
|
|
|First lien residential mortgage         |  | $              
|Multifamily mortgage                    |  |                
|Residential construction                |  |                
|Real estate acquisition and development |  |                
|Commercial real estate(1)               |  |                
|Commercial construction(2)              |  |                
|Commercial, Warehouse and MSR           |  |                
|Commercial, financial and industrial    |  |                
|Consumer and other                      |  |                
|Unallocated                             |  |                
|                                        |  |                
|                                        |  | $              
|                                        |  |                

The following table sets forth the allocation of the provision or the reduction of allowance for loan losses by loan type during the periods
indicated.

|                                        |  | Year Ended December 31, |       
|--------------------------------------- |  | ----------------------- | ------
|
|
|First lien residential mortgage         |  | $                       | 601   
|Multifamily mortgage                    |  |                         | (20   
|Residential construction                |  |                         | (9    
|Real estate acquisition and development |  |                         | 82    
|Commercial real estate(1)               |  |                         | 2,158 
|Commercial construction(2)              |  |                         | (2,416
|Commercial, Warehouse and MSR           |  |                         |      
|Commercial, financial and industrial    |  |                         | 1,020 
|Consumer and other                      |  |                         | 26    
|Unallocated                             |  |                         | 1,858 
|                                        |  |                         |       
|                                        |  | $                       | 3,300 
|                                        |  |                         |       

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17

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Estimating the allowance for loan losses is a critical accounting policy. It is subjective in nature and requires estimates that may be subject to
revision as facts and circumstances warrant. In assessing the adequacy of the allowance, management reviews the type, size, quality and risk of loans in the portfolio and considers such factors as
specific known risks, historical and peer group experience, the existing nonperforming loans and the underlying collateral value on those loans, general economic conditions, particularly as they
relate to Coastal's lending areas, industry standards, regulatory policies and other factors related to the collectibility of Coastal's loan portfolio. Management's calculation of the appropriate
total allowance for loan losses addresses both performing and nonperforming loans. For performing loans, a stratification of the portfolio is done to group together loans of the same type. An
appropriate allowance percentage is then assigned to those groups based upon the level of risk of the various loan types or groups. This aggregate analysis is based upon industry standards as well as
Coastal's historical experience and includes an unallocated amount in the allowance calculation to provide for the inherently subjective nature of the estimate. For nonperforming loans or otherwise
adversely classified loans with balances that exceed $500,000, an appropriate allowance percentage or dollar amount is identified on a case-by-case basis. This analysis
specifically addresses the particular risk characteristics or weaknesses that are affecting the collectibility of the loan being reviewed. In addition, management also conducts an ongoing analysis of
Coastal's actual loss experience on single-family mortgage loans to substantiate the adequacy of the allowance policy for such loans. Based on the ongoing assessment by management, provisions for loan
losses are charged to earnings to bring the total allowance for loan losses to a level deemed appropriate by management based on probable losses in the loan portfolio. While management uses the best
information available to recognize losses on loans, there can be no assurance that future additions to the allowance will not be necessary. When comparing 2003 and 2002, the changes in the provision
for loan losses are due to management's continuing evaluation of the overall allowance for loan losses. The decrease in the provision for loan losses in 2003 was based upon the current level of
unallocated reserves required to adhere to our loan policy described above. The increase in the provision for loan losses in 2002 (in the fourth quarter of 2002) was due to management's reevaluation
of the allowance for loan losses given the current economic conditions, the decision in 2002 to sell loans which resulted in charge-offs totaling $1.8 million to writedown such
loans to fair value, and the changes that have occurred within the mix of Coastal's loan portfolio, in addition to certain specific loans in the portfolio that have warranted greater attention and
specific allocations of the allowance for loan losses. While management believes that it has adequately provided for loan losses and that the allowance for loan losses is adequate at
December 31, 2003, it will continue to monitor the loan portfolio and make adjustments to its allowance for loan losses as it considers necessary. At December 31, 2003, the Bank's ratio
of the allowance for loan losses to nonperforming loans was 95.66% and the ratio of the allowance for loan losses to total loans receivable was 0.98%.

The
Board of Directors of the Bank reviews its Asset Classification and Allowance Policy ("ACAP") at least annually. The policy provides that the Bank at least annually will establish a
monthly provision amount to be added to the allowance for loan losses and the resultant allowance will be "tested" monthly for adequacy based on policy guidelines. Management maintains the allowance
for loan losses at a level considered adequate to cover probable losses on the loans receivable portfolio. This allowance covers all loans, including loans deemed to be impaired, loans not impaired
and loans excluded from the impairment test. The adequacy of the allowance is based on management's periodic evaluation of the loan portfolio, which considers, among other things, the size, quality
and risk of loans
in the portfolio, identification of any adverse situations which may affect the ability of borrowers to repay, assessment of current and future economic conditions, regulatory policies and the
estimated value of the underlying collateral, if any.

The
Bank's management believes that its present allowance for loan losses is adequate based upon, among other considerations, the factors discussed above, its existing nonperforming
loans and the underlying collateral value on those loans and its historical and peer group loss experience. Management continues to review its loan portfolio to determine whether its ACAP should be
altered in

18

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light
of current conditions and to make any additional provisions which may be deemed necessary. While management uses the best information available to make such determinations, additional provisions
for loan losses may be required to be established in the future should economic or other conditions change substantially. In addition, the FDIC and the Texas Savings and Loan Department, as an
integral part of their examination processes, periodically review the Bank's allowance for loan losses. These agencies may require the Bank to increase the allowance for loan losses, based on their
respective judgments of the information available at the time of the examinations.

Mortgage Loan Servicing.The Bank services residential real estate loans for others, including FNMA, FHLMC and other private
investors. Loan servicing for others includes collecting and remitting loan payments, accounting for principal and interest, making advances to cover delinquent payments, making inspections as
required of mortgaged premises, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults and generally administering the loans.

Due
to the Bank's declining servicing for others portfolio (with an average remaining loan life of approximately seven years), in the first quarter of 2000 management decided to sell its
entire servicing rights portfolio based on the then current market conditions for loan servicing rights and the expected declining income benefits of that servicing portfolio on an ongoing basis.
Effective March 31, 2000, the Bank sold, to a third party, its rights to service approximately $389.1 million of mortgage loans for third party investors, primarily FNMA and FHLMC,
pursuant to a purchase and sale agreement. The Bank subserviced those mortgage loans until the transfer to the purchaser was completed in the second quarter of 2000. The Bank recorded a
$2.2 million gain on the sale of the above mentioned mortgage servicing rights in 2000.

In
December 2002, Coastal sold $70.1 million of mortgage loans with servicing retained to a third party investor and recognized the estimated fair value of those servicing
rights retained of $359,000, which is recorded in prepaid expenses and other assets in the Company's Consolidated Statement of Financial Condition at December 31, 2002.

In
December 2003, Coastal purchased the servicing rights applicable to $160.5 million of mortgage loans for $1.7 million. As of December 31, 2003, Coastal
serviced for others approximately $209.0 million of such loans. See "First Lien Residential Mortgage Loan Purchases, Sales and Originations."

The
Bank receives fees for servicing mortgage loans for others, which generally range from 0.25% to 0.50% per annum on the declining principal balance of mortgage loans. Such fees serve
to compensate the Bank for the costs of performing the servicing function. Other sources of loan servicing revenues include late charges and other ancillary fees. Servicing fees are collected out of
the monthly mortgage payments made by borrowers and are recorded net of the amortization of mortgage servicing rights. For the year ended 2003, the Bank earned $69,000 in conjunction with its loan
servicing.

The
Bank's servicing portfolio was subject to reduction by normal principal amortization, by prepayment or by foreclosure of outstanding loans. The following table sets forth certain
information regarding the mortgage loans serviced for others portfolio for period indicated.

Year Ended December 31,2003

2002

2001(In thousands)Beginning loans serviced

$
68,828

$


$
New loans added


160,487


68,828


Loans transferred (prior to foreclosure)


(9,990
)




Amortization and payoffs


(10,728
)




Ending loans serviced

$
208,597

$
68,828

$



19

---

Mortgage-Backed Securities

The Bank maintains a substantial portfolio of mortgage-backed securities as a means of investing in housing-related mortgage instruments without the costs
associated with originating mortgage loans for portfolio retention. At December 31, 2003, the Company's mortgage-backed securities available-for-sale portfolio amounted
to $504.4 million, or 18.8%, of total assets. Effective September 30, 2001, Coastal transferred all of its mortgage-backed securities to the available-for-sale
category. This was due to management's intent to restructure a portion of the asset base to make it less vulnerable to market interest rate fluctuations. In late November 2001, Coastal
completed the sale of approximately $845 million of its mortgage-backed securities and recorded a gain of $169,000. The majority of the securities sold were CMOs tied to COFI and contained
extension risk which caused, on average, higher levels of price volatility. Also in November 2001, Coastal used a portion of the proceeds of the sale to purchase approximately
$512 million of primarily pass-thru mortgage-backed securities. A consequence of this 2001 securities sale was that any securities purchased by Coastal for approximately two years
thereafter were required to be placed in either the available-for-sale or trading category. Securities available-for-sale are securities other than
those held-to-maturity or for trading purposes and are recorded at fair value, with unrealized gains and losses excluded from earnings and recorded net of tax as other
comprehensive income (loss) in stockholders' equity until realized. Realized gains and losses on securities are recorded in earnings in the year of sale based on the specific identification of each
individual security sold. Premiums and discounts on mortgage-backed securities are amortized or accreted as a yield adjustment over the life of the securities using the interest method, with the
amortization or accretion being adjusted when the prepayments are received.

The
following table sets forth the composition of the Company's mortgage-backed securities portfolio at the dates indicated.

At December 31,2003

2002

2001(In thousands)Available-for-sale:CMOs

$
71,396

$
83,794

$
106,657Agency securities


423,902


379,569


397,413Non-agency securities


1,594


2,047


2,572496,892


465,410


506,642Unamortized premium


9,135


8,662


9,873Unearned discount


(44
)




Net unrealized gain (loss)


(1,581
)

950


(2,447
)Total mortgage-backed securities available-for-sale

$
504,402

$
475,022

$
514,068


The
mortgage-backed securities which the Company purchases and maintains in its portfolio can include FNMA, FHLMC and GNMA certificates, certain privately issued, credit-enhanced
mortgage-backed securities which are rated "AAA" or better by the national securities rating agencies and certain types of CMOs. The FNMA, FHLMC and GNMA certificates ("Agency Securities") are
modified pass-thru mortgage-backed securities, which represent undivided interests in underlying pools of fixed-rate, or certain types of adjustable rate, single family
residential mortgages issued by these quasi-governmental (GNMA) and private (FNMA and FHLMC) corporations. FNMA and GNMA provide to the certificate holder a guarantee (which is backed by the full
faith and credit of the U.S. government in the case of GNMA certificates) of timely payments of interest and scheduled principal payments, whether or not they have been collected. FHLMC guarantees the
timely payment of interest and the full (though not necessarily timely) payment of principal. The guarantees of FNMA and FHLMC are not backed by the full faith and credit of the U.S. government. The
mortgage-backed securities acquired by the Company that have been pooled and sold by private issuers, generally large

20

---

investment
banking firms, provide for the timely payments of principal and interest either through insurance issued by a reputable insurer or the right to receive certain payments thereunder is
subordinated in a manner which is sufficient to have such mortgage-backed securities generally earn a credit rating of "AAA" or better from one or more of the national securities rating agencies.

A
CMO is a special type of pay-thru debt obligation in which the stream of principal and interest payments on the underlying mortgages or mortgage-backed securities is used
to create classes with different maturities and, in some cases, amortization schedules and a residual class of the CMO security being sold, with each such class possessing different risk
characteristics. The residual interest sold represents any residual cash flows which result from the excess of the monthly receipts generated by principal and interest payments on the underlying
mortgage collateral and any reinvestment earnings thereon, less the cash payments to the CMO holders and any administrative expenses. As a matter of policy, due to the risk associated with residual
interests, the Bank does not intend to invest in residual interests in CMOs.

Mortgage-backed
securities generally yield less than the loans which underlie such securities because of their payment guarantees or credit enhancements which reduce credit risk. In
addition, mortgage-backed securities are more liquid than individual mortgage loans and may be used to collateralize obligations of the Bank. Mortgage-backed securities issued or guaranteed by FNMA or
FHLMC (except interest-only securities or the residual interests in CMOs) are weighted at no more than 20% for risk-based capital purposes, compared to a weight of 50% to 100%
for residential loans. See "RegulationRegulatory Capital Requirements."

The
following table sets forth the Company's activities with respect to mortgage-backed securities (including held-to-maturity and available-for-sale)
during the periods indicated.

Year Ended December 31,2003

2002

2001(In thousands)Mortgage-backed securities
available-for-sale purchased

$
303,826

$
112,579

$
512,267Mortgage-backed securities
available-for-sale sold


(64,062
)




(844,749
)Discount accretion (premium
amortization), net


(4,254
)

(3,142
)

(401
)Change in unrealized gain (loss) on
mortgage-backed securities
available-for-sale


(2,531
)

3,397


424Principal repayments on
mortgage-backed securities


(203,599
)

(151,880
)

(133,711
)Net increase (decrease) in
mortgage-backed securities

$
29,380

$
(39,046
)
$
(466,170
)


Investment Activities

Under the Texas Savings Bank Act (the "Act"), the Bank is permitted to invest in obligations of, or guaranteed as to principal and interest by, the United States
or the State of Texas, in the stock or in any obligations or consolidated obligations of the FHLB and in various other specified instruments. The Bank holds investment securities from time to time to
help meet its liquidity requirements and as temporary investments until funds can be utilized to purchase residential mortgage loans, mortgage-backed securities or to originate other loans for the
Bank's portfolio. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources."

21

---

Sources of Funds

General.Advances from the FHLB, deposits, sales of securities under agreements to repurchase, as well as maturities of and
principal repayments on loans and mortgage-backed securities have been the major sources of funds for use in the Bank's lending and investments and for other general business purposes. Management of
the Bank closely monitors rates and terms of competing sources of funds on at least a weekly basis and utilizes the source which is the most cost effective.

Deposits.The Bank attracts a majority of its deposits through its 43 branch offices in metropolitan Houston, Austin, Corpus
Christi, the Rio Grande Valley and small cities in the southeast quadrant of Texas. The Bank also obtains deposits through acquisitions. The Bank offers a variety of traditional retail deposit
products which currently includes interest-bearing checking, noninterest-bearing checking, savings, money market demand accounts and certificates of deposit which generally range in terms from three
to 60 months. Included among these deposit products are individual retirement account certificates. Beginning in 1995 with the acquisition of Texas Capital, the Bank's management has pursued a
commercial banking strategy related to deposits designed to increase the level of lower cost transaction and commercial deposit accounts. The Bank offers a range of products for commercial businesses
including Small Business Checking, Business Interest Checking, Analysis Checking and Commercial Money Market Accounts. The acquisitions and marketing efforts have resulted in the outstanding balances
of demand deposit accounts increasing to 44.5% of total deposits at December 31, 2003 from 32.1% at December 31, 1998.

Effective
January 1, 1998, the Company implemented a program whereby a portion of the balance in noninterest-bearing and interest-bearing checking accounts is reclassified to
money market demand accounts under Federal Reserve Regulation D. The amount of such reclassification, reflected in the following table, was approximately $261.2 million
($151.2 million from noninterest bearing and $110.0 million from interest-bearing) at December 31, 2003, $250.9 million ($131.3 million from noninterest-bearing and
$119.6 million from interest-bearing) at December 31, 2002, and $243.3 million ($113.0 million from noninterest-bearing and $130.3 million from interest-bearing) at
December 31, 2001. The following table shows the distribution of and certain other information relating to the Company's deposits by type at the dates indicated.

|                         |                                                                                                     | At December 31,               |  
|------------------------ | --------------------------------------------------------------------------------------------------- | ----------------------------- | -
|
|
|
|Demand deposit accounts: |                                                                                                     |                               |  
|                         | Noninterest-bearing checking                                                                        |                               | $
|                         | Interest-bearing checking                                                                           |                               |  
|                         | Savings                                                                                             |                               |  
|                         | Money market demand (including amounts reclassified from noninterest and interest-bearing checking) |                               |  
|                         |                                                                                                     |                               |  
|                         |                                                                                                     | Total demand deposit accounts |  
|                         |                                                                                                     |                               |  
|Certificate accounts:    |                                                                                                     |                               |  
|                         | Maturing within 1 year                                                                              |                               |  
|                         | 1-2 years                                                                                           |                               |  
|                         | 2-3 years                                                                                           |                               |  
|                         | 3-4 years                                                                                           |                               |  
|                         | 4-5 years                                                                                           |                               |  
|                         | Over 5 years                                                                                        |                               |  
|                         |                                                                                                     |                               |  
|                         |                                                                                                     | Total certificate accounts    |  
|                         |                                                                                                     |                               |  
|                         |                                                                                                     | Total                         |  
|                         |                                                                                                     |                               |  

22

---

Prior to the reclassification as discussed above, noninterest-bearing checking accounts, interest-bearing checking accounts and money market
demand accounts were as follows at December 31, 2003, 2002 and 2001:

2003

2002

2001Noninterest-bearing checking

$
212,003

$
182,364

$
160,738Interest-bearing checking


128,610


134,034


146,144Money market demand accounts


360,376


279,717


262,513


The following table sets forth the average balance of each deposit type and the average rate paid on each deposit type for the periods indicated.

|                         |                              | Year Ended December 31, |        
|------------------------ | ---------------------------- | ----------------------- | -------
|
|
|
|Demand deposit accounts: |                              |                         |        
|                         | Noninterest-bearing checking |                         | $      
|                         | Interest-bearing checking    |                         |        
|                         | Savings                      |                         |        
|                         | Money market demand(1)       |                         |        
|Certificate accounts     |                              |                         | 946,652
|                         |                              |                         |        
|                         | Total deposits               |                         | $      
|                         |                              |                         |        

---

2003

2002

2001(In thousands)Noninterest-bearing checking

$
155,655

$
139,314

$
95,733Interest-bearing checking


119,702


126,532


92,200$
275,357

$
265,846

$
187,933


[This space intentionally left blank]

23

---

The
following table presents by various interest rate categories the amounts of certificate accounts at the dates indicated and the amounts of certificate accounts at December 31,
2003 which mature during the periods indicated.

|                      |  | Amounts at December 31, |         | Amounts at December 31, 2003 Maturing In
|--------------------- |  | ----------------------- | ------- | ----------------------------------------
|
|
|Certificate accounts: |  |                         |         |                                         
|Less than 2.00%       |  | $                       | 442,044 |                                         
|2.00% to 3.99%        |  |                         | 413,885 |                                         
|4.00% to 5.99%        |  |                         | 70,877  |                                         
|6.00 to 7.99%         |  |                         | 2,877   |                                         
|8.00 to 9.99%         |  |                         |        |                                         
|                      |  |                         |         |                                         
|Total                 |  | $                       | 929,683 |                                         
|                      |  |                         |         |                                         

Certificates maturing within one year consist primarily of six month and one year certificates. Historically, a majority of such certificate
holders roll over their balances into new certificates with similar terms at the Bank's then current interest rates.

The
following table sets forth the net deposit flows of the Company during the periods indicated.

|                                                 |  | Year Ended December 31, |       
|------------------------------------------------ |  | ----------------------- | ------
|
|
|Decrease due to sale of branches(1)              |  | $                       |      
|Net increase (decrease) before interest credited |  |                         | 30,698
|Interest credited                                |  |                         | 30,991
|                                                 |  |                         |       
|Net deposit increase (decrease)                  |  | $                       | 61,689
|                                                 |  |                         |       

---

[This space intentionally left blank]

24

---

The
following table sets forth the amount of the Bank's certificates of deposits at December 31, 2003 which are $100,000 or more by time remaining until maturity.

At December 31, 2003Number of
accounts

Deposit Amount(In thousands)Three months or less

448

$
51,843Over three through six months

403


44,310Over six through twelve months

560


69,659Over twelve months

543


62,803Total

1,954

$
228,615


The Bank's deposits are obtained primarily from businesses and residents of Houston, Austin, Corpus Christi, the Rio Grande Valley and small
cities in the southeast quadrant of Texas. Currently, the principal methods used by the Bank to attract and retain deposit accounts include competitive interest rates, having branch locations in
under-served markets and offering a variety of services for the Bank's commercial business and retail customers. The Bank uses traditional marketing methods to attract new customers and deposits,
including newspaper and radio advertising. Through 2003, except as noted below, the Bank has not solicited brokered deposit accounts and generally has not negotiated rates on larger denomination
(i.e., jumbo) certificates of deposit. From early 1997 through mid year 2002, the Bank solicitated deposit accounts through a "money desk." Money desk rates were only offered to institutions
(primarily credit unions and municipal utility districts) and were generally up to 50 basis points higher than on regular certificate of deposit accounts. The offering of deposits through the "money
desk" was discontinued during 2002.

The
Bank also provides its customers with the opportunity to invest in non-FDIC insured mutual funds, including government bond funds, tax-free municipal bond
funds, growth funds, income growth funds, and sector funds specific to an industry, which are provided through a third party arrangement with another company, which maintains representatives at the
Bank's branch offices. The Bank earns a fee after the payment of all expenses, which was not material
to the Bank's results of operations for the years ended December 31, 2003, 2002 or 2001. See "Subsidiaries of the BankCoastalBanc Financial Corp", and "Subsidiaries of the
BankCoastal Banc Insurance Agency, Inc."

[This space intentionally left blank]

25

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Borrowings.The following table sets forth certain information regarding the borrowings of the Bank
at or for the dates
indicated.

At or For the Year
Ended December 31,2003

2002

2001(Dollars in thousands)FHLB advances:Average balance outstanding

$
741,378

$
683,454

$
795,009Maximum amount outstanding at any
month-end during the period


888,003


760,139


1,218,145Balance outstanding at end of period


799,875


696,085


690,877Average interest rate during the period


2.27
%

2.95
%

4.90
%Average interest rate at end of period


2.02
%

2.71
%

3.46
%Securities sold under agreements
ot repurchase:Average balance outstanding

$


$


$
283,622Maximum amount outstanding at any
month-end during the period








493,003Balance outstanding at end of period








Average interest rate during the period








3.77
%Average interest rate at end of period











As
noted previously, as a result of the asset base restructuring that occurred in November 2001, the Company's total assets decreased during that year. As part of the
restructuring, the Company sold mortgage-backed securities of $845 million, purchased $512 million of mortgage-backed securities to replace the assets sold and reduced borrowings with
the remainder of the sales proceeds.

The
Bank obtains long term, fixed rate and short term, variable rate advances from the FHLB upon the security of certain of its first lien residential and multifamily mortgage loans and
mortgage-backed securities, provided certain standards related to creditworthiness of the Bank have been met. FHLB advances are generally available for general business purposes to expand lending and
investing activities. Borrowings have generally been used to fund the purchase of loans receivable and mortgage-backed securities.

Advances
from the FHLB are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The programs of the FHLB currently
utilized by the Bank include various short-term, fixed rate advances and long term, fixed and
variable-rate advances. At December 31, 2003, the Bank had total FHLB advances of $799.9 million at a weighted average interest rate of 2.02%. Of the advances outstanding at
December 31, 2003, none were short-term advances with an original maturity of less than 90 days.

The
Bank also obtains funds from the sales of securities to investment dealers under agreements to repurchase ("reverse repurchase agreements"). In a reverse repurchase agreement
transaction, the Bank will generally sell a mortgage-backed security agreeing to repurchase the same security on a specified later date at an agreed upon price. The mortgage-backed securities
underlying the agreements are delivered to the dealers who arrange the transactions. The dealers may lend the Bank's securities to others in the normal course of their operations; however, such
dealers or third party custodians

26

---

safe-keep
the securities which are to be specifically repurchased by the Bank. Reverse repurchase agreements represent a competitive cost funding source for the Bank; however, the Bank is
subject to the risk that the lender may default at maturity and not return the collateral. In order to minimize this potential risk, the Bank only deals with large, established investment brokerage
firms when entering into these transactions. At December 31, 2003, the Bank did not have any borrowings under reverse repurchase agreements.

To
a lesser extent, beginning in 1997, the Bank has utilized federal funds purchased from a correspondent bank for overnight borrowing purposes. There were no federal funds purchased
outstanding at any time during 2003, 2002 or 2001.

The
Asset/Liability Subcommittee of the Bank attempts to match the maturity of its borrowings with particular repricing dates of certain assets in order to maintain a
pre-determined interest rate spread. The Bank's objective is to minimize the increase or decrease in the interest rate spread during periods of fluctuating interest rates from that which
was contemplated at the time the assets and liabilities were first put on the Bank's books. The Bank also attempts to alter the interest rate risk associated with its borrowings through the use of
interest rate swaps and interest rate caps purchased from selected securities brokers/dealers. See "Management's Discussion and Analysis of Financial Condition and Results of
OperationsAsset and Liability Management" in Item 7 hereof.

Subsidiaries of the Bank

General.The Bank is permitted to invest in the capital stock, obligations and other securities of its service corporations
in an aggregate amount not to exceed 10% of the Bank's assets. In addition, the
Bank may make conforming loans in an amount not exceeding 50% of the Bank's regulatory capital to service corporations of which the Bank owns more than 10% of the stock. At December 31, 2003,
the Bank was authorized to have a maximum investment of approximately $268.0 million in its subsidiaries.

At
December 31, 2003, the Bank had two active wholly-owned subsidiaries, the activities of which are described below. At December 31, 2003, the Bank's aggregate equity
investment in its subsidiaries was $257,000.

CoastalBanc Financial Corp.CoastalBanc Financial Corp. ("CBFC") was formed in 1986 to act as an investment advisor to other
insured financial institutions. The Bank is the sole stockholder of CBFC. Over the past five years, CBFC has been inactive in its investment advisory capacity. CBFC became active during the last
quarter of 1992 in connection with the sale of mutual funds through third party intermediaries. Fees generated, net of expenses, resulted in a net income of $7,000, $5,000 and $27,000 for the years
ended December 31, 2003, 2002 and 2001, respectively.

Coastal Banc Insurance Agency, Inc.In 1987, the Bank entered into an Administrative Services Agreement with CBIA, a
Texas business corporation licensed under Texas law to act as a life insurance agent. Until June 22, 2000, CBIA was affiliated with the Bank as a result of being wholly-owned by a former
executive officer of the Bank. On June 22, 2000, CBIA became a subsidiary of the Bank. CBIA receives fees related to insurance and investment product sales through third party intermediaries to
the Bank's deposit and loan customers. Fees generated, net of expenses, resulted in net income of $4,000 $14,000 and $13,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
Expenses of CBIA include administrative fees paid to the Bank of $525,000, $575,000 and $510,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

Affiliates of the Bank

Coastal Banc Capital Corp.In March of 2003, management of the Company made the decision to discontinue the operations of
CBCC due to the current economic climate. Prior to March, CBCC

27

---

was
a direct subsidiary of HoCo and an affiliate of the Bank. CBCC, through its Mortgage Asset Trading Group, was engaged in the business of purchasing and reselling packages of whole loan assets on
behalf of the Bank and institutional investors. These activities continued until September 2002, when the operations of the Mortgage Asset Trading Group were moved to CBMC. Effective
January 1, 2002, CBCC formed two new groups in an effort to increase its fee income within its existing business of asset trading and by providing additional services for commercial business
customers. The Specialty Finance Group focused on developing a network of buyers of mortgage loans and developing the capability of trading in other types of debt instruments. The operations of the
Specialty Finance Group were also moved to CBMC in September 2002. The Corporate Finance Group, as an intermediary, focused on raising capital for its business customers and providing merger
and acquisition advisory services to buyers and sellers of companies.

CBCC
had net income (loss) (before intercompany eliminations) of $(44,000), $(29,000), and $437,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

Coastal Banc Mortgage Corp.CBMC is a direct subsidiary of HoCo and an affiliate of the Bank. Effective
September 2002, CBMC began performing the functions previously performed by the Mortgage Asset Trading Group and the Specialty Finance Group of CBCC, which were moved from CBCC to CBMC. In
addition, CBMC entered into a marketing service agreement with a third party to enhance the opportunities for both parties related to the business of buying and selling whole loan related assets. The
agreement calls for shared revenues for referring business between the parties.

During
2003, CBMC facilitated the purchase of whole loan assets totaling $565.7 million (including purchase premium) for the Bank's portfolio. In addition, CBMC facilitated the
purchase of $164.2 million of loans held for sale. During the year ended December 31, 2003, CBMC recorded brokerage fees on transactions facilitated for the Bank of $769,000. All
significant intercompany balances and transactions are eliminated in consolidation. At December 31, 2003, HoCo's unconsolidated equity investment in CBMC was $157,000. CBMC had net income
(loss) (before intercompany eliminations) of $3,000 for the year ended December 31, 2003 and $(67,000) for the period from CBMC's inception in July 2002 through December 31, 2002.

The
Bank and CBMC entered into a mortgage warehouse revolving loan agreement pursuant to which the Bank had established a $17.0 million revolving line of credit to be drawn upon
from time to time by CBMC to finance the acquisition of whole loan assets and the holding of such assets until they are sold. The advances drawn by CBMC are collateralized by such assets purchased and
held by CBMC. No advances have been made against this line of credit. The transactions between the Bank and CBMC are within regulatory guidelines.

Regulation

Set forth below is a brief description of certain laws and regulations which relate to the regulation of the Company and the Bank. The description does not
purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. Certain federal banking laws have been recently amended. See "RegulationThe
Company-Financial Modernization."

The Company

Regulations.The Company and HoCo are registered unitary savings and loan holding companies and are subject to OTS and
Department regulation, examination, supervision and reporting requirements. In addition, because the capital stock of the Company is registered under Section 12(g) of the Securities Exchange
Act of 1934, the Company is also subject to various reporting and other requirements of the SEC. As a subsidiary of a savings and loan holding company, the Bank is also subject to certain Federal and
state restrictions in its dealings with the Company and affiliates thereof.

28

---

Federal Activities Restrictions.There are generally no restrictions on the activities of a savings and loan holding company
which holds only one subsidiary savings bank provided that it meets the grandfather requirement described below. See "The CompanyFinancial Modernization." However, if the Director of the
OTS determines that there is reasonable cause to believe that the continuation by a savings and loan holding company of an activity constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary savings institution (i.e., a savings association or savings bank), the Director may impose such restrictions as he deems necessary to address such risk, including limiting
(i) payment of dividends by the savings institution; (ii) transactions between the savings institution and its affiliates; and (iii) any activities of the savings institution that
might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the savings institution. Notwithstanding the foregoing, if the savings institution
subsidiary of such a holding company fails to meet the Qualified Thrift Lender ("QTL") test, then such unitary holding company also shall become subject to the activities restrictions
applicable to multiple savings and loan holding companies and, unless the savings institution requalifies as a QTL within one year thereafter, shall register as, and become subject to the restrictions
applicable to, a bank holding company. See "Regulation of The BankQualified Thrift Lender Test."

If
the Company were to acquire control of another savings institution, other than through merger or other business combination with the Bank, the Company would become a multiple savings
and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions and where each subsidiary savings institution meets the QTL test, as set
forth below, the activities of the Company and any of its subsidiaries (other than the Bank or other subsidiary savings institutions) would thereafter be subject to further restrictions. No multiple
savings and loan holding company or subsidiary thereof which is not a savings institution shall commence or continue beyond a limited period of time after becoming a multiple savings and loan holding
company or subsidiary thereof any business activity, other than: (i) furnishing or performing management services for a subsidiary savings institution; (ii) conducting an insurance
agency or escrow business; (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings institution; (iv) holding or managing properties used or occupied
by a subsidiary savings institution; (v) acting as trustee under deeds of trust; (vi) those activities authorized by regulation as of March 5, 1987 to be engaged in by multiple
savings and loan holding companies; or (vii) unless the Director of the OTS by regulation prohibits or limits such activities for savings and loan holding companies, those activities authorized
by the Federal Reserve Board as permissible for bank holding companies or financial holding companies. The activities described in (i) through (vi) above may be engaged in only after
giving the OTS prior notice and being informed that the OTS does not object to such activities. In addition, the activities described in (vii) above also must be approved by the Director of the
OTS prior to being engaged in by a multiple savings and loan holding company.

Restrictions on Acquisitions.Except under limited circumstances, savings and loan holding companies are prohibited from
acquiring, without prior approval of the Director of the OTS, (i) control of any other savings institution or savings and loan holding company or substantially all the assets thereof or
(ii) more than 5% of the voting shares of a savings institution or holding company thereof which is not a subsidiary. Except with the prior approval of the Director of the OTS, no director or
officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such company's stock, may acquire control of any savings institution, other than a
subsidiary savings institution, or of any other savings and loan holding company.

The
Director of the OTS may approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings institutions in more than one state only
if (i) the multiple savings and loan holding company involved controls a savings institution which operated a home or branch office located in the state of the association to be acquired as of
March 5, 1987; (ii) the acquiror is authorized to acquire control of the savings institution pursuant to the emergency

29

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acquisition
provisions of the Federal Deposit Insurance Act ("FDIA"), or (iii) the statutes of the state in which the institution to be acquired is located specifically permit institutions to
be acquired by the state-chartered institutions or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such
state-chartered savings institutions).

Financial Modernization.Under the Gramm-Leach-Bliley Act enacted into law on November 12, 1999, no company may
acquire control of a savings and loan holding company after May 4, 1999, unless the
company is engaged only in activities traditionally permitted to a multiple savings and loan holding company or newly permitted to a financial holding company under Section 4(k) of the Bank
Holding Company Act. With limited exceptions, existing savings and loan holding companies and those formed pursuant to an application filed with the OTS before May 4, 1999, may engage in any
activity including non-financial or commercial activities provided such companies control only one savings association and that savings association meets the QTL test. Corporate
reorganizations are permitted, but the transfer of grandfathered unitary thrift holding company status through acquisition is not permitted. The Company and HoCo qualify to engage in that broader
range of activities.

Texas Regulations.Under the Texas Savings Bank Act ("TSBA"), each registered holding company, such as the Company, is
required to file reports with the Department as required by the Texas Savings and Loan Commissioner ("Commissioner") and is subject to such examination as the Commissioner may prescribe.



On
July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley Act of 2002, which generally establishes a comprehensive framework to modernize and reform the
oversight of public company auditing, improve the quality and transparency of financial reporting by those companies and strengthen the independence of auditors. Certain of the new legislation's more
significant reforms are noted below.



30

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Regulation of the Bank

The Bank is required to file reports with the Department and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions, such as any merger or acquisition with another institution. The regulatory system to which the Bank is subject is intended primarily for the
protection of the deposit insurance fund and depositors, not stockholders. The regulatory structure also provides the Department and the FDIC with substantial discretion in connection with their
supervisory and enforcement functions. The Department and the FDIC conduct periodic examinations of the Bank in order to assess its compliance with federal and state regulatory requirements. As a
result of such examinations, the Department and the FDIC may require various corrective actions.

Virtually
every aspect of the Bank's business is subject to numerous federal and/or state regulatory requirements and restrictions with respect to such matters as, for example, the
nature and amounts of loans and investments that may be made, the issuance of securities, the amount of reserves that must be established against deposits, the establishment of branches, mergers,
non-banking activities and other operations. Numerous laws and regulations also set forth special restrictions and procedural requirements with respect to the extension of credit, credit
practices, the disclosure of credit terms and discrimination in credit transactions.

Limitations on Transactions with Affiliates.Transactions between savings institutions and any affiliate are governed by
Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings institution is generally any company or entity which controls or is under common control with the savings institution. In a
holding company context, the parent holding company of a savings institution (such as the Company) and any companies which are controlled by such parent holding company are affiliates of the savings
institution. Generally, Section 23A limits the extent to which the savings institution or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10%
of such institution's capital stock and surplus, and contains an aggregate limit on all such

31

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transactions
with all affiliates to an amount equal to 20% of such capital stock and surplus. Section 23B applies to "covered transactions" as well as certain other transactions and requires
that all such transactions be on terms substantially the same, or at least as favorable to the institution or subsidiary, as those provided to a non-affiliate. The term "covered
transaction" includes the making of loans to, purchase of assets from and, issuance of a guarantee to an affiliate and similar transactions. Section 23B transactions also apply to the provision
of services and the sale of assets by a savings association to an affiliate. In addition to the restrictions imposed by Sections 23A and 23B, no savings institution may (i) loan or otherwise
extend credit to an affiliate, except for any affiliate which engages only in activities which are permissible for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates which are subsidiaries of the savings institution.

In
addition, Sections 22(h) and (g) of the Federal Reserve Act place restrictions on loans to executive officers, directors and principal stockholders. Under Section 22(h),
loans to a director, an executive officer and to a greater than 10% stockholder of a savings institution (a "principal stockholder"), and certain affiliated interests of each of them, may not exceed,
together with all other outstanding loans to such person and affiliated interests, the savings institution's loans to one borrower limit (generally equal to 15% of the institution's unimpaired capital
and surplus). Section 22(h) also requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to
other persons and also requires prior Board approval for certain loans. In addition, the aggregate amount of extensions of credit by a savings institution to all insiders cannot exceed the
institution's unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers. At December 31, 2003, the Bank was in compliance
with the above restrictions.

Regulatory Capital Requirements.Federally insured state-chartered banks are required to maintain minimum levels of
regulatory capital. These standards generally must be as stringent as the comparable capital requirements imposed on national banks. The FDIC also is authorized to impose capital requirements in
excess of these standards on individual banks on a case-by-case basis.

Under
current FDIC regulations, the Bank is required to comply with three separate minimum capital adequacy requirements: a "Tier 1 capital ratio" and two "risk-based"
capital requirements. "Tier 1 capital" generally includes common stockholders' equity (including retained earnings), qualifying noncumulative perpetual preferred stock and any related surplus,
and minority interests in the equity accounts of fully consolidated subsidiaries, minus intangible assets, other than properly valued mortgage servicing assets, nonmortgage servicing assets and
purchased credit card relationships up to certain specified limits and minus net deferred tax assets in excess of certain specified limits. At December 31, 2003, the Bank did not have any net
deferred tax assets in excess of the specified limits.

Tier 1 Capital Ratio.FDIC regulations establish a minimum 3.0% ratio of Tier 1 capital to total assets for the most
highly-rated state-chartered, FDIC-supervised banks and for all other state-chartered, FDIC-supervised banks, the minimum Tier 1 capital ratio shall not be less than 4.0%.
Under FDIC regulations, highly-rated banks are those that the FDIC determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate
risk exposure, excellent asset quality, high liquidity and good earnings. At December 31, 2003, the minimum Tier 1 capital ratio for capital adequacy purposes for the Bank was 4.0% and its
actual Tier 1 capital ratio was 6.26%.

Risk-Based Capital Requirements.The risk-based capital requirements contained in FDIC regulations
generally require the Bank to maintain a minimum ratio of Tier 1 capital to risk-weighted assets of at least 4.00% and a ratio of total risk-based capital to
risk-weighted assets of at least 8.00%. To calculate the amount of capital required, assets are placed in one of four categories and given a percentage weight (0%, 20%, 50% or 100%) based
on the relative risk of the category. For example,

32

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U.S.
Treasury Bills and GNMA securities are placed in the 0% risk category. FNMA and FHLMC securities are placed in the 20% risk category, loans secured by one-to-four family
residential properties and certain privately issued mortgage-backed securities are generally placed in the 50% risk category and commercial and consumer loans and other assets are generally placed in
the 100% risk category. In addition, certain off-balance sheet items are converted to balance sheet credit equivalent amounts and each amount is then assigned to one of the four
categories.

For
purposes of the risk-based capital requirements, "total capital" means Tier 1 capital plus supplementary or Tier 2 capital, so long as the amount of supplementary or Tier
2 capital that is used to satisfy the requirement does not exceed the amount of Tier 1 capital. Supplementary or Tier 2 capital includes, among other things, so-called permanent capital
instruments (cumulative or other perpetual preferred stock, mandatory convertible subordinated debt and perpetual subordinated debt), so-called maturing capital instruments (mandatorily
redeemable preferred stock, intermediate-term preferred stock, mandatory convertible subordinated debt and subordinated debt), and a certain portion of the allowance for loan losses up to
a maximum of 1.25% of risk-weighted assets. At December 31, 2003, the Bank's Tier 1 capital to risk-weighted assets ratio was 9.23% and its total risk-based
capital to risk weighted assets ratio was 10.31%.

The
following table sets forth information with respect to each of the Bank's minimum capital adequacy requirements at the dates shown.

|                                                      |  | At December 31, |  
|----------------------------------------------------- |  | --------------- | -
|
|
|Tier 1 capital to total assets                        |  | 6.26            | %
|Tier 1 risk-based capital
to risk weighted assets     |  | 9.23            |  
|Total risk-based capital
risk to risk weighted
assets |  | 10.31           |  

---

[This space intentionally left blank]

33

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The following table sets forth a reconciliation between the Bank's stockholders' equity and each of its three minimum regulatory capital requirements at December 31, 2003.

Tier 1
Capital

Tier 1
Risk-based
Capital

Total
Risk-based
Capital(Dollars in thousands)Total stockholders' equity

$
187,078

$
187,078

$
187,078Unrealized loss on securities
available-for-sale


1,109


1,109


1,109Less nonallowable assets:Goodwill


(21,429
)

(21,429
)

(21,429
)Mortgage servicing rights


(195
)

(195
)

(195
)Plus allowance for loan losses








19,389Total regulatory capital


166,563


166,563


185,952Minimum required capital


106,507


72,170


144,339Excess regulatory capital

$
60,056

$
94,393

$
41,613Bank's regulatory capital percentage(1)


6.26
%

9.23
%

10.31
%Minimum regulatory capital
adequacy required percentage


4.00
%

4.00
%

8.00
%Bank's regulatory capital percentage in
excess of minimum requirement


2.26
%

5.23
%

2.31
%


---

FDIC Insurance Premiums.The deposits of the Bank are insured to the maximum extent permitted by the Savings
Association Insurance Fund (the "SAIF") and the Bank Insurance Fund (the "BIF"), both of which are administered by the FDIC, and are backed by the full faith and credit of the U.S. government. As the
insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured institution from
engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the FDIC. The FDIC also has the authority to initiate enforcement actions against savings institutions.

The
Bank currently pays deposit insurance premiums to the FDIC based on a risk-based assessment system established by the FDIC for all bank and thrift institutions. Under
applicable regulations, institutions are assigned to one of three capital groups based solely on the level of an institution's capital"well capitalized," "adequately capitalized" and
"undercapitalized"which are defined in the same manner as the regulations establishing the prompt corrective action system under Section 38 of the FDIA. These three groups are then
divided into three subgroups which reflect varying levels of supervisory concern, from those which are considered to be healthy to those which are considered to be of substantial supervisory concern.
The matrix so created results in nine assessment risk classifications, with rates during the last six months of 2003 ranging from zero for well capitalized, healthy institutions, such as the Bank, to
27 basis points for undercapitalized institutions with substantial supervisory concerns.

34

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In
addition, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, a mixed-ownership
government corporation established to recapitalize the predecessor to the SAIF. The current assessment rate for the quarter ended December 31, 2003 was .0152% of insured deposits and is
adjusted quarterly. These assessments will continue until the Financing Corporation bonds mature in 2019.

Safety and Soundness Standards.The FDIC and the other federal bank regulatory agencies have established guidelines for
safety and soundness, addressing operational and managerial standards, as well as compensation matters for insured financial institutions. Institutions failing to meet these standards are required to
submit compliance plans to their appropriate federal regulators. The FDIC and the other agencies have also established guidelines regarding asset quality and earnings standards for insured
institutions. The Bank believes that it is in compliance with these guidelines and standards.

Activities and Investments of Insured State-Chartered Banks.The activities and equity investments of
FDIC-insured, state-chartered banks are limited by Federal law to those that are permissible for national banks. An insured state bank generally may not acquire or retain any equity
investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank is not prohibited from, among other things, (i) acquiring or retaining a majority
interest in a subsidiary, (ii) investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction
of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank's assets, (iii) acquiring up to 10% of the voting stock of a company that solely
provides or reinsures directors' and officers' liability insurance, and (iv) acquiring or retaining the voting shares of a depository institution if certain requirements are met.

Community Reinvestment Act.Under the Community Reinvestment Act ("CRA"), as implemented by FDIC regulations, a financial
institution has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent
with the CRA. The CRA requires the FDIC, in connection with its examination of a financial institution, to assess the institution's record of meeting the credit needs of its community and to take such
record into account in its evaluation of certain applications by such institution. As of the date of its most recent regulatory examination, the Bank was rated "satisfactory" with respect to its CRA
compliance.

Under
revisions to the CRA regulations promulgated in 1995, a new evaluation system became effective that rates institutions based on their actual performance in meeting community credit
needs. The system evaluates the degree to which an institution is performing under tests and standards judged in the context of information about the institution, its community, its competitors and
its peers with respect to (i) lending, (ii) service delivery systems and (iii) community development. It also specifies that an institution's CRA performance will be considered in
an institution's expansion (e.g., branching) proposals and may be the basis for approving, denying or conditioning the approval of an application.

Qualified Thrift Lender Test.All savings institutions and subsidiaries of savings and loan holding companies, including the
Bank, are required to meet a QTL test set forth under Section 10(m) of the Home Owners' Loan Act, as amended, ("HOLA") to avoid certain restrictions on their operations and those of their
holding company. A savings institution has the option of complying with the QTL test set forth in the HOLA and implementing regulations or by qualifying as a domestic building and loan association as
defined in Section 7701(a)(19) of the Code. The QTL test set forth in HOLA requires that a depository institution must have at least 65% of its portfolio assets (which consist of total assets
less intangibles, properties used to conduct the savings institution's business and liquid assets not

35

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exceeding
20% of total assets) in qualified thrift investments on a monthly average basis in nine of every 12 months. Loans and mortgage-backed securities secured by domestic residential
housing, as well as certain obligations of the FDIC and certain other related entities may be included in qualifying thrift investments without limit. Certain other housing-related and
non-residential real estate loans and investments, including loans to develop churches, nursing homes, hospitals and schools, and consumer loans and investments in subsidiaries engaged in
housing-related activities may also be included. Qualifying assets for the QTL test include investments related to domestic residential real estate or manufactured housing, the book value of property
used by an institution or its subsidiaries for the conduct of its business, an amount of residential mortgage loans that the institution or its subsidiaries sold within 90 days of origination,
shares of stock issued by any FHLB and shares of stock issued by the FHLMC or the FNMA. The Bank was in compliance with the QTL test as of December 31, 2003, with 75.7% of its assets invested
in qualified thrift investments.

Restrictions on Capital Distributions.The Bank is required to provide to the OTS not less than 30 days' advance
notice of the proposed declaration by its board of directors of any dividend on its capital stock. The OTS may object to the payment of the dividend on safety and soundness grounds. The FDIA prohibits
an insured depository institution from paying dividends on its capital stock or interest on its capital notes or debentures (if such interest is required to be paid only out of net profits) or
distributing any of its capital assets while it remains in default in the payment of any assessment due
the FDIC. Texas law permits the Bank to pay dividends out of current or retained income in cash or additional stock.

Legislative and Regulatory Proposals.Proposals to change the laws and regulations governing the operations and taxation of,
and federal insurance premiums paid by, savings banks and other financial institutions and companies that control such institutions are frequently raised in Congress, state legislatures and before the
FDIC and other bank regulatory authorities. The likelihood of any major changes in the future and the impact such changes might have on the Bank are impossible to determine. Similarly, proposals to
change the accounting treatment applicable to savings banks and other depository institutions are frequently raised by the SEC, the FDIC, the IRS and other appropriate authorities, including, among
others, proposals relating to fair market value accounting for certain classes of assets and liabilities. The likelihood and impact of any additional future accounting rule changes and the impact such
changes might have on the Bank are impossible to determine.

Federal Home Loan Bank System.The Bank is a member of the FHLB of Dallas, which is one of 12 regional FHLBs that administer
the home financing credit function of savings institutions and commercial banks. Each FHLB serves as a source of liquidity for its members within its assigned region. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by its Board of
Directors. As of December 31, 2003, the Bank's advances from the FHLB of Dallas amounted to $799.9 million or 29.9% of its total assets.

As
a member, the Bank is required to purchase and maintain stock in the FHLB of Dallas in an amount equal to the sum of a membership investment requirement of 0.20% of the member's total
assets as of the previous December 31 and an activity-based investment requirement of 4.25% of currently outstanding advances and certain new loans. At December 31, 2003, the Bank had
$45.5 million in FHLB stock, which was in compliance with this requirement.

The
FHLBs are required to provide funds for the resolution of troubled savings associations and to contribute to affordable housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of FHLB dividends paid and could continue to
do so in the future. These contributions also could have an adverse effect on the value of FHLB stock in the

36

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future.
For the year ended December 31, 2003, dividends paid by the FHLB of Dallas to the Bank totaled $959,000.

Federal Reserve System.The Federal Reserve Board requires all depository institutions to maintain reserves against their
transaction accounts (primarily checking accounts) and
non-personal time deposits. At December 31, 2003, the Bank was in compliance with such requirements.

The
balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy applicable liquidity requirements. Because required reserves must be
maintained in the form of vault cash or a noninterest-bearing account at a Federal Reserve Bank, the effect of this reserve requirement is to reduce a bank's earning assets. The amount of funds
necessary to satisfy this requirement has not had a material affect on the Bank's operations.

Texas Savings Bank Law.As a Texas chartered savings bank, the Bank is subject to regulation and supervision by the
Department under the TSBA. The TSBA contains provisions governing the incorporation and organization, location of offices, rights and responsibilities of directors and officers as well as the
corporate powers, savings, lending, capital and investment requirements and other aspects of the Bank and its affairs. In addition, the Department is given extensive rulemaking power and
administrative discretion under the TSBA, including authority to enact and enforce rules and regulations.

The
Bank is required under the TSBA to comply with certain capital requirements established by the Department. The TSBA also restricts the amount the Bank can lend to one borrower to
that permitted to national banks, which is generally not more than 15% of the Bank's unimpaired capital and unimpaired surplus and, if such loans are fully secured by readily marketable collateral, an
additional 10% of unimpaired capital and unimpaired surplus. The Department generally examines the Bank once every year and the current practice is for the Department to conduct a joint examination
with the FDIC. The Department monitors the extraordinary activities of the Bank by requiring that the Bank seek the Department's approval for certain transactions such as the establishment of
additional offices, a reorganization, merger or purchase and assumption transaction, changes of control, or the issuance of capital obligations. The Department may intervene in the affairs of a
savings bank if the savings bank, or its director, officer or agent has: engaged in an unsafe and unsound practice, violated the savings bank's articles of incorporation, violated a statute or
regulation, filed materially false or misleading information, committed a criminal act or a breach of fiduciary duty, or if the savings bank is, or is in imminent danger of becoming, insolvent.

Taxation

Federal Taxation.The Company and its subsidiaries, which include the Bank, file a consolidated Federal income tax
return on a calendar year basis using the accrual method. The Company and its subsidiaries are subject to federal income taxation in the same general manner as other corporations with some exceptions
as discussed below. Prior to the Small Business Job Protection Act of 1996 ("the 1996 Act"), institutions such as the Bank who met certain definitional tests and other conditions prescribed by the
Code, benefited from certain favorable provisions regarding their deductions from taxable income for
annual additions to their bad debt reserve. In years prior to the 1996 Act, the Bank was permitted to deduct an annual addition to the reserve for bad debts in determining taxable income. Due to the
1996 Act, the Bank no longer is able to utilize a reserve method for determining the bad debt deduction, but must use the specific charge-off method in computing its bad debt deduction.
Further, the Bank's post-1987 tax bad debt reserve was being recaptured into income over a six year period. At December 31, 2003, the Bank had no remaining post-1987 tax
bad debt reserves.

Taxable Distributions and Recapture.The Bank is not required to provide deferred taxes on its pre-1988 (base
year) tax bad debt reserve of approximately $900,000. This reserve may be included in

37

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taxable
income in future years if the Bank makes non-dividend distributions to stockholders (including distributions in redemption, dissolution or liquidation).

Minimum Tax.In addition to regular income taxes, corporations are subject to an alternative minimum tax which is generally
equal to 20% of alternative minimum taxable income (taxable income, increased by tax preference items and adjusted for certain regular tax items). Payment of alternative minimum tax may give rise to
alternative minimum tax credit carryovers which may be used to offset regular tax liabilities in future years.

Southwest Plan Acquisition.In connection with the Southwest Plan Acquisition, the FSLIC Resolution Fund ("FRF") retained all
of the future federal income tax benefits (as defined) derived from the federal income tax treatment of certain items, in addition to net operating loss carryforwards, related to the Southwest Plan
Acquisition for which the Bank agreed to pay the FRF when actually realized. The provisions for federal income taxes recorded for the years ended December 31, 2003, 2002 and 2001, represent the
gross tax liability computed under these tax sharing provisions before reduction for actual federal taxes paid to the Internal Revenue Service. Alternative minimum taxes paid with the federal return
in 2003, 2002 and 2001 are available as credit carryforwards to reduce regular federal tax liabilities in future years, over an indefinite period and were partially utilized beginning in 2000. To the
extent these credits were generated due to the utilization of other tax benefits retained by the FRF, they will also be treated as tax benefit items. Although the termination of the assistance
agreement related to the Southwest Plan Acquisition was effective March 31, 1994, the FRF will continue to receive the related future net tax benefits as defined.

The
Company's Federal income tax returns have not been audited by the United States Internal Revenue Service. Generally, the tax returns of the Company since 1999 are subject to review
by the Internal Revenue Service.

State and Franchise Taxation.The Company, the Bank, CBCC, CBMC, CBFC and CBIA each pay an annual franchise tax equal to the
greater of $2.50 per $1,000 of taxable capital apportioned to Texas, or $4.50 per $100 of net taxable earned surplus apportioned to Texas. Taxable earned surplus is the applicable entities' Federal
taxable income with certain modifications, such as the exclusion of interest earned on Federal obligations.

38

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Item 2.Properties

The Company's business is conducted from 43 offices in Texas. The following table sets forth the location of the offices of the Company, as well as certain
additional information relating to these offices as of December 31, 2003.

|Location                                                   | Owned/Leased (with Lease Expiration Date)                               |  | Net Book Value of Property Or Leasehold Improvements |       | Deposits |   | Percent of
Total
Deposits | 
|---------------------------------------------------------- | ----------------------------------------------------------------------- |  | ---------------------------------------------------- | ----- | -------- | - | ------------------------- | 
|
|Branch Offices:                                            |                                                                         |  |                                                      |       |          |   |                           | 
|1329 North Virginia
Port Lavaca, Texas 77979               | Owned                                                                   |  | $                                                    | 154   |          | $ | 23,789                    | 
|3207 Westpark Drive
Houston, Texas 77005                   | Owned                                                                   |  |                                                      | 2,309 |          |   | 37,203                    | 
|8 Braeswood Square
Houston, Texas 77096                    | Leased; December 31, 2006                                               |  |                                                      | 163   |          |   | 76,683                    | 
|408 Walnut
Columbus, Texas 78934                           | Owned                                                                   |  |                                                      | 189   |          |   | 48,731                    | 
|870 S. Mason, Suite 100
Katy, Texas 77450                  | Leased; August 31, 2006                                                 |  |                                                      |      |          |   | 32,823                    | 
|602 Lyons
Schulenburg, Texas 78956                         | Owned                                                                   |  |                                                      | 65    |          |   | 25,701                    | 
|325 Meyer Street
Sealy, Texas 77474                        | Owned                                                                   |  |                                                      | 373   |          |   | 43,931                    | 
|116 E. Post Office
Weimar, Texas 78962                     | Owned                                                                   |  |                                                      | 23    |          |   | 23,820                    | 
|323 Boling Road
Wharton, Texas 77488                       | Owned                                                                   |  |                                                      | 99    |          |   | 38,139                    | 
|1621 B FM 517 Rd. E.
Dickinson, Texas 77539                | Leased; March 31, 2004                                                  |  |                                                      |      |          |   | 34,681                    | 
|                                                           | To be relocated to the League City branch currently under construction. | 
|300 S. Cage
Pharr, Texas 78577                             | Owned                                                                   |  |                                                      | 170   |          |   | 13,103                    | 
|295 West Highway 77
San Benito, Texas 78586                | Owned                                                                   |  |                                                      | 202   |          |   | 18,059                    | 
|1260 Blalock, Suite 100
Houston, Texas 77055               | Leased; January 20, 2004                                                |  |                                                      |      |          |   | 60,419                    | 
|14011 Park Drive, Suite 115
Tomball, Texas 77375           | Leased; March 14, 2004                                                  |  |                                                      | 5     |          |   | 27,169                    | 
|                                                           | Negotiation to renew lease is in process.                               | 
|915-H North Shepherd
Houston, Texas 77008                  | Leased; October 31, 2006                                                |  |                                                      | 5     |          |   | 45,168                    | 
|16000 Stuebner Airline Road, Suite 100
Spring, Texas 77379 | Leased; September 30, 2005                                              |  |                                                      | 3     |          |   | 39,969                    | 
|7602 N. Navarro
Victoria, Texas 77904                      | Owned                                                                   |  |                                                      | 337   |          |   | 64,061                    | 
|                                                           |                                                                         |  |                                                      |       |          |   |                           | 

39

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|1410 Ed Carey
Harlingen, Texas 78550                      | Owned                                |  | $ | 1,348 |  | $ | 9,714  |  | 0.58 | %
|--------------------------------------------------------- | ------------------------------------ |  | - | ----- |  | - | ------ |  | ---- | -
|4900 N. 10th St., G-1
McAllen, Texas 78504                | Leased; August 14, 2006              |  |   |      |  |   | 17,105 |  | 1.02 |  
|10838 Leopard Street, Suite A
Corpus Christi, Texas 78410 | Leased; December 31, 2005            |  |   | 25    |  |   | 29,219 |  | 1.74 |  
|4060 Weber Road
Corpus Christi, Texas 78411               | Leased; April 30, 2004               |  |   | 5     |  |   | 45,712 |  | 2.73 |  
|301 E. Main Street
Brenham, Texas 77833                   | Owned                                |  |   | 234   |  |   | 55,939 |  | 3.34 |  
|1192 W. Dallas
Conroe, Texas 77301                        | Leased; December 31, 2006            |  |   |      |  |   | 38,131 |  | 2.27 |  
|2353 Town Center Dr.
Sugar Land, Texas 77478              | Owned                                |  |   | 971   |  |   | 46,136 |  | 2.75 |  
|1629 S. Voss
Houston, Texas 77057                         | Owned                                |  |   | 1,344 |  |   | 31,164 |  | 1.86 |  
|708 East Austin
Giddings, Texas 78942                     | Owned                                |  |   | 184   |  |   | 25,528 |  | 1.52 |  
|5718 Westheimer, Suite 100
Houston, Texas 77057           | Leased; July 31, 2012                |  |   | 1     |  |   | 34,316 |  | 2.05 |  
|2600 S. Gessner, Suite 100
Houston, Texas 77063           | Leased; October 31, 2012             |  |   |      |  |   | 9,601  |  | 0.57 |  
|1250 Pin Oak Road
Katy, Texas 77494                       | Owned                                |  |   | 1,130 |  |   | 17,554 |  | 1.05 |  
|2120 Thompson Highway
Richmond, Texas 77469               | Owned                                |  |   | 388   |  |   | 31,752 |  | 1.89 |  
|7200 North Mopac
Austin, Texas 78731                      | Leased; December 31, 2007            |  |   | 1     |  |   | 22,486 |  | 1.34 |  
|1112 Seventh Street
Bay City, Texas 77414                 | Leased; April 30, 2007               |  |   | 14    |  |   | 49,559 |  | 2.96 |  
|441 Austin Avenue, Suite A
Port Arthur, Texas 77640       | Leased; June 30, 2004
ATM Site Owned |  |   | 173   |  |   | 26,123 |  | 1.56 |  
|2810 First Street
Rosenberg, Texas 77471                  | Owned                                |  |   | 1,628 |  |   | 4,489  |  | 0.27 |  
|3302 Boca Chica
Brownsville, Texas 78521                  | Leased; December 31, 2004            |  |   | 11    |  |   | 10,013 |  | 0.60 |  
|1075 Parades Line Road
Brownsville, Texas 78521           | Owned                                |  |   | 2,564 |  |   | 34,665 |  | 2.07 |  
|2000 N. Conway
Mission, Texas 78572                       | Owned                                |  |   | 883   |  |   | 17,833 |  | 1.06 |  
|509 South Main
McAllen, Texas 78501                       | Leased; December 31, 2005            |  |   | 3     |  |   | 35,406 |  | 2.11 |  
|                                                          |                                      |  |   |       |  |   |        |  |      |  

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|198 South Sam Houston
San Benito, Texas 78586                                              | Owned                                            |  | $ | 936    |  | $ | 39,720    |  | 2.37   |  
|------------------------------------------------------------------------------------------ | ------------------------------------------------ |  | - | ------ |  | - | --------- |  | ------ | -
|502 S. Dixieland Road
Harlingen, Texas 78552                                               | Owned                                            |  |   | 278    |  |   | 11,835    |  | 0.71   |  
|200 Sugar Road
Edinburg, Texas 78539                                                       | Owned                                            |  |   | 209    |  |   | 7,990     |  | 0.48   |  
|300 S. Closner
Edinburg, Texas 78539                                                       | Owned                                            |  |   | 714    |  |   | 24,749    |  | 1.48   |  
|221 East Van Buren
Harlingen, Texas 78550                                                  | Owned                                            |  |   | 3,175  |  |   | 58,324    |  | 3.48   |  
|2404 Research Forest Drive
The Woodlands, Texas 77381                                      | OwnedUnder Construction                         |  |   | 2,033  |  |   |          |  |       |  
|231 South FM 270
League City, Texas 77573                                                  | OwnedUnder Construction                         |  |   | 1,220  |  |   |          |  |       |  
|                                                                                           | Dickinson branch to be relocated to League City. | 
|Copperfield
Houston, Texas                                                                 | OwnedUnder Construction                         |  |   | 818    |  |   |          |  |       |  
|Shadow Creek Ranch
Pearland, Texas                                                         | OwnedUnder Construction                         |  |   | 1,180  |  |   |          |  |       |  
|Administrative Office(1)Coastal Banc Plaza
5718 Westheimer, Suite 600
Houston, Texas 77057 | Leased; July 31, 2012                            |  |   | 2,227  |  |   | 287,619   |  | 17.16  |  
|Records and Retention Office2199 N. Jefferson
La Grange, TX 78945                          | Leased; December 17, 2006                        |  |   |       |  |   |          |  |       |  
|                                                                                           |                                                  |  |   |        |  |   |           | 
|Total                                                                                      |                                                  |  | $ | 27,794 |  | $ | 1,676,131 |  | 100.00 | %
|                                                                                           |                                                  |  |   |        |  |   |           | 

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The net book value of the Company's investment in premises and equipment totaled $32.6 million at December 31, 2003. At
December 31, 2003, the net book value of the Company's electronic data processing equipment, which includes its in-house computer system, local area network and
forty-two automatic teller machines, was $1.6 million.

41

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Item 3.Legal Proceedings

Coastal
is, and has been involved, from time to time, in various claims, complaints, proceedings and litigation relating to activities from the normal course of its operations. Based on
the facts currently available to management, management believes that the matters pending at December 31, 2003, are without merit, or will be covered by insurance and any other matters are of
such amounts, which upon resolution, are not likely to have a material adverse effect on Coastal's consolidated financial condition, results of operations or cash flows.

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

Not
applicable.

PART II

Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchasers of Equity  Securities

The
information required herein is incorporated by reference from page 59 of the Company's printed Annual Report to Stockholders for fiscal 2003 ("Annual Report"), which is included
herein as Exhibit 13.

Item 6.Selected Financial Data

The
information required herein is incorporated by reference from pages 8 through 10 of the Annual Report.

Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations

The
information required herein is incorporated by reference on pages 11 through 28 of the Annual Report.

Item 7A.Quantitative and Qualitative Disclosures about Market Risk

The
information required herein is incorporated by reference from pages 21 through 26 of the Annual Report. The Company's principal market risk exposure is to interest rates.

Item 8.Financial Statements and Supplementary Data

The
financial statements and supplementary data required herein are incorporated by reference from pages 31 through 58 of the Annual Report.

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There
have been no disagreements with accountants on any matter of accounting principles or practices or financial statement disclosures during the two year period ended
December 31, 2003.

Item 9A.Controls and Procedures

Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002, Coastal's management has reviewed the disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of Coastal or caused such disclosure controls and procedures to
be designed under management's supervision, particularly during the quarterly period in which this report was being prepared. Disclosure controls and procedures are the controls and other procedures
of Coastal that are designed to ensure that the information required to be disclosed by Coastal in its reports filed or submitted under the Exchange Act is recorded,

42

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processed,
summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by Coastal in its reports filed under the Exchange Act is accumulated and communicated to Coastal's management, including the principal executive
officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Management believes that such disclosure controls and procedures as of the end of the
period covered by this report were adequate to ensure that material information relating to Coastal, including its consolidated subsidiaries, is made known to management by others within Coastal and
its consolidated subsidiaries. To management's knowledge, there were no significant changes in internal control over financial reporting or in other factors that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over financial reporting.

Coastal
intends to continually review and evaluate the design and effectiveness of its disclosure controls and procedures and to improve its controls and procedures over time and to
correct any deficiencies that it may discover in the future. The goal is to ensure that senior management has timely access to all material financial and non-financial information
concerning Coastal's business. While Coastal believes that the present design of its disclosure controls and procedures is effective to achieve this goal, further events affecting its business may
cause Coastal to modify its disclosure controls and procedures.

PART III

Item 10.Directors and Executive Officers of the Registrant

The
information required herein is incorporated by reference from the definitive Proxy Statement for its 2004 Annual Meeting of shareholders to be filed with the SEC pursuant to
Regulation 14A under the Securities and Exchange Act of 1934 ("the 2004 Proxy Statement") under the section titled "Information with Respect to the Nominees for Director, Directors Whose Terms
Continue and Executive Officers".

Item 10A.Code of Ethics for Executive Officers

The
information required herein is incorporated by reference from the 2004 Proxy Statement under the section titled "Election of DirectorsCorporate Governance Principles".

Item 11.Executive Compensation

The
information required herein is incorporated by reference from the 2004 Proxy Statement under the section titled "Executive Compensation".

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The
information required herein is incorporated by reference from the 2004 Proxy Statement under the sections titled "Executive CompensationDisclosure of Equity Compensation
Plan Information as of December 31, 2003" and "Voting Securities and Certain Beneficial Ownership of Coastal Common Stock".

Item 13.Certain Relationships and Related Transactions

The
information required herein is incorporated by reference from the 2004 Proxy Statement under the section titled "Executive Compensation".

43

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Item 14.Principal Accountant Fees and Services

The
information required herein is incorporated by reference from the 2004 Proxy Statement under the section titled "Proposal to Ratify the Selection of Independent Auditors".

PART IV

Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K

| |  | (a)(1) |  | The following financial statements are incorporated herein by reference from pages 31 through 58 of the Annual Report. 
| |  | ------ |  | -----------------------------------------------------------------------------------------------------------------------
| |  |        |  | Independent Auditors' Report                                                                                           
| |  |        |  | Consolidated Statements of Financial Condition as of December 31, 2003 and 2002.                                       
| |  |        |  | Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2003.              
| |  |        |  | Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 31, 2003.
| |  |        |  | Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 2003.
| |  |        |  | Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2003.          
| |  |        |  | Notes to Consolidated Financial Statements.                                                                            
| |  | (a)(2) |  | There are no financial statement schedules filed herewith.                                                             
| |  | (a)(3) |  | The following exhibits are filed as part of this report.                                                               

| |  | Exhibit No. |  |                                                                                                                                                                                                                                           
| |  | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 3.1         |  | Articles of Incorporation of the Company. (Incorporated by reference to the Company's Registration Statement on Form S-4 (No. 33-75952) filed on March 2, 1994).                                                                          
| |  | 3.2         |  | Bylaws of Company. (Incorporated by reference to the Company's Registration Statement on Form S-4 (No. 33-75952) filed on March 2, 1994).                                                                                                 
| |  | 4           |  | Form of Company common stock certificate. (Incorporated by reference to the Company's Registration Statement on Form S-4 (No. 33-75952) filed on March 2, 1994).                                                                          
| |  | 4.1         |  | Form of Indenture dated as of June 30, 1995, with respect to the Company's 10% Notes, due 2002. (Incorporated by reference to the Company's Registration Statement on Amendment No. 6 to Form S-1 (No. 33-91206) filed on June 16,
 1995).
| |  | 4.2         |  | Certificate of Designations, 9.12% Series A Cumulative Preferred Stock. (Incorporated by reference to the Company's Registration Statement on Form S-3 (No. 333-75983) filed on April 9, 1999).                                           
| |  |             |  |                                                                                                                                                                                                                                           

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| |  | 4.3   |  | Form of Indenture of the Corporation relating to the Junior Subordinated Debentures and Amended and Restated Declaration of Trust of Coastal Capital Trust I. (Incorporated by reference to the Company's Registration Statement on Form S-3
(No. 333-87370) filed on May 1, 2002).
| |  | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 4.4   |  | Form of Indenture of the Corporation relating to the Junior Subordinated Debentures and Amended and Restated Declaration of Trust of Coastal Capital Trust II. (Furnished).                                                                                                        
| |  | 10.1  |  | 1991 Stock Compensation Program. (Incorporated by reference to the Company's Registration Statement on Form S-4 (No. 33-75952) filed on March 2, 1994).                                                                                                                            
| |  | 10.2  |  | 1995 Stock Compensation Program. (Incorporated by reference to the Company's Registration Statement Form S-1 (No. 33-91206) filed on April 14, 1995).                                                                                                                              
| |  | 10.3  |  | 1999 Stock Compensation Program. (Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 333-80877) filed on June 17, 1999).                                                                                                                           
| |  | 10.4  |  | Change-In-Control Severance Agreements for Mr. Garrett and Ms. Wylie. (Incorporated by reference to the Company's 1998 Annual Report on Form 10-K (No. 000-24526) filed on March 23, 1999).                                                                                        
| |  | 10.5  |  | Form of Amendment No. 1 to Change-In-Control Severance Agreements. (Incorporated by reference to the Company's 1999 Annual Report on Form 10-K (No. 000-24526) filed on March 28, 2000).                                                                                           
| |  | 10.6  |  | Change-In-Control Severance Agreements for Mr. Mehos, Mr. Garrrett and Ms. Wylie. (Incorporated by reference to the Company's 2000 Annual Report on Form 10-K (No. 000-24526) filed on March 27, 2001).                                                                            
| |  | 10.7  |  | 2002 Non-employee Director Stock Purchase Plan. (Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 333-83966) filed on March 7, 2002).                                                                                                            
| |  | 10.8  |  | Stock Purchase Agreement between the Company and James C. Niver dated April 23, 2002 (Incorporated by reference to the Company's Registration Statement on Form S-3 (No. 333-87370) filed on May 1, 2002).                                                                         
| |  | 10.9  |  | Change-In-Control Severance Agreement for Mr. New. (Incorporated by reference to the Company's 2002 Annual Report on Form 10K (No. 000-24526) file on March 25, 2003).                                                                                                             
| |  | 10.10 |  | Agreement and Plan of Merger. (Incorporated by reference from the 2004 Proxy Statement to be filed on March 20, 2004).                                                                                                                                                             
| |  | 12    |  | Ratio of earnings to combined fixed charges and preferred stock dividends. (Incorporated by reference to the Company's 2003 Annual Report).                                                                                                                                        
| |  | 13    |  | Annual Report to Stockholders for 2003. (Furnished).                                                                                                                                                                                                                               
| |  | 21    |  | Subsidiaries of the Registrant as of December 31, 2003. (Furnished).                                                                                                                                                                                                               
| |  | 28    |  | Form of proxy mailed to stockholders of the Company. (Incorporated by reference from the 2004 Proxy Statement to be filed March 20, 2004).                                                                                                                                         
| |  | 31.1  |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). (Furnished).                                                                                                                                                                                    
| |  |       |  |                                                                                                                                                                                                                                                                                    

45

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| |  | 31.2 |  | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). (Furnished).                                                                                              
| |  | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 32.1 |  | Certification of the Chairman of the Board and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Furnished).
| |  | 32.2 |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Furnished).                          
| |  | 99.1 |  | Statement of Factors Under Private Securities Litigation Reform Act of 1995. (Furnished).                                                                                                    





46

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 BANCORP, INC.
|-------------------- |  | ---------------------
|Date: March 12, 2004 |  | By:                  

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated.

|/s/ Manuel J. MehosManuel J. Mehos, Chairman of the Board and Chief Executive Officer (principal executive officer) |  |  |  | Date: March 12, 2004
|------------------------------------------------------------------------------------------------------------------- |  |  |  | --------------------
|/s/ R. Edwin AlldayR. Edwin Allday, Director                                                                        |  |  |  | Date: March 12, 2004
|/s/ D. Fort Flowers, Jr.D. Fort Flowers, Jr., Director                                                              |  |  |  | Date: March 12, 2004
|/s/ Dennis S. FrankDennis S. Frank, Director                                                                        |  |  |  | Date: March 12, 2004
|/s/ Robert E. Johnson, Jr.Robert E. Johnson, Jr., Director                                                          |  |  |  | Date: March 12, 2004
|/s/ Catherine N. WylieCatherine N. Wylie, Chief Financial Officer (principal financial and accounting officer)      |  |  |  | Date: March 12, 2004

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