Exhibit 13

Coastal Bancorp, Inc. and Subsidiaries

FINANCIAL HIGHLIGHTS
December 31, 2003, 2002 and 2001

|                                      |                                                                                 | December 31 |  
|------------------------------------- | ------------------------------------------------------------------------------- | ----------- | -
|
|
|For the Year Ended                    |                                                                                 |             |  
|                                      | Net interest income                                                             |             | $
|                                      | Provision for loan losses                                                       |             |  
|                                      | Noninterest income(1)                                                           |             |  
|                                      | Noninterest expense                                                             |             |  
|                                      | Net income                                                                      |             |  
|                                      | Diluted earnings per common share before cumulative effect of accounting change |             |  
|                                      | Diluted earnings per common share  reported                                    |             |  
|                                      | Diluted earnings per common shareas adjusted(2)                                |             |  
|                                      |                                                                                 |             |  
|At Year End                           |                                                                                 |             |  
|                                      | Total assets                                                                    |             | $
|                                      | Loans receivable                                                                |             |  
|                                      | Mortgage-backed securities available-for-sale                                   |             |  
|                                      | Deposits(1)                                                                     |             |  
|                                      | Borrowed funds                                                                  |             |  
|                                      | Subordinated debentures(3)                                                      |             |  
|                                      | Senior Notes payable(4)                                                         |             |  
|                                      | Minority interestpreferred stock of Coastal Banc ssb(3)                        |             |  
|                                      | Preferred stockholders' equity(3)                                               |             |  
|                                      | Common stockholders' equity(5)                                                  |             |  
|                                      | Book value per common share                                                     |             |  
|                                      | Tangible book value per common share                                            |             |  
|                                      |                                                                                 |             |  
|Significant Ratios for the Year Ended |                                                                                 |             |  
|                                      | Return (before minority interest) on average assets                             |             |  
|                                      | Return on average common equity                                                 |             |  
|                                      | Net interest margin                                                             |             |  
|                                      | Interest rate spread including noninterest-bearing deposits                     |             |  
|                                      | Interest rate spread                                                            |             |  
|                                      | Average common equity to average total assets                                   |             |  
|                                      | Noninterest expense to average total assets                                     |             |  
|                                      |                                                                                 |             |  
|Asset Quality Ratios at Year End      |                                                                                 |             |  
|                                      | Nonperforming assets to total assets                                            |             |  
|                                      | Nonperforming loans to total loans receivable                                   |             |  
|                                      | Allowance for loan losses to nonperforming loans                                |             |  
|                                      | Allowance for loan losses to total loans receivable                             |             |  
|                                      |                                                                                 |             |  

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1

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CORPORATE PROFILE

Coastal Bancorp, Inc., a Texas corporation ("Bancorp"), headquartered in Houston, Texas, is the holding company for Coastal Banc Holding
Company, Inc. ("HoCo"), a Delaware unitary savings bank holding company. HoCo is the parent company to Coastal Banc ssb, a Texas-chartered, FDIC-insured, state savings bank. Coastal
Banc ssb operates 43 branch offices in metropolitan Houston, Austin, Corpus Christi, the Rio Grande Valley and small cities in the southeast quadrant of Texas. At December 31, 2003, Coastal
Banc ssb had $2.7 billion in assets and met the regulatory requirements to be a "well capitalized" institution according to FDIC guidelines.

(Unless
otherwise noted in the Annual Report to Stockholders, or unless the context requires otherwise, references to "Coastal," "us," "our" and the "Company" are references to Coastal
Bancorp, Inc. and its consolidated subsidiaries.)

TABLE OF CONTENTS

|Letter from the Chairman and Chief Executive Officer                                  |  | 3 
|------------------------------------------------------------------------------------- |  | --
|Selected Consolidated Financial and Other Data                                        |  | 5 
|Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 8 
|Directors and Officers                                                                |  | 29
|Independent Auditors' Report                                                          |  | 32
|Consolidated Financial Statements                                                     |  | 33
|Notes to Consolidated Financial Statements                                            |  | 39
|Stock Prices and Dividends                                                            |  | 72
|Stockholder Information                                                               |  | 73

2

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CHAIRMAN'S LETTER

On December 2, 2003, Coastal announced an agreement to merge with Hibernia Corporation ("Hibernia") resulting in the cash payment of $41.50 per share to
holders of our common stock. The transaction is expected to close, subject to the usual conditions, during the second quarter of 2004, soon after this Annual Report is issued.

It's
been a long and prosperous journey. Coastal was founded in 1986 with the purchase of Coastal Bend Savings & Loan, a small, one-branch savings institution in Port
Lavaca, Texas, with less than $10 million in deposits. In 1988, following the Texas banking industry collapse, Coastal became the first acquirer of failed savings institutions under the Federal
government's "Southwest Plan." Fueled by subsequent acquisitions and opening de-novo branches, Coastal grew to over $2.6 billion in assets and approximately $1.7 billion in
deposits by the end of 2003.

On
March 25, 1992, Coastal went public at a split-adjusted price of $8.33 per share. I have been a major holder of Coastal stock since then, and remain so today. Every year in my
letter to you I have made it clear that Coastal's primary focus is the price of our stock. Now we are selling that same stock to Hibernia for $41.50 per share. Coastal stock had never traded that high
prior to the announcement of the transaction.

I
want to personally thank all of you for your support over the years. We've had our ups and downs, but mostly ups. If you stuck with us until the day that we announced the transaction,
you made money. Many of you made very good money. Thus, we have successfully completed our mission.

Farewell...and
may your next stock investment be even more profitable.

Manuel
J. Mehos
Chairman of the Board, President and Chief Executive Officer

3

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Banking
is truly a service industry. At Coastal Banc we have always tried to put our customers first and give them the best service possible. Loyal customers are not only good for
Coastal's business, they are also a source of personal pride to Coastal's employees. Knowing that the customers appreciate what we have done for them is the highest reward any business can receive for
a job well done. We are very grateful to our customers...they are the people who have have made Coastal Banc a success.

Catherine
N. Wylie
Senior Executive Vice President-
Chief Financial Officer,
Chief Operations Officer

4

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COASTAL BANCORP, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following selected consolidated summary financial and other data of Coastal Bancorp, Inc. and subsidiaries does not purport to be complete and should
be read in conjunction with, and is qualified in its entirety by, the more detailed information contained in the Consolidated Financial Statements and Notes thereto included elsewhere herein.

|                   |                                                                | At December 31,
|------------------ | -------------------------------------------------------------- | ---------------
|
|
|Balance Sheet Data |                                                                |                
|                   | Total assets(1)                                                |                
|                   | Loans receivable(2)                                            |                
|                   | Mortgage-backed securities held-to-maturity(1)(2)              |                
|                   | Mortgage-backed securities available-for-sale(1)               |                
|                   | Deposits(3)                                                    |                
|                   | Advances from the Federal Home Loan Bank of Dallas ("FHLB")(1) |                
|                   | Subordinated debentures(4)                                     |                
|                   | Senior Notes payable(5)                                        |                
|                   | Minority interest  preferred stock of Coastal Banc ssb(4)     |                
|                   | Preferred stockholders' equity(4)                              |                
|                   | Common stockholders' equity(6)                                 |                

|               |                                                                                                                | For the Year Ended December 31, |  
|-------------- | -------------------------------------------------------------------------------------------------------------- | ------------------------------- | -
|
|Operating Data |                                                                                                                |                                 |  
|               | Interest income                                                                                                |                                 | $
|               | Interest expense                                                                                               |                                 |  
|               |                                                                                                                |                                 |  
|               | Net interest income                                                                                            |                                 |  
|               | Provision for loan losses(7)                                                                                   |                                 |  
|               |                                                                                                                |                                 |  
|               | Net interest income after provision for loan losses                                                            |                                 |  
|               | Gain on sale of branch offices(3)                                                                              |                                 |  
|               | Gain on sale of mortgage servicing rights                                                                      |                                 |  
|               | Gain on sale of loans receivable held for sale                                                                 |                                 |  
|               | Gain on sales of mortgage-backed securities available-for-sale, net                                            |                                 |  
|               | Gain (loss) on derivative instruments                                                                          |                                 |  
|               | Other noninterest income                                                                                       |                                 |  
|               | Other noninterest expense                                                                                      |                                 |  
|               |                                                                                                                |                                 |  
|               | Income before provision for Federal income taxes, minority interest and cumulative effect of accounting change |                                 |  
|               | Provision for Federal income taxes                                                                             |                                 |  
|               | Minority interestpreferred stock dividends of Coastal Banc ssb                                                |                                 |  
|               | Cumulative effect of change in accounting for derivative instruments, net of tax(8)                            |                                 |  
|               |                                                                                                                |                                 |  
|               | Net income                                                                                                     |                                 | $
|               |                                                                                                                |                                 |  
|               | Net income available to common stockholders                                                                    |                                 | $
|               |                                                                                                                |                                 |  
|               | Basic earnings per common share before cumulative effect of accounting change(8)                               |                                 | $
|               |                                                                                                                |                                 |  
|               | Basic earnings per common sharereported(9)                                                                    |                                 | $
|               |                                                                                                                |                                 |  
|               | Basic earnings per shareas adjusted(9)                                                                        |                                 | $
|               |                                                                                                                |                                 |  
|               | Diluted earnings per common share before cumulative effect of accounting change(8)                             |                                 | $
|               |                                                                                                                |                                 |  
|               | Diluted earnings per common sharereported(9)                                                                  |                                 | $
|               |                                                                                                                |                                 |  
|               | Diluted earnings per shareas adjusted(9)                                                                      |                                 | $
|               |                                                                                                                |                                 |  

(Footnotes appear on page 7)

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COASTAL BANCORP, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

|                                    |                                                                                  | At or For the Year Ended December 31, |       
|----------------------------------- | -------------------------------------------------------------------------------- | ------------------------------------- | ------
|
|Selected Ratios                     |                                                                                  |                                       |       
|Performance Ratios(10):             |                                                                                  |                                       |       
|                                    | Return (before minority interest) on average assets                              |                                       | 0.52  
|                                    | Return on average common equity                                                  |                                       | 9.30  
|                                    | Dividend payout ratio                                                            |                                       | 23.36 
|                                    | Average common equity to average total assets                                    |                                       | 4.98  
|                                    | Net interest margin(11)                                                          |                                       | 2.52  
|                                    | Interest rate spread including noninterest-bearing deposits(11)                  |                                       | 2.46  
|                                    | Interest rate spread(11)                                                         |                                       | 2.28  
|                                    | Noninterest expense to average total assets                                      |                                       | 2.13  
|                                    | Average interest-earning assets to average interest-bearing liabilities          |                                       | 111.68
|                                    | Ratio of earnings to combined fixed charges and preferred stock dividends:       |                                       |       
|                                    |                                                                                  | Excluding interest on deposits        |       
|                                    |                                                                                  | Including interest on deposits        |       
|Asset Quality Ratios:               |                                                                                  |                                       |       
|                                    | Nonperforming assets to total assets(12)                                         |                                       | 0.85  
|                                    | Nonperforming loans to total loans receivable and loans receivable held for sale |                                       | 1.02  
|                                    | Allowance for loan losses to nonperforming loans                                 |                                       | 95.66 
|                                    | Allowance for loan losses to total loans receivable                              |                                       | 0.98  
|Bank Regulatory Capital Ratios(13): |                                                                                  |                                       |       
|                                    | Tier 1 capital to total assets                                                   |                                       | 6.26  
|                                    | Tier 1 risk-based capital to risk-weighted assets                                |                                       | 9.23  
|                                    | Total risk-based capital to risk-weighted assets                                 |                                       | 10.31 
|Other Data:                         |                                                                                  |                                       |       
|                                    | Full-time employee equivalents                                                   |                                       | 590   
|                                    | Number of full service offices                                                   |                                       | 43    

(Footnotes appear on page 7)

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Footnotes for pages 5 through 6:

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COASTAL BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

Coastal Bancorp, Inc. ("Bancorp") through its wholly-owned subsidiary, HoCo, owns 100 percent of the voting stock of Coastal Banc ssb (the "Bank"),
a Texas-chartered, FDIC insured, state savings bank. The consolidated financial statements included herein include the accounts of Bancorp, HoCo, the Bank and subsidiaries of both HoCo and the Bank
(collectively known as "Coastal").

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

On
June 23, 2003, Coastal, 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
Trust Preferred Securities II 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 23,
2033, at the option of Bancorp on or after June 23, 2008, 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 within 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.

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
June 18, 2002, Coastal, 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%. 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 within 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.

8

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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 Coastal
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 to Coastal Banc ssb.

On
December 31, 2003, Coastal retroactively implemented Financial Accounting Standards Board ("FASB") Interpretation No. 46R, "Consolidation of Variable Interest Entities,
an interpretation of Accounting Research Bulletin ("ARB") No. 51", resulting in the deconsolidation of CCTII as well as CCTI established in 2002, both of which were created for the sole purpose
of issuing trust preferred securities. The implementation of this Interpretation resulted in Bancorp's $1.9 million investment in the common equity of the two trusts being included in the
consolidated statements of financial condition as other assets and subordinated debentures, and the interest income and interest expense received from and paid to the trusts, respectively, being
included in the consolidated statements of income as interest income and interest expense. The increase to other interest income and interest expense totaled $146,000 for the year ended
December 31, 2003 and $74,000 for the year ended December 31, 2002.

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 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. As of December 31, 2003, 2,746,110 shares were held in treasury at an
average repurchase price of $19.53 per share for a total cost of $53.6 million.

FINANCIAL CONDITION

During 2003, total assets increased $155.2 million, or 6.1%, when comparing December 31, 2002 to December 31, 2003. This increase was
primarily comprised of a $169.1 million increase in loans receivable and a $29.4 million increase in mortgage-backed securities available-for-sale. To offset the
significant principal paydowns received on its single-family mortgage loans and mortgage-backed securities portfolios due to the continuing low market rates of interest and the resulting refinancing
of mortgage assets, Coastal purchased $565.7 million single-family loans and $303.8 million mortgage-backed securities available-for-sale during 2003. These
increases were somewhat offset by a decrease in loans receivable held for sale of $41.8 million. This was due to one loan package purchased in November 2002 that was sold to third party
investors in January 2003. There were smaller changes in other asset categories as follows: a $17.3 million decrease in Federal funds sold and a $583,000 decrease in accrued interest
receivable, offset by a $5.2 million increase in property and equipment, a $5.0 million increase in other securities available-for-sale, a $4.3 million
increase in stock in the FHLB, a $1.0 million increase in cash and cash equivalents and an $894,000 increase in prepaid expenses and other assets.

Advances
from the FHLB increased 14.9%, or $103.8 million, from December 31, 2002 to December 31, 2003 and deposits increased by 3.8%, or $61.7 million.
Advances from the FHLB increased to fund the purchases of assets noted above. The increase in deposits was due to deposit inflows resulting from Coastal's focus on increasing transaction accounts and
other changes in deposits. Subordinated debentures increased 20.0%, or $10.3 million, during 2003 due to the issuance previously discussed. Other changes in liabilities included a
$1.4 million decrease in other liabilities and accrued expenses and a $75,000 increase in advances from borrowers for taxes and insurance.

Stockholders'
equity decreased $19.2 million, or 12.6%, from December 31, 2002 to December 31, 2003 as a result of the redemption of the $27.5 million in
9.12% Cumulative Series A Preferred Stock,

9

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$652,000
in common stock repurchased during 2003, common stock dividends of $2.8 million, preferred stock dividends of $1.5 million and a $1.7 million change in accumulated other
comprehensive gain (loss), somewhat offset by 2003 net income of $13.5 million and common stock issued of $1.4 million due to the exercise of stock options.

RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2003

The results of operations of Coastal depend primarily on its net interest income, which is the difference between interest income on interest-earning assets and
interest expense on interest-bearing liabilities. Coastal's interest-earning assets consist principally of loans receivable, mortgage-backed securities and other investments. Coastal's
interest-bearing liabilities have consisted primarily of deposits, advances from the FHLB, securities sold under agreements to repurchase, federal funds purchased, subordinated debentures and its
Senior Notes payable. Coastal's net income is also affected by the level of the provision for loan losses, noninterest income, including service charges on deposit accounts, loan fees, loan servicing
income and gains on sales of assets, as well as by its noninterest expense, including compensation and benefits and occupancy costs.

10

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The following table sets forth, for the periods and at the dates indicated, information regarding Coastal's average consolidated statements of financial condition. Ratio, yield and rate
information is based on average balances for the year.

|                                                                                 |                                            |      |      | Year Ended December 31, 2003 |          
|-------------------------------------------------------------------------------- | ------------------------------------------ | ---- | ---- | ---------------------------- | ---------
|
|
|ASSETS                                                                           |                                            |      |      |                              |          
|Interest-earning assets:                                                         |                                            |      |      |                              |          
|Loans receivable(1)                                                              |                                            | 4.94 | %    | $                            | 1,935,814
|Mortgage-backed securities                                                       |                                            | 2.73 |      |                              | 502,581  
|Other securities                                                                 |                                            | 1.78 |      |                              | 2,812    
|Federal funds sold                                                               |                                            | 0.94 |      |                              | 10,111   
|FHLB stock                                                                       |                                            | 2.00 |      |                              | 42,831   
|Other                                                                            |                                            | 7.24 |      |                              | 2,471    
|                                                                                 |                                            |      |      |                              |          
|                                                                                 | Total interest-earning assets              |      | 4.42 |                              |          
|                                                                                 |                                            |      |      |                              |          
|Noninterest-earning assets(2)                                                    |                                            |      |      |                              | 89,406   
|                                                                                 |                                            |      |      |                              |          
|                                                                                 | Total assets                               |      |      |                              | $        
|                                                                                 |                                            |      |      |                              |          
|LIABILITIES AND STOCKHOLDERS' EQUITY                                             |                                            |      |      |                              |          
|Interest-bearing liabilities:                                                    |                                            |      |      |                              |          
|Interest-bearing deposits                                                        |                                            | 1.87 | %    | $                            | 1,437,200
|Advances from the FHLB                                                           |                                            | 2.02 |      |                              | 741,378  
|Securities sold under agreements to repurchase and federal funds purchased       |                                            |     |      |                              |         
|Subordinated debentures                                                          |                                            | 8.20 |      |                              | 56,970   
|Senior Notes payable                                                             |                                            |     |      |                              |         
|                                                                                 |                                            |      |      |                              |          
|                                                                                 | Total interest-bearing liabilities         |      | 2.09 |                              |          
|                                                                                 |                                            |      |      |                              |          
|Noninterest-bearing deposits                                                     |                                            |      |      |                              | 190,425  
|Other noninterest-bearing liabilities                                            |                                            |      |      |                              | 15,283   
|                                                                                 |                                            |      |      |                              |          
|                                                                                 | Total liabilities                          |      |      |                              |          
|Minority interestpreferred stock of Coastal Banc ssb                            |                                            |      |      |                              |         
|Preferred stockholders' equity                                                   |                                            |      |      |                              | 15,897   
|Common stockholders' equity                                                      |                                            |      |      |                              | 128,873  
|                                                                                 |                                            |      |      |                              |          
|                                                                                 | Total liabilities and stockholders' equity |      |      |                              | $        
|                                                                                 |                                            |      |      |                              |          
|Net interest income; interest rate spread                                        |                                            | 2.33 | %    |                              |          
|                                                                                 |                                            |      |      |                              |          
|Net interest-earning assets; net interest yield on interest-earning assets       |                                            |      |      | $                            | 261,072  
|                                                                                 |                                            |      |      |                              |          
|Ratio of average interest-earning assets to average interest-bearing liabilities |                                            |      |      |                              | 1.12x    
|                                                                                 |                                            |      |      |                              |          

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|                                                                                 |                                            | Year Ended December 31, 2002 |          
|-------------------------------------------------------------------------------- | ------------------------------------------ | ---------------------------- | ---------
|
|
|ASSETS                                                                           |                                            |                              |          
|Interest-earning assets:                                                         |                                            |                              |          
|Loans receivable(1)                                                              |                                            | $                            | 1,931,931
|Mortgage-backed securities                                                       |                                            |                              | 467,744  
|Other securities                                                                 |                                            |                              | 8,242    
|Federal funds sold                                                               |                                            |                              | 9,337    
|FHLB stock                                                                       |                                            |                              | 40,491   
|Other                                                                            |                                            |                              | 2,628    
|                                                                                 |                                            |                              |          
|                                                                                 | Total interest-earning assets              |                              |          
|                                                                                 |                                            |                              |          
|Noninterest-earning assets(2)                                                    |                                            |                              | 90,900   
|                                                                                 |                                            |                              |          
|                                                                                 | Total assets                               |                              | $        
|                                                                                 |                                            |                              |          
|LIABILITIES AND STOCKHOLDERS' EQUITY                                             |                                            |                              |          
|Interest-bearing liabilities:                                                    |                                            |                              |          
|Interest-bearing deposits                                                        |                                            | $                            | 1,477,648
|Advances from the FHLB                                                           |                                            |                              | 683,454  
|Securities sold under agreements to repurchase and federal funds purchased       |                                            |                              |         
|Subordinated debentures                                                          |                                            |                              | 27,821   
|Senior Notes payable                                                             |                                            |                              | 3,726    
|                                                                                 |                                            |                              |          
|                                                                                 | Total interest-bearing liabilities         |                              |          
|                                                                                 |                                            |                              |          
|Noninterest-bearing deposits                                                     |                                            |                              | 169,857  
|Other noninterest-bearing liabilities                                            |                                            |                              | 20,420   
|                                                                                 |                                            |                              |          
|                                                                                 | Total liabilities                          |                              |          
|Minority interestpreferred stock of Coastal Banc ssb                            |                                            |                              | 15,359   
|Preferred stockholders' equity                                                   |                                            |                              | 27,500   
|Common stockholders' equity                                                      |                                            |                              | 125,488  
|                                                                                 |                                            |                              |          
|                                                                                 | Total liabilities and stockholders' equity |                              | $        
|                                                                                 |                                            |                              |          
|Net interest income; interest rate spread                                        |                                            |                              |          
|                                                                                 |                                            |                              |          
|Net interest-earning assets; net interest yield on interest-earning assets       |                                            | $                            | 267,724  
|                                                                                 |                                            |                              |          
|Ratio of average interest-earning assets to average interest-bearing liabilities |                                            |                              | 1.12x    
|                                                                                 |                                            |                              |          

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12

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|                                                                                 |                                            | Year Ended December 31, 2001 |          
|-------------------------------------------------------------------------------- | ------------------------------------------ | ---------------------------- | ---------
|
|
|ASSETS                                                                           |                                            |                              |          
|Interest-earning assets:                                                         |                                            |                              |          
|Loans receivable(1)                                                              |                                            | $                            | 1,942,701
|Mortgage-backed securities                                                       |                                            |                              | 905,441  
|Other securities                                                                 |                                            |                              | 6,690    
|Federal funds sold                                                               |                                            |                              | 7,776    
|FHLB stock                                                                       |                                            |                              | 45,700   
|Other                                                                            |                                            |                              | 3,017    
|                                                                                 |                                            |                              |          
|                                                                                 | Total interest-earning assets              |                              |          
|                                                                                 |                                            |                              |          
|Noninterest-earning assets(2)                                                    |                                            |                              | 98,487   
|                                                                                 |                                            |                              |          
|                                                                                 | Total assets                               |                              | $        
|                                                                                 |                                            |                              |          
|LIABILITIES AND STOCKHOLDERS' EQUITY                                             |                                            |                              |          
|Interest-bearing liabilities:                                                    |                                            |                              |          
|Interest-bearing deposits                                                        |                                            | $                            | 1,531,004
|Advances from the FHLB                                                           |                                            |                              | 795,009  
|Securities sold under agreements to repurchase and federal funds purchased       |                                            |                              | 283,622  
|Subordinated debentures                                                          |                                            |                              |         
|Senior Notes payable                                                             |                                            |                              | 45,868   
|                                                                                 |                                            |                              |          
|                                                                                 | Total interest-bearing liabilities         |                              |          
|                                                                                 |                                            |                              |          
|Noninterest-bearing deposits                                                     |                                            |                              | 150,428  
|Other noninterest-bearing liabilities                                            |                                            |                              | 26,433   
|                                                                                 |                                            |                              |          
|                                                                                 | Total liabilities                          |                              |          
|Minority interestpreferred stock of Coastal Banc ssb                            |                                            |                              | 28,750   
|Preferred stockholders' equity                                                   |                                            |                              | 27,500   
|Common stockholders' equity                                                      |                                            |                              | 121,198  
|                                                                                 |                                            |                              |          
|                                                                                 | Total liabilities and stockholders' equity |                              | $        
|                                                                                 |                                            |                              |          
|Net interest income; interest rate spread                                        |                                            |                              |          
|                                                                                 |                                            |                              |          
|Net interest-earning assets; net interest yield on interest-earning assets       |                                            | $                            | 255,822  
|                                                                                 |                                            |                              |          
|Ratio of average interest-earning assets to average interest-bearing liabilities |                                            |                              | 1.10x    
|                                                                                 |                                            |                              |          

---

13

---

The following table analyzes net interest income in terms of changes in the volume of interest-earning assets and interest-bearing liabilities and changes in yields and rates. The table
reflects the extent to which changes in Coastal's interest income and interest expense are attributable to changes in volume (change in volume multiplied by prior year rate) and changes in rate
(changes in rate multiplied by prior year volume). Changes attributable to the combined impact of volume and rate have been allocated proportionately to changes due to volume and changes due to rate.

|                 |                                                                            | Year Ended December 31, |  
|---------------- | -------------------------------------------------------------------------- | ----------------------- | -
|
|
|Interest Income  |                                                                            |                         |  
|                 | Loans receivable                                                           |                         | $
|                 | Mortgage-backed securities                                                 |                         |  
|                 | Other securities                                                           |                         |  
|                 | Federal funds sold                                                         |                         |  
|                 | FHLB stock                                                                 |                         |  
|                 | Other                                                                      |                         |  
|                 |                                                                            |                         |  
|                 |                                                                            | Total                   |  
|                 |                                                                            |                         |  
|Interest Expense |                                                                            |                         |  
|                 | Interest-bearing deposits                                                  |                         |  
|                 | Securities sold under agreements to repurchase and federal funds purchased |                         |  
|                 | Advances from the FHLB                                                     |                         |  
|                 | Subordinated debentures                                                    |                         |  
|                 | Senior Notes payable                                                       |                         |  
|                 |                                                                            |                         |  
|                 |                                                                            | Total                   |  
|                 |                                                                            |                         |  
|                 | Net change in net interest income                                          |                         | $
|                 |                                                                            |                         |  

NET INCOME

Coastal reported net income of $13.5 million for the year ended December 31, 2003, $19.7 million for the year ended December 31, 2002
and $21.8 million for the year ended December 31, 2001.

When
comparing net income for 2003 to 2002, the primary contributor to the decrease in net income was decreased net interest income. Net interest income decreased $11.9 million
from 2002 to 2003 as a result of a 0.52% decrease in net interest margin. During 2003, Coastal experienced significant principal paydowns on its mortgage-backed securities and single-family mortgage
loans receivable portfolios due to the continuing low market rates of interest and the resulting refinancing of mortgage assets. In addition to the decreased net interest income, noninterest income
decreased by $1.8 million due to the gains recorded in 2002, offset by increases in service charges on deposit accounts and gains on sales of mortgage-backed securities
available-for-sale and loans held for sale in 2003. These decreases were somewhat offset by a $2.5 million decrease in the provision for loan losses, a
$2.6 million decrease in the provision for Federal income taxes, a $1.5 million decrease in the expense for minority interest (related to the preferred stock of Coastal Banc ssb which
was redeemed in July of 2002) and an $824,000 decrease in noninterest expense.

When
comparing net income for 2002 to 2001, the primary contributor to the decrease in net income was decreased net interest income. Net interest income decreased $11.8 million
from 2001 to 2002, as a result of Coastal's smaller asset size as compared to 2001, lower market interest rates and unusually high principal paydowns received on Coastal's mortgage-backed securities
and mortgage loan portfolios. In addition to the decreased net interest income, the provision for loan losses increased $1.9 million due to management's reevaluation of the overall allowance
for loan losses given the changes that have occurred within the mix of Coastal's loan portfolio, current economic conditions and

14

---

the
decision in 2002 to sell loans which resulted in charge-offs totaling $1.8 million to writedown such loans to fair value, in addition to specific loans in the portfolio that
have warranted greater attention and specific allocations of the allowance for loan losses. These decreases to net income were only somewhat offset by a $6.1 million increase in noninterest
income, a $2.6 million decrease in noninterest expense, a $1.7 million decrease in the provision for Federal income taxes and a $1.1 million decrease in the expense for minority
interest (preferred stock dividends of Coastal Banc ssb) due to the redemption of the preferred stock during 2002. The increase in noninterest income was primarily due to the $4.4 million gain
on the sale of the five central Texas branches and the $359,000 gain on the sale of the group of loans with servicing rights retained during the period. The increase is also due to a
$2.1 million increase in service charges on deposit accounts and the $422,000 fair value loss on derivative instruments recorded in 2001 (compared to a $12,000 fair value loss recorded during
2002), offset by a $702,000 decrease in the gain on the sale of real estate owned and various smaller changes in other categories of noninterest income. The decrease in noninterest expense was
primarily due to the $2.8 million decrease in the amortization of goodwill. In addition, Coastal experienced decreases of $869,000 and $1.3 million in office occupancy and data
processing, respectively. These decreases were partially offset by an increase of $1.1 million in compensation, payroll taxes and other benefits, a $519,000 increase in advertising expense, a
$153,000 increase in postage and delivery expense and a $599,000 increase in other noninterest expense. The decrease in the provision for Federal income taxes was due to the decreased income before
Federal income taxes, minority interest and cumulative effect of accounting change.

NET INTEREST INCOME

Net interest income amounted to $62.9 million in 2003, an $11.9 million, or 16.0% decrease from 2002. The decrease in net interest income was due to
a 0.52% decrease in net interest margin, from 3.04% in 2002 to 2.52% in 2003. Interest rate spread, defined to exclude noninterest-bearing deposits, decreased to 2.28% in 2003 from 2.74% in 2002.
Management also calculates an alternative interest rate spread which includes noninterest-bearing deposits. Under this calculation, the interest rate spreads for 2003 and 2002 were 2.46% and 2.94%,
respectively. Net interest margin and interest rate spread are affected by the changes in the amount and composition of interest-earning assets and interest-bearing liabilities, in addition to changes
in the applicable interest rates on those assets and liabilities.

The
decrease in interest rate spread was comprised of a decrease in the average yield on interest-earning assets from 5.60% to 4.58%, offset somewhat by a decrease in the average rate on
interest-bearing liabilities from 2.86% to 2.30%. In the very low rate environment that typified most of 2003,
Coastal experienced interest rate spread compression for a number of reasons including the timing differences relating to the repricing of certain assets and liabilities, changes in asset mix and an
unusually high level of mortgage loan prepayments. Due principally to the low interest rates, mortgage loan refinancing activity reached record levels for the industry during 2003. As noted earlier,
Coastal experienced significant principal payments on its mortgage-backed securities and single-family mortgage loans receivable portfolios during the year.

Total
interest income amounted to $114.5 million during 2003, a $23.2 million, or 16.8% decrease from 2002. Average interest earning assets increased $36.2 million,
while the average yield decreased 1.02%, from 5.60% in 2002 to 4.58% in 2003. The significant paydowns Coastal experienced in 2003 totaled approximately $203.6 million on mortgage-backed
securities and $462.3 million on single-family mortgage loans. Since the majority of Coastal's single-family mortgage assets have been acquired primarily through bulk purchases at a premium,
the significant paydowns resulted in greater premium amortization (and therefore a lower yield) on those purchased assets. While Coastal purchased mortgage-backed securities and single-family mortgage
loans receivable to replace the paid down assets, the purchased assets were at lower rates due to the lower market rates of interest. When comparing

15

---

the
two periods, the average yield on loans receivable decreased 1.03% and the average yield on mortgage-backed securities decreased 0.88%. The average yield on loans receivable in 2003 was 5.13%
compared to 6.16% in 2002 and the average yield on mortgage-backed securities was 2.78% in 2003 compared to 3.66% in 2002.

Total
interest expense amounted to $51.6 million in 2003, an $11.2 million, or 17.9% decrease from 2002. Average interest-bearing liabilities increased $42.9 million
for 2003, while the average interest rate decreased 0.56% due to the lower borrowing rates. When comparing 2003 to 2002, average FHLB advances increased $57.9 million. Average subordinated
debentures increased $29.1 million due to the issuances in June of 2002 and in June of 2003. Average interest-bearing deposits decreased $40.4 million due to continuing low market rates
of interest and the average balance of Senior Notes payable decreased $3.7 million due to their repurchase in February of 2002.

Net
interest income amounted to $74.8 million in 2002, an $11.8 million, or 13.6% decrease from 2001. The decrease in net interest income was primarily due to Coastal's
smaller average asset size, the loan sales mentioned previously and continuing higher than expected principal payments received on Coastal's mortgage-backed securities and single-family mortgage loan
portfolios. When comparing 2002 to 2001, average interest-earning assets decreased $451.0 million, $437.7 million of which was the decrease in mortgage-backed securities primarily due to
the 2001 restructuring of Coastal's asset base. The restructuring is discussed further in "Management's Analysis of Financial Condition and Results of OperationsAsset and Liability
Management". In addition, during 2002, due to the high levels of prepayments due to refinancings of single-family mortgages, Coastal experienced higher principal paydowns totaling approximately
$152 million on its mortgage-backed securities portfolio and $342 million on its single-family mortgage loan portfolio during the year.

Net
interest margin increased to 3.04% in 2002 from 2.97% in 2001. Interest rate spread, defined to exclude noninterest-bearing deposits, increased to 2.74% in 2002 from 2.56% in 2001.
Management also calculates an alternative interest rate spread which includes noninterest-bearing deposits. Under this calculation, the interest rate spreads for 2002 and 2001 were 2.94% and 2.81%,
respectively. Net interest margin and interest rate spread are affected by the changes in the amount and composition of interest-earning assets and interest-bearing liabilities, in addition to changes
in the applicable interest rates on those assets and liabilities.

Total
interest income amounted to $137.7 million during 2002, a $72.9 million, or 34.6% decrease from 2001. This decrease was due to the decrease in average
interest-earning assets of $451.0 million and a decrease in the average yield on those assets of 1.63%. The decrease in average interest-earning assets was primarily due to the restructuring in
2001 mentioned previously. When comparing the two periods, the average balance of mortgage-backed securities decreased $437.7 million and the average balance of loans receivable decreased
$10.8 million. The average yield on loans receivable decreased 1.83% and the average yield on mortgage-backed securities decreased 2.18%. The decrease in the overall average yield on
interest-earning assets was due to declining market rates throughout 2002.

Total
interest expense amounted to $62.9 million in 2002, a $61.2 million, or 49.4% decrease from 2001. The decrease in interest expense was due to the
$462.9 million decrease in the average balance of interest-bearing liabilities and a 1.81% decrease in the average rate paid on those liabilities. When comparing 2002 to 2001, average
securities sold under agreements to repurchase decreased $283.6 million, average FHLB advances decreased $111.6 million and average interest-bearing deposits decreased
$53.4 million. The average balance of Senior Notes payable decreased $42.1 million due to their repurchase on February 1, 2002 and the average balance of subordinated debentures
increased $27.8 million due to their issuance on June 18, 2002. The overall decrease in the average rate paid on interest-bearing liabilities was due to the continued declining wholesale
funding and deposit costs because of the decline in market interest rates throughout 2002.

16

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PROVISION FOR LOAN LOSSES AND THE ALLOWANCE FOR LOAN LOSSESCRITICAL ACCOUNTING POLICY

Management analyzes the loan portfolio to determine the adequacy of the allowance for loan losses and the appropriate provision required to maintain an adequate
allowance. 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 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 perceived 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. 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.

Coastal's
allowance for loan losses has generally increased over time in order to address asset growth and changes in asset mix. The historical growth in the allowance when compared with
Coastal's actual charge-off experience tends to support the validity of the methods employed by management to arrive at an appropriate allowance level along with the more subjective
aspects of this process.

For
the years ended December 31, 2003, 2002 and 2001, the provision for loan losses was $3.3 million, $5.8 million and $3.9 million, respectively. The changes
in the provision for loan losses, when comparing the periods, are due to management's continuing evaluation of the overall allowance for loan losses. The decrease in the provision for loan losses in
the fourth of quarter of 2003 was based upon the current level of unallocated reserves. 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 changes that have occurred within the mix of Coastal's loan portfolio, current economic conditions and the decision in 2002 to sell loans which
resulted in charge-offs totaling $1.8 million to writedown such loans to fair value, 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.

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,
Coastal's nonperforming

17

---

loans
increased slightly, when compared to December 31, 2002, by $1.7 million, or 9.3%, to $20.3 million. At December 31, 2003, 2002 and 2001, Coastal had nonperforming
loans as follows:

December 31,2003

2002

2001(In thousands)Nonaccrual loans receivable:First lien residential

$
10,312

$
9,184

$
21,744Residential construction





49


218Multifamily real estate








82Commercial 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


14117,702


17,778


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








62Residential construction


136


83


755Multifamily real estate





282


Commercial real estate


188


302


Acquisition and development


454


59


Commercial, financial and industrial


1,789


43


31Consumer and other








12,567


769


849Total nonperforming loans

$
20,269

$
18,547

$
24,713


Coastal's
asset quality ratios are as follows:

December 31,2003

2002

2001Nonperforming loans to total loans receivable and loans receivable held for sale

1.02
%
1.00
%
1.33
%Allowance for loan losses to nonperforming loans

95.66

97.69

62.26Allowance for loan losses to total loans receivable

0.98

1.00

0.83


18

---

NONINTEREST INCOME

Total noninterest income decreased $1.8 million, or 10.5%, to $15.4 million in 2003, compared to $17.2 million for 2002. This decrease was
comprised of the gains recorded in 2002 of $4.4 million from the sale of the five central Texas branches, $359,000 from the loans sold with servicing rights retained and $229,000 from the sale
of branch real estate. These decreases were somewhat offset by a $2.1 million increase in service charges on deposit accounts, an $802,000 increase in the gain on sale of mortgage loans held
for sale and a $493,000 increase in the gain on sale of mortgage-backed securities available-for-sale. The increased income from service charges on deposit accounts is due to
Coastal's continued focus on increasing transaction-type accounts and the related fee income, including Coastal's Free Checking and Bounce Protection features on retail checking accounts
introduced during August of 2002. The increase in the gain on sale of mortgage loans held for sale was due to routine sales transactions in 2003 by Coastal Banc ssb which were facilitated by Coastal
Banc Mortgage Corp.("CBMC"), an affiliate of the Bank. The loans sold were purchased with the intention to resell all or part of the loan packages to third parties. CBMC was formed during the third
quarter of 2002 for the purpose of facilitating the purchase and sale of whole loan packages and participations to third parties.

Total
noninterest income increased $6.1 million, or 54.4%, to $17.2 million in 2002, compared to $11.1 million for 2001. This increase was primarily due to Coastal's
sale in December 2002 of five of its branches in central Texas that resulted in a gain of $4.4 million. In addition, service charges on deposit accounts increased $2.1 million due
to Coastal's continued focus on increasing transaction accounts and the related fee income, including Coastal's new Free Checking and Bounce Protection features on retail checking accounts introduced
during August 2002. Other increases in noninterest income were due to a $359,000 gain on the sale of loans recorded in 2002 and the $422,000 fair value loss on derivative instruments recorded
in 2001 (compared to a $12,000 fair value loss recorded during 2002). These increases were only partially offset by a $100,000 decrease in loan fees, a $702,000 decrease in the gain on the sale of
real estate owned, a $169,000 decrease in the gain on the sale of mortgage-backed securities mentioned previously and a $218,000 decrease in other noninterest income. The decrease in the gain on the
sale of real estate owned was primarily due to the gain of $603,000 recorded in 2001 on one commercial real estate owned property. The decrease in other noninterest income was primarily due to
$300,000 in insurance proceeds received in 2001 for reimbursement of certain deposit losses in prior years.

NONINTEREST EXPENSE

Total noninterest expense amounted to $55.1 million during 2003, a decrease of $824,000, or 1.5% from 2002. The decrease in noninterest expense was due to
decreases of $1.1 million in compensation, payroll taxes and other benefits, $705,000 in advertising and $398,000 in office occupancy, offset by a $1.3 million increase in other
noninterest expense. The $1.1 million decrease in compensation related expenses is primarily composed of a $571,000 decrease due to the sale of the five central Texas branches in December of
2002, a $437,000 decrease due to the outsourcing of the internal audit function in September of 2002 and decreases of $129,000, $112,000 and $84,000 in group insurance, hiring expense and contract
labor, respectively. These decreases were partially offset by a $288,000 increase in compensation paid to CBMC employees including brokerage commissions related to the loan sales mentioned previously.
The decrease in advertising expense was due to management's decision to reduce this spending in 2003. The increase in other noninterest expense was primarily comprised of a $337,000 increase in audit
and accounting fees due to the outsourcing of internal audit, a $409,000 increase in legal fees and insurance premiums and a $561,000 increase in expenses related to loans, repossessed assets and real
estate owned.

Total
noninterest expense amounted to $55.9 million during 2002, a decrease of $2.6 million, or 4.4%, over 2001. The decrease in noninterest expense was primarily due to
the $2.8 million decrease in

19

---

the
amortization of goodwill due to the implementation of Statements of Financial Accounting Standards No. 142 and 147 as of January 1, 2002. In addition, Coastal experienced decreases
of $869,000 and $1.3 million in office occupancy and data processing, respectively. The decrease in office occupancy was primarily due to certain assets becoming fully depreciated during 2001
and 2002. The decrease in data processing expense was due to the conversion of the Rio Grande Valley Region branches to Coastal's primary deposit and loan data processing system and the item
processing functions brought in-house during the third quarter of 2001. These decreases were partially offset by an increase of $1.1 million in compensation, payroll taxes and other
benefits, a $519,000 increase in advertising expense, a $153,000 increase in postage and delivery expense and a $599,000 increase in other noninterest expense. The increase in compensation, payroll
taxes and other benefits was due to the increase in staff needed to bring the item processing functions in-house during the third quarter of 2001, normal merit increases for existing staff
and additional personnel needed to continue Coastal's focus on commercial banking products, lending and providing other services to commercial business customers. The increase in advertising and
postage and delivery expenses were primarily due to Coastal's continued focus on increasing transaction deposit accounts. The increase in other noninterest expense was primarily due to the $401,000
reversal of an accrued franchise tax liability during the 2001 period and smaller changes in various other categories.

PROVISION FOR FEDERAL INCOME TAXES

Coastal incurred no regular Federal income taxes in 2003, 2002 or 2001 primarily due to the utilization of the net operating loss carryforwards acquired in
May 1988 from the savings and loan associations obtained in connection with the Federal Savings and Loan Insurance Corporation's Southwest Plan (the "Southwest Plan Acquisition") and because
payments to Coastal pursuant to the related assistance agreement in prior years were excludable from taxable income, which resulted in Coastal reporting losses each year for tax purposes. However,
pursuant to the terms of the Southwest Plan Acquisition assistance agreement, the FSLIC Resolution Fund ("FRF") retained all of the future tax benefits to be derived from the Federal income tax
treatment of the assistance payments received from the FRF and from the utilization of the net operating loss carryforwards acquired. The amount of tax benefit to Coastal during these years (which
corresponds to the amount of Federal taxes which Coastal would have paid in these years but for the tax-exempt nature of the assistance payments from the FRF and the utilization of the net
operating loss carryforwards) is recorded in Coastal's Consolidated Statements of Income as its provision for Federal income taxes, which also includes alternative minimum taxes paid. The alternative
minimum taxes recorded during these years are available as credit carryforwards to reduce future regular Federal income taxes over an indefinite period. Beginning in 2000, these alternative minimum
tax credit carryforwards were used to offset regular income taxes.

The
provisions for Federal income taxes were $6.5 million in 2003, $9.1 million in 2002 and $10.9 million in 2001 with the effective tax rates being 32.6%, 30.1%,
and 30.7%, respectively. The provision for Federal incomes taxes includes the tax benefit received from the dividends on the Series A Preferred Stock of Coastal Bancorp, Inc. of $514,000
for the year 2003 and $878,000 for each of the years 2002 and 2001. This benefit ceased upon redemption of the Bancorp Preferred Stock in July of 2003. Although the termination of the agreement with
the FRF was effective March 31, 1994, the FRF will continue to receive the future Federal income tax benefits of the net operating loss carryforwards acquired, which are expected to continue
into 2004.

ASSET AND LIABILITY MANAGEMENT

During 2001, Coastal entered into a transaction to strategically restructure a portion of its 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. The majority of the

20

---

securities
sold were CMOs tied to the Eleventh District COFI index and contained extension risk which caused, on average, higher levels of price volatility. Coastal replaced approximately
$512 million of these securities with primarily pass-thru securities with an overall shorter expected duration. This restructuring was undertaken to decrease the price volatility of
the Bank's investments and to improve the stability of future earnings.

Coastal's
asset and liability management process is utilized to measure and manage its interest rate risk exposure, which is Coastal's primary market risk. Interest rate risk can be
defined as the exposure of Coastal's net interest income to adverse movements in interest rates. The principal determinant of the exposure of Coastal's earnings to interest rate risk is the timing
difference between the repricing or maturity of Coastal's interest-earning assets and the repricing or maturity of its interest-bearing liabilities. In order to minimize interest rate risk and achieve
an acceptable interest rate spread between interest-earning assets and interest-bearing liabilities, Coastal endeavors to match the timing of the repricing or maturities as well as the basis (for
example, the London Interbank Offered Rate ("LIBOR") or cost of funds rate) of its interest-earning assets to its interest-bearing liabilities. Coastal also may use interest rate swap and cap
agreements to aid in minimizing exposure to interest rate fluctuations.

Coastal's
asset and liability management strategy is formulated and monitored by the Board of Directors of the Bank (the "Board"). The Board's written policies and procedures are
implemented by the Asset/Liability Subcommittee (the "Subcommittee"), a management-staffed committee composed of the Chief Executive Officer, Chief Banking Officer, the Senior Vice President of Retail
Banking, the Treasury Manager, the Manager of Portfolio Risk and other Senior Managers of the Bank. The Subcommittee meets monthly to review, among other things, the sensitivity of Coastal's assets
and liabilities to interest rate changes, including those transactions attributable to altering the interest rate risk, the purchase and sale activity and maturities of investments and borrowings. In
accordance therewith, the Subcommittee reviews Coastal's liquidity, cash flow needs, maturities of investments, deposits and borrowings, interest rate matching, core deposit activity, current market
conditions and interest rates on both a local and national level.

To
effectively measure and manage interest rate risk, the Board and the Subcommittee regularly review interest rate risk by forecasting the impact of alternative interest rate scenarios
on net income, net interest income and on Coastal's economic value of equity ("EVE"), which is defined as the difference between the market value of Coastal's existing assets and liabilities,
including the effects of off-balance sheet instruments, and by evaluating such impact against the guidelines established by the Board for allowable changes in net interest income and EVE.
Coastal utilizes the market-value analysis to address the change in the equity value of Coastal's balance sheet arising from movements in interest rates by computing the net present value of Coastal's
assets, liabilities and off-balance sheet instruments. The extent to which assets have gained or lost value in relation to the gains or losses of liabilities determines the appreciation or
depreciation in equity on a market-value basis. Economic value analysis is intended to evaluate the impact of immediate and sustained changes in interest rates on the market value of the current
balance sheet. From these analyses, interest rate risk is quantified and appropriate strategies are formulated and implemented on an ongoing basis.

21

---

The following table presents an analysis of the sensitivity in Coastal's annual net interest income and EVE based on the indicated changes in interest rates at December 31, 2003
and 2002. The interest rate scenarios presented in the table include interest rates at December 31, 2003 and 2002 and, for the net interest income calculation, interest rates are adjusted by
the indicated changes over a four-quarter period with net interest income being measured for the following calendar year, and for the EVE calculation, the interest rate adjustments consist
of instantaneous and parallel changes in the yield curve. Each rate scenario reflects assumptions relating to the estimated effect of prepayments and repricing of applicable assets and liabilities.

Estimated Change InNet Interest Income
December 31,

EVE
December 31,Change
In Interest Rates
(in basis points)2003

2002

2003

2002+200

9.97
%
3.78
%
(1.12
)%
2.91
%+100

4.96

1.87

(0.18
)
3.880







-100

(1.84
)
(0.33
)
0.74

(3.85
)


In
reviewing these results, it is acknowledged that the historically low level of market interest rates does tend to constrain any further reductions in Coastal's cost of deposits. For
instance, certain of Coastal's transaction accounts and some time deposits are already priced at 1.00% or below due to the current very low rate environment.

There
are limitations inherent in any methodology used to estimate the exposure to changes in interest rates. It is not possible to fully model the market risk in instruments with
leverage, option or prepayment risks. Therefore, this analysis is not intended to be a forecast of the actual effect of a change in interest rates on Coastal. Management of Coastal believes that all
of the assumptions used in this analysis to evaluate the vulnerability of Coastal's operations to changes in interest rates take into account historical experience and considers them reasonable;
however, the interest rate sensitivity of Coastal's assets and liabilities and the estimated effects of changes in interest rates on Coastal's net interest income and EVE indicated in the above
analysis could vary substantially if different assumptions were used or if actual experience differs from the historical experience.

The
EVE is significantly impacted by the estimated effect of prepayment risk on the value of mortgage-backed securities and loans receivable as market interest rates change. Prepayment
risk arises due to the possibility that the cash flow experience of an asset may change as interest rates change. When interest rates increase, mortgage-related assets will generally not be prepaid
and conversely, when interest rates decrease, prepayments increase. Prepayments affect Coastal's net spread and the duration match of its assets and liabilities. Coastal has prepayment risk on its
mortgage-backed securities and loans receivable held at a premium due to the fact that the amortization of the capitalized premiums on those assets will accelerate when the underlying loans are
prepaid. Coastal attempts to anticipate its prepayment risk by extrapolation from past prepayment behavior after adjusting for expected interest rate levels and other economic factors and utilizes
these assumptions when analyzing its risk exposure. There is also a risk of an inverted yield curve. In this situation, assuming the rates under one year would be inverted, Coastal's net interest
income would be negatively affected. As assets, primarily the one-year treasury securities and whole loans, reprice at the lower one-year rate, the one-month
borrowings would reprice at the higher one-month LIBOR rate causing a decline in net interest income. The magnitude of this risk depends on the steepness of the inversion, which part of
the curve inverts and the duration of the inverted curve.

A
more conventional but limited asset and liability monitoring tool involves analyzing the extent to which assets and liabilities are "interest rate sensitive" and measuring an
institution's interest rate sensitivity "gap." While this conventional gap measure may be useful, it is limited in its ability to

22

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predict
trends in future earnings and to predict the effect of changing interest rates. It makes no assumptions about changes in prepayment tendencies, deposit or loan maturity preferences or
repricing time lags that may occur in response to a change in the interest rate environment. An asset or liability is said to be interest rate sensitive within a specific time period if it will mature
or reprice within that time period. The interest rate sensitivity "gap" is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a
given time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the
amount of interest rate sensitive liabilities exceeds interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while
a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to increase net interest income, while a positive gap
would tend to adversely affect net interest income. Given Coastal's current position based on this "gap" analysis, however, Coastal's net interest spread would benefit over time from a gradual
increase in interest rates, in which its assets may be redeployed at higher yields. If interest rates were to fall, yields earned on interest rate sensitive investments would be reduced, while longer
term fixed liability costs, such as Coastal's certificates of deposit, would not immediately change. While this analysis takes into account repricing and maturities of assets and liabilities, it fails
to consider all the interest rate sensitivities of those asset and liability accounts.

The
following table summarizes the contractual maturities or repricing characteristics of Coastal's interest-earning assets and interest-bearing liabilities at December 31, 2003.
The principal balance of adjustable rate assets is included in the period in which they are first scheduled to adjust or could be adjusted rather than in the period in which they mature. Coastal's
one-year cumulative gap position at December 31, 2003 was positive $6.3 million or 0.23% of total assets. This is a snapshot of the position as of such date. The position
changes frequently and may not be indicative of Coastal's position at any other time. Other material assumptions are set forth in the footnotes to the table.

23

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|                                                                                 |                                                   | As of December 31, 2003                                              
|-------------------------------------------------------------------------------- | ------------------------------------------------- | ---------------------------------------------------------------------
|
|
|INTEREST-SENSITIVE ASSETS                                                        |                                                   |                                                                      
|                                                                                 | Loans, net:(1):                                   |                                                                      
|                                                                                 |                                                   | First lien mortgage-single family fixed rate                         
|                                                                                 |                                                   | First lien mortgage-single family adjustable rate                    
|                                                                                 |                                                   | First lien mortgage-multifamily fixed rate                           
|                                                                                 |                                                   | First lien mortgage-multifamily variable rate                        
|                                                                                 |                                                   | Construction and acquisition and development, net of loans in process
|                                                                                 |                                                   | Commercial real estate                                               
|                                                                                 |                                                   | Commercial                                                           
|                                                                                 |                                                   | Consumer and other                                                   
|                                                                                 | Mortgage-backed securities available- for-sale(1) |                                                                      
|                                                                                 | Other securities available-for-sale               |                                                                      
|                                                                                 | Other interest-earning assets(2)                  |                                                                      
|                                                                                 |                                                   |                                                                      
|                                                                                 |                                                   |                                                                      
|                                                                                 |                                                   |                                                                      
|                                                                                 | Noninterest-sensitive assets                      |                                                                      
|                                                                                 |                                                   |                                                                      
|                                                                                 |                                                   |                                                                      
|                                                                                 |                                                   |                                                                      
|INTEREST-SENSITIVE LIABILITIES:                                                  |                                                   |                                                                      
|                                                                                 | Interest-bearing deposits:(3):                    |                                                                      
|                                                                                 |                                                   | Now accounts                                                         
|                                                                                 |                                                   | Savings accounts                                                     
|                                                                                 |                                                   | Money market demand accounts                                         
|                                                                                 |                                                   | Certificate accounts                                                 
|                                                                                 | Advances from the FHLB                            |                                                                      
|                                                                                 | Subordinated debentures                           |                                                                      
|                                                                                 |                                                   |                                                                      
|                                                                                 |                                                   |                                                                      
|                                                                                 |                                                   |                                                                      
|                                                                                 | Noninterest-sensitive liabilities                 |                                                                      
|                                                                                 |                                                   |                                                                      
|                                                                                 |                                                   |                                                                      
|                                                                                 | Stockholders' equity                              |                                                                      
|                                                                                 |                                                   |                                                                      
|                                                                                 |                                                   |                                                                      
|                                                                                 |                                                   |                                                                      
|Gap during the period                                                            |                                                   | $                                                                    
|                                                                                 |                                                   |                                                                      
|Cumulative gap at December 31, 2003                                              |                                                   | $                                                                    
|                                                                                 |                                                   |                                                                      
|Interest-sensitive assets as a % of interest sensitive liabilities (cumulative) |                                                   |                                                                      
|Interest-sensitive assets as a % of total assets (cumulative)                    |                                                   |                                                                      
|Ratio of gap to total assets                                                     |                                                   |                                                                      
|Ratio of cumulative gap to total assets                                          |                                                   |                                                                      
|Cumulative gap at December 31, 2002                                              |                                                   | $                                                                    

---

24

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DERIVATIVE INSTRUMENTS

Coastal is a party to derivative instruments in the normal course of business to reduce its exposure to fluctuations in interest rates. These derivative
instruments have included interest rate swap agreements where Coastal makes fixed interest payments and receives payments based on a floating index and rate cap agreements, as described below.
Effective January 1, 2001, Coastal adopted FASB Statement No. 133 ("Statement 133"), which requires companies to recognize all derivatives as either assets or liabilities in the
consolidated statements of financial condition and measure all derivatives at fair value. The interest rate swap and cap agreements held by Coastal on December 31, 2000 were determined to not
qualify for hedge accounting, therefore on implementation of Statement 133, Coastal recorded a transition adjustment to record these derivative instruments at fair value. On January 1, 2001,
Coastal recorded a transition adjustment loss of $160,000, or $104,000 net of the tax effect, as the cumulative effect of the change in accounting for derivative instruments to record the fair value
of Coastal's derivative instruments in the consolidated statements of income. For the year ended December 31, 2001, Coastal recorded an additional fair value loss on these derivative
instruments of $422,000. The fair value changes in the derivative instruments during 2001 were primarily attributable to Coastal's interest rate swap agreements, which were totally liquidated in
June 2001. Coastal's interest rate cap agreements expired in 2003 and Coastal had no derivative instruments at December 31, 2003.

Until
their expiration in 2003, Coastal had interest rate cap agreements with third parties, primarily sophisticated investment banking firms. The agreements provided for the third
parties to make payments to Coastal whenever a defined floating rate exceeded rates ranging from 8.0% to 9.0%, depending on the agreement. Payments on the interest rate cap agreements were based on
the notional principal amount of the agreements; no funds were actually borrowed or were to be repaid. The fair value of the interest rate cap agreements was zero at December 31, 2002, which
was the recorded book value of such agreements at such date due to the implementation of Statement 133. The interest rate cap agreements were used to alter the interest rate sensitivity of a portion
of Coastal's mortgage-backed securities and loans receivable. As such, the amortization of the purchase price and interest income from the interest rate cap agreements were recorded in "interest
income on mortgage-backed securities or loans receivable," as appropriate, in the accompanying consolidated statements of income. The net decrease in interest income related to the interest rate cap
agreements was approximately $15,000 for the year ended December 31, 2003 and $25,000 for each of the years ended December 31, 2002 and 2001. No payments were made to Coastal under the
interest rate cap agreements during the years ended December 31, 2003, 2002 or 2001.

Coastal
totally liquidated its interest rate swap positions in June of 2001. The interest rate swap agreements previously held by Coastal provided for Coastal to make fixed interest
payments and receive payments based on a floating LIBOR index, as defined in each agreement. The net effect of the
interest rate swaps to Coastal was to increase interest expense by $35,000 for the year ended December 31, 2001. See Note 16 of the Notes to Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

Coastal's total assets were $2.7 billion at December 31, 2003 and $2.5 billion at December 31, 2002. Common stockholders' equity was
$133.7 million at December 31, 2003. The regulatory capital of Coastal Banc ssb exceeded all three of the Bank's regulatory capital adequacy requirements at December 31, 2003. At
December 31, 2003, the Bank's core capital amounted to 6.26% of adjusted total assets, compared to the requirement of 4.0%, its Tier 1 risk-based capital amounted to 9.23% of
risk-adjusted assets as compared to the requirement of 4.0% and its total risk-based capital amounted to 10.31% of risk-adjusted assets, compared to a requirement
of 8.0%.

Coastal's
primary sources of funds consist of deposits bearing market rates of interest, advances from the FHLB, securities sold under agreements to repurchase and principal and interest
payments on

25

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loans
receivable and mortgage-backed securities. Coastal uses its funding resources principally to meet its ongoing commitments to fund maturing deposits and deposit withdrawals, repay borrowings,
purchase loans receivable and mortgage-backed securities, fund existing and continuing loan commitments, maintain its liquidity, meet operating expenses and fund stock purchases and acquisitions of
other banks and thrifts, either on a branch office or whole bank acquisition basis.

At
December 31, 2003, Coastal had the following contractual obligations and commitments (in thousands):

|                                                               |                               | Payments Due In
|-------------------------------------------------------------- | ----------------------------- | ---------------
|
|FHLB Advances                                                  |                               | $              
|Subordinated debentures                                        |                               |                
|Annual rental commitments under noncancelable operating leases |                               |                
|                                                               |                               |                
|                                                               | Total contractual obligations |                
|                                                               |                               |                

|                                                                        |                   | Amount of Commitment Expiring In
|----------------------------------------------------------------------- | ----------------- | --------------------------------
|
|Commitments to extend credit and undisbursed portion of lines of credit |                   | $                               
|Standby letters of credit                                               |                   |                                 
|                                                                        |                   |                                 
|                                                                        | Total commitments |                                 
|                                                                        |                   |                                 

In
addition, scheduled maturities of certificates of deposit during the twelve months following December 31, 2003 totaled $656.5 million. Management believes that Coastal
has adequate resources to fund all its commitments.

INFLATION AND CHANGING PRICES

The Consolidated Financial Statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the
United States of America, which require the measurement of financial position and operating results, without considering changes in the relative purchasing power of money over time due to inflation.
Unlike most commercial companies, substantially all of the assets and liabilities of Coastal are monetary in nature. As a result, interest rates have a more significant impact on Coastal's performance
than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the prices of goods and services.

RECENT ACCOUNTING STANDARDS

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34" ("FIN 45"). This Interpretation elaborates on
the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required
to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to
guarantees issued or modified after December 31, 2002 and did not have a material effect on Coastal's consolidated financial statements for the years ended December 31, 2003 or 2002.

26

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In
April 2003, the FASB issued Statement No. 149 ("Statement 149"), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". Statement 149 amends FASB
Statement 133, "Accounting for Derivative Instruments and Hedging Activities" and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. Statement 149 improves financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In
particular, Statement 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, clarifies when a derivative contains a financing
component, amends the definition of underlying to conform to the language in FIN 45 and amends certain other existing pronouncements. Statement 149 is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30, 2003. However, the provisions of Statement 149 that related to Statement 133 implementation issues that have
been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. The adoption of Statement 149 did not
have a material impact on Coastal's consolidated financial statements.

In
May 2003, the FASB issued Statement No. 150 ("Statement 150"), "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity".
Statement 150 requires certain financial instruments that have characteristics of both liabilities and equity to be classified as a liability on the consolidated statements of financial condition.
Prior to the issuance of Statement 150, Coastal classified trust preferred securities as liabilities on the consolidated statements of financial condition and the related interest cost as interest
expense on the consolidated statements of income, which is consistent with the requirements of Statement 150. Statement 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Statement 150 will be effected by reporting the cumulative effect of
a change in accounting principle for contracts created before the issuance date and still existing at the beginning of that interim period. The adoption of Statement 150 did not have an impact on
Coastal's consolidated financial statements.

On
January 17, 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which addresses consolidation by business
enterprises of variable interest entities. FIN 46 clarifies the application of ARB No. 51 "Consolidated Financial Statements", to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other
parties. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date.
It applies in the first fiscal year or interim period beginning after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before
February 1, 2003. Coastal has two statutory business trusts, one of which was formed subsequent to January 31, 2003, for the sole purpose of issuing trust preferred securities as further
described in Note 14 to our accompanying consolidated financial statements. FIN 46 was revised and reissued in December 2003.

On
December 31, 2003, Coastal retroactively implemented FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51",
resulting in the deconsolidation of Coastal Capital Trust I and Coastal Capital Trust II, both of which were created for the sole purpose of issuing trust preferred securities. The implementation of
this Interpretation resulted in Bancorp's $1.9 million investment in the common equity of the two trusts being included in the consolidated statements of financial condition as other assets and
subordinated debentures, and the interest income and interest expense received from and paid to the trusts, respectively, being included in the consolidated statements of income as interest income and
interest expense. The increase to other

27

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interest
income and interest expense totaled $146,000 for the year ended December 31, 2003 and $74,000 for the year ended December 31, 2002.

FORWARD-LOOKING INFORMATION

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: The statements contained in this Annual Report to stockholders which are not
historical facts contain forward looking statements with respect to plans, projections or future performance of Coastal, the occurrence of which involve certain risks and uncertainties detailed in
Coastal's filings with the Securities and Exchange Commission ("SEC").

The
above discussion should be read in conjunction with the information contained in the Consolidated Financial Statements and the Notes thereto. The above information contains
"forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), and is subject to the safe harbor created by the Reform Act. The words
"estimate," "project," "anticipate," "expect," "intend," "believe," "plans" and similar expressions are intended to identify forward-looking statements. Because such forward-looking statements involve
risks and uncertainties,
there are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Factors, all of which are difficult to predict and
many of which are beyond the control of Coastal, that could cause actual results to differ materially include, but are not limited to: risks related to changes in market rates of interest, changes in
our loan portfolio, including the risks associated with our non-traditional lending (loans other than single-family residential mortgage loans such as multifamily, real estate acquisition
and development, commercial real estate, commercial business and commercial construction loans), the possibility that Coastal's allowance for loan losses proves to be inadequate, Coastal's ability to
attract core deposits, the concentration of Coastal's loan portfolio in Texas and California to the extent that the economies of those states experience problems, the risk that the merger with
Hibernia will not be completed, continuing interest margin compression, changes in the volume of loan originations or purchases, the timing of repayments and prepayments on loans, Coastal's
acquisition strategy, including risks of adversely changing results of operations and factors affecting Coastal's ability to consummate further acquisitions; risks involved in Coastal's ability to
quickly and efficiently integrate the operations of acquired entities with those of Coastal; changes in business strategies, changes in general market rates of interest and in economic and business
conditions, and changes in the laws and regulations applicable to Coastal; and other factors as discussed herein.

28

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Coastal Bancorp, Inc. and SubsidiariesDIRECTORS AND OFFICERS

Board of Directors of Coastal Bancorp, Inc., Coastal Banc ssb and subsidiaries (as noted)

Manuel J. MehosChairman of the Board, President and Chief Executive Officer of Coastal Bancorp, Inc.; Chairman of the Board, President and Chief Executive Officer of Coastal Banc
Holding Company, Inc.; Chairman of the Board of Coastal Banc Capital Corp., a wholly-owned subsidiary of Coastal Banc Holding Company, Inc.; Chairman of the Board, President and Chief
Executive Officer of the Bank, a wholly-owned subsidiary of Coastal Banc Holding Company, Inc.; Chairman of the Board and Chief Executive Officer of Coastal Banc Mortgage Corp., a wholly-owned
subsidiary of Coastal Banc Holding Company, Inc.; and Chief Executive Officer of CoastalBanc Financial Corp., a wholly-owned subsidiary of the Bank, Houston, Texas

R. Edwin AlldaySelf employed consultant who provides management consulting services to non-profit organizations, Houston, Texas

D. Fort Flowers, Jr.President of Sentinel Trust Company, a Texas Limited Banking Association, providing fiduciary and investment management services to affluent families, their closely held
corporations and foundations, Houston, Texas, and Director and Vice Chairman of the Board of New Covenant Trust Company, a National Trust Company, Louisville, Kentucky

Dennis S. FrankChief Executive Officer and President of Silvergate Capital Corporation, a financial institution holding company controlling Silvergate Bank, La Jolla, California, and
President and Chief Executive Officer of DSF Management Corp., a private investment company, Houston, Texas

Robert E. Johnson, Jr.Partner, law firm of Johnson & Johnson, Austin, Texas

Corporate Officers of Coastal Bancorp, Inc.

Manuel J. MehosChairman of the Board, President and Chief Executive Officer

Catherine N. WylieSenior Executive Vice President, Chief Financial Officer, Chief Operations Officer and Treasurer

Linda B. FrazierSenior Vice President, Secretary and General Counsel

Code of Ethics

The Company has adopted a Code of Conduct, which applies to all employees, officers and directors of Coastal and it's subsidiaries, and a Code of Ethics for
Executive Officers which applies to executive officers of Coastal and its subsidiaries. The Code of Ethics for Executive Officers meets the requirements of a "Code of Ethics" as defined by Item 406 of
regulation S-K and the new Nasdaq National Market listing standards. The Code of Conduct and Code of Ethics for Executive Officers are posted on our website at
www.coastalbanc.com/corporategovernance/codeofconduct. We will also provide a copy of our Code of Conduct and Code of Ethics for Executive Officers to shareholders upon
request, free of charge. We intend to disclose any amendments to, or waivers from, the Code of Ethics for Executive Officers for directors or executive officers on our website at
www.coastalbanc.com/corporategovernance/codeofconduct.

29

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Corporate Officers of Coastal Banc Holding Company, Inc.

Manuel J. MehosChairman of the Board, President and Chief Executive Officer

Catherine N. WylieDirector, Senior Executive Vice President, Chief Financial Officer, Chief Operations Officer and Treasurer

Linda B. FrazierDirector, Senior Vice President and Secretary

Linda S. BubaczDirector, Assistant Treasurer and Assistant Secretary

Corporate Officers of Coastal Banc ssb

Manuel J. MehosPresident and Chief Executive Officer

Catherine N. WylieSenior Executive Vice PresidentChief Financial Officer and Chief Operations Officer

Robert V. NewExecutive Vice PresidentChief Banking Officer

David R. GrahamExecutive Vice PresidentCommercial Real Estate Lending

Walter A. PawkettExecutive Vice PresidentCommercial LendingRio Grande Valley

H. Edward Selke, Jr.Executive Vice PresidentChief Credit Officer

30

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COASTAL  A HISTORICAL PERSPECTIVE

Coastal was acquired by an investor group in 1986 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 the change in ownership), Coastal had one full service office and total assets of approximately $10.7 million.

In
May 1988, Coastal became the first acquirer of failed or failing savings institutions under the Federal government's "Southwest Plan." In this transaction, Coastal acquired
from the Federal Savings and Loan Insurance Corporation, as receiver for four insolvent savings associations, 14 additional branch offices and approximately $543.4 million of assets and assumed
$543.4 million in deposits and other liabilities. Since completion of the Southwest Plan acquisition and through 2003, Coastal entered into seven branch acquisitions and one whole bank
acquisition: two with an instrumentality of the Federal government and six with private institutions. In each transaction, Coastal agreed to acquire certain assets in consideration of the assumption
of certain deposit liabilities. In 1996, Coastal also exchanged three branches for one resulting in a net deposit increase of $26.0 million and sold one branch in separate transactions. In
2002, Coastal sold five branches with $75.3 million in deposits. All of these transactions resulted in the net assumption of $1.8 billion of deposits and the net acquisition of 53 branch
offices. Coastal has also opened eight de novo branches since inception. Coastal has been able
to achieve operating economies and improve efficiency by closing an aggregate of 19 branch offices and transferring the deposits to other offices located in the same market area.

At
December 31, 2003, Coastal had total assets of approximately $2.7 billion and total deposits of approximately $1.7 billion with 43 branch offices in metropolitan
Houston, Austin, Corpus Christi, the Rio Grande Valley and small cities in the southeast quadrant of Texas.

31

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Independent Auditors' Report

The
Board of Directors
Coastal Bancorp, Inc.:

We
have audited the accompanying consolidated statements of financial condition of Coastal Bancorp, Inc. and subsidiaries as of December 31, 2003 and 2002 and the related
consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2003. These
consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial condition of Coastal Bancorp, Inc. and subsidiaries
at December 31, 2003 and 2002 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003 in conformity
with accounting principles generally accepted in the United States of America.

January 23,
2004
Houston, Texas

32

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COASTAL BANCORP, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION  December 31, 2003 and 2002  (In thousands, except share data)

|                                                                                                                 |                                                                                                                                                                                                                          | 2003                                       |           | 2002      |          
|---------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | --------- | --------- | ---------
|ASSETS                                                                                                           |                                                                                                                                                                                                                         
|Cash and cash equivalents                                                                                        |                                                                                                                                                                                                                          | $                                          | 40,814    |           | $        
|Federal funds sold (Note 4)                                                                                      |                                                                                                                                                                                                                          |                                            | 10,440    |           |          
|Loans receivable held for sale (Note 6)                                                                          |                                                                                                                                                                                                                          |                                            | 8,078     |           |          
|Loans receivable, net (Notes 6 and 12)                                                                           |                                                                                                                                                                                                                          |                                            | 1,981,924 |           |          
|Mortgage-backed securities available-for-sale, at fair value (Notes 5, 12, 13, and 16)                           |                                                                                                                                                                                                                          |                                            | 504,402   |           |          
|Other securities available-for-sale, at fair value                                                               |                                                                                                                                                                                                                          |                                            | 6,787     |           |          
|Accrued interest receivable (Note 7)                                                                             |                                                                                                                                                                                                                          |                                            | 9,198     |           |          
|Property and equipment (net of accumulated depreciation and amortization of $26,258 in 2003 and $26,050 in 2002) |                                                                                                                                                                                                                          |                                            | 32,563    |           |          
|Stock in the Federal Home Loan Bank of Dallas ("FHLB")                                                           |                                                                                                                                                                                                                          |                                            | 45,471    |           |          
|Goodwill (Note 8)                                                                                                |                                                                                                                                                                                                                          |                                            | 21,429    |           |          
|Prepaid expenses and other assets (Notes 9, 10, 14, 16 and 18)                                                   |                                                                                                                                                                                                                          |                                            | 21,884    |           |          
|                                                                                                                 |                                                                                                                                                                                                                          |                                            |           |           |          
|                                                                                                                 |                                                                                                                                                                                                                          | Total assets                               |           | $         | 2,682,990
|                                                                                                                 |                                                                                                                                                                                                                          |                                            |           |           |          
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                             |                                                                                                                                                                                                                         
|Liabilities:                                                                                                     |                                                                                                                                                                                                                          |                                            |           |           |          
|                                                                                                                 | Deposits (Note 11)                                                                                                                                                                                                       |                                            | $         | 1,676,131 |          
|                                                                                                                 | Advances from the FHLB (Note 12)                                                                                                                                                                                         |                                            |           | 799,875   |          
|                                                                                                                 | Subordinated debentures (Note 14)                                                                                                                                                                                        |                                            |           | 61,856    |          
|                                                                                                                 | Advances from borrowers for taxes and insurance                                                                                                                                                                          |                                            |           | 2,482     |          
|                                                                                                                 | Other liabilities and accrued expenses                                                                                                                                                                                   |                                            |           | 8,954     |          
|                                                                                                                 |                                                                                                                                                                                                                          |                                            |           |           |          
|                                                                                                                 |                                                                                                                                                                                                                          | Total liabilities                          |           |           | 2,549,298
|                                                                                                                 |                                                                                                                                                                                                                          |                                            |           |           |          
|Commitments and contingencies (Notes 6, 16, 19 and 24)                                                           |                                                                                                                                                                                                                          |                                            |           |           |          
|Stockholders' equity (Notes 5, 21, 22 and 23):                                                                   |                                                                                                                                                                                                                          |                                            |           |           |          
|                                                                                                                 | Preferred Stock, no par value; authorized shares 5,000,000; 9.12% Cumulative, Series A, 1,100,000 shares issued and outstanding at December 31, 2002                                                                     |                                            |           |          |          
|                                                                                                                 | Common Stock, $.01 par value; authorized shares 30,000,000; 7,981,434 shares issued and 5,235,324 shares outstanding at December 31, 2003; 7,867,029 shares issued and 5,141,010 shares outstanding at December 31,
2002 |                                            |           | 80        |          
|                                                                                                                 | Additional paid-in capital                                                                                                                                                                                               |                                            |           | 37,179    |          
|                                                                                                                 | Retained earnings                                                                                                                                                                                                        |                                            |           | 151,167   |          
|                                                                                                                 | Accumulated other comprehensive income (loss)net unrealized gain (loss) on securities available-for-sale                                                                                                                |                                            |           | (1,104    | )        
|                                                                                                                 | Treasury stock at cost (2,746,110 shares in 2003 and 2,726,019 shares in 2002)                                                                                                                                           |                                            |           | (53,630   | )        
|                                                                                                                 |                                                                                                                                                                                                                          |                                            |           |           |          
|                                                                                                                 |                                                                                                                                                                                                                          | Total stockholders' equity                 |           |           | 133,692  
|                                                                                                                 |                                                                                                                                                                                                                          |                                            |           |           |          
|                                                                                                                 |                                                                                                                                                                                                                          | Total liabilities and stockholders' equity |           | $         | 2,682,990
|                                                                                                                 |                                                                                                                                                                                                                          |                                            |           |           |          

See accompanying notes to Consolidated Financial Statements.

33

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COASTAL BANCORP, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF INCOME  Years ended December 31, 2003, 2002 and 2001  (In thousands, except per share data)

|                                                                                |                                                                  | 2003                                                                                                           |         | 2002   |        | 2001    |        
|------------------------------------------------------------------------------- | ---------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------- | ------- | ------ | ------ | ------- | -------
|Interest income:                                                                |                                                                  |                                                                                                                |         |        |        |         |        
|                                                                                | Loans receivable                                                 |                                                                                                                | $       | 99,301 |        | $       | 118,970
|                                                                                | Mortgage-backed securities                                       |                                                                                                                |         | 13,951 |        |         | 17,114 
|                                                                                | FHLB stock, federal funds sold and other interest-earning assets |                                                                                                                |         | 1,275  |        |         | 1,613  
|                                                                                |                                                                  |                                                                                                                |         |        |        |         |        
|                                                                                |                                                                  |                                                                                                                | 114,527 |        |        | 137,697 |        
|                                                                                |                                                                  |                                                                                                                |         |        |        |         |        
|Interest expense:                                                               |                                                                  |                                                                                                                |         |        |        |         |        
|                                                                                | Deposits                                                         |                                                                                                                |         | 29,913 |        |         | 39,825 
|                                                                                | Advances from the FHLB                                           |                                                                                                                |         | 16,838 |        |         | 20,173 
|                                                                                | Other borrowed money                                             |                                                                                                                |         |       |        |         |       
|                                                                                | Subordinated debentures                                          |                                                                                                                |         | 4,865  |        |         | 2,474  
|                                                                                | Senior Notes payable                                             |                                                                                                                |         |       |        |         | 378    
|                                                                                |                                                                  |                                                                                                                |         |        |        |         |        
|                                                                                |                                                                  |                                                                                                                |         | 51,616 |        |         | 62,850 
|                                                                                |                                                                  |                                                                                                                |         |        |        |         |        
|                                                                                |                                                                  | Net interest income                                                                                            |         |        | 62,911 |         |        
|Provision for loan losses (Note 6)                                              |                                                                  |                                                                                                                | 3,300   |        |        | 5,800   |        
|                                                                                |                                                                  |                                                                                                                |         |        |        |         |        
|                                                                                |                                                                  | Net interest income after provision for loan losses                                                            |         |        | 59,611 |         |        
|                                                                                |                                                                  |                                                                                                                |         |        |        |         |        
|Noninterest income:                                                             |                                                                  |                                                                                                                |         |        |        |         |        
|                                                                                | Service charges on deposit accounts                              |                                                                                                                |         | 11,971 |        |         | 9,894  
|                                                                                | Loan fees                                                        |                                                                                                                |         | 867    |        |         | 1,148  
|                                                                                | Gain on sale of branch offices (Note 3)                          |                                                                                                                |         |       |        |         | 4,395  
|                                                                                | Gain on sale of loans receivable                                 |                                                                                                                |         |       |        |         | 359    
|                                                                                | Gain on sale of loans receivable held for sale                   |                                                                                                                |         | 926    |        |         | 124    
|                                                                                | Gain on sale of mortgage-backed securities available-for-sale    |                                                                                                                |         | 493    |        |         |       
|                                                                                | Gain (loss) on derivative instruments                            |                                                                                                                |         | 15     |        |         | (12    
|                                                                                | Gain on sale of real estate owned, net                           |                                                                                                                |         | 124    |        |         | 117    
|                                                                                | Other                                                            |                                                                                                                |         | 1,010  |        |         | 1,184  
|                                                                                |                                                                  |                                                                                                                |         |        |        |         |        
|                                                                                |                                                                  |                                                                                                                |         | 15,406 |        |         | 17,209 
|                                                                                |                                                                  |                                                                                                                |         |        |        |         |        
|Noninterest expense:                                                            |                                                                  |                                                                                                                |         |        |        |         |        
|                                                                                | Compensation, payroll taxes and other benefits                   |                                                                                                                |         | 30,819 |        |         | 31,914 
|                                                                                | Office occupancy                                                 |                                                                                                                |         | 9,646  |        |         | 10,044 
|                                                                                | Data processing                                                  |                                                                                                                |         | 1,865  |        |         | 1,691  
|                                                                                | Amortization of goodwill (Note 8)                                |                                                                                                                |         |       |        |         |       
|                                                                                | Advertising                                                      |                                                                                                                |         | 1,248  |        |         | 1,953  
|                                                                                | Postage and delivery                                             |                                                                                                                |         | 1,548  |        |         | 1,654  
|                                                                                | Other                                                            |                                                                                                                |         | 9,943  |        |         | 8,637  
|                                                                                |                                                                  |                                                                                                                |         |        |        |         |        
|                                                                                |                                                                  |                                                                                                                |         | 55,069 |        |         | 55,893 
|                                                                                |                                                                  |                                                                                                                |         |        |        |         |        
|                                                                                |                                                                  | Income before provision for Federal income taxes, minority interest and cumulative effect of accounting change |         |        | 19,948 |         |        
|Provision for Federal income taxes (Note 18)                                    |                                                                  |                                                                                                                | 6,498   |        |        | 9,140   |        
|                                                                                |                                                                  |                                                                                                                |         |        |        |         |        
|                                                                                |                                                                  | Income before minority interest and cumulative effect of accounting change                                     |         |        | 13,450 |         |        
|Minority interestpreferred stock dividends of Coastal Banc ssb (Note 21)       |                                                                  |                                                                                                                |        |        |        | 1,507   |        
|                                                                                |                                                                  |                                                                                                                |         |        |        |         |        
|                                                                                |                                                                  | Income before cumulative effect of accounting change                                                           |         |        | 13,450 |         |        
|Cumulative effect of accounting change for derivative instruments (Note 16)     |                                                                  |                                                                                                                |        |        |        |        |        
|                                                                                |                                                                  |                                                                                                                |         |        |        |         |        
|                                                                                |                                                                  | Net income                                                                                                     |         | $      | 13,450 |         | $      
|                                                                                |                                                                  |                                                                                                                |         |        |        |         |        
|                                                                                |                                                                  | Net income available to common stockholders                                                                    |         | $      | 11,980 |         | $      
|                                                                                |                                                                  |                                                                                                                |         |        |        |         |        
|Basic earnings per common share before cumulative effect of accounting change   |                                                                  | $                                                                                                              | 2.31    |        | $      | 3.13    |        
|                                                                                |                                                                  |                                                                                                                |         |        |        |         |        
|Basic earnings per common share (Notes 8 and 23)                                |                                                                  | $                                                                                                              | 2.31    |        | $      | 3.13    |        
|                                                                                |                                                                  |                                                                                                                |         |        |        |         |        
|Diluted earnings per common share before cumulative effect of accounting change |                                                                  | $                                                                                                              | 2.22    |        | $      | 2.99    |        
|                                                                                |                                                                  |                                                                                                                |         |        |        |         |        
|Diluted earnings per common share (Notes 8 and 23)                              |                                                                  | $                                                                                                              | 2.22    |        | $      | 2.99    |        
|                                                                                |                                                                  |                                                                                                                |         |        |        |         |        

See accompanying notes to Consolidated Financial Statements.

34

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COASTAL BANCORP, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME  Years ended December 31, 2003, 2002 and 2001  (In thousands)

|                                               |                                                                                                        | 2003 |        | 2002   |   | 2001  
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ---- | ------ | ------ | - | ------
|Net income                                     |                                                                                                        | $    | 13,450 |        | $ | 19,716
|Other comprehensive income (loss), net of tax: |                                                                                                        |      |        |        |   |       
|                                               | Change in net unrealized gains (losses) on securities available-for- sale, net of tax effects (Note 5) |      |        | (2,043 | ) |       
|                                               | Reclassification adjustment for net gains included in net income                                       |      |        | 320    |   |       
|                                               |                                                                                                        |      |        |        |   |       
|Comprehensive income                           |                                                                                                        | $    | 11,727 |        | $ | 21,925
|                                               |                                                                                                        |      |        |        |   |       

35

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COASTAL BANCORP, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY  Years ended December 31, 2003, 2002 and 2001  (In thousands)

|                                                                                                                                   |  | Preferred
Stock |         | Common
Stock |   | Additional
Paid-in
Capital |  | Retained
Earnings |        | Accumulated
Other
Comprehensive
Income (Loss) |   | Treasury
Stock |   | Total |       
|---------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | ------------ | - | -------------------------- |  | ----------------- | ------ | --------------------------------------------- | - | -------------- | - | ----- | ------
|BalanceDecember 31, 2000                                                                                                          |  | $               | 27,500  |              | $ | 77                         |  | $                 | 33,312 |                                               | $ | 110,794        |   | $     | (1,867
|Dividends on Preferred Stock (Note 22)                                                                                             |  |                 |        |              |   |                           |  |                   |       |                                               |   | (2,508         | ) |       |      
|Dividends on Common Stock (Note 22)                                                                                                |  |                 |        |              |   |                           |  |                   |       |                                               |   | (2,663         | ) |       |      
|Exercise of stock options (Note 19)                                                                                                |  |                 |        |              |   | 1                          |  |                   | 2,054  |                                               |   |               |   |       |      
|Change in net unrealized gain (loss) on securities available-for-sale, net of reclassification adjustment and tax effects (Note 5) |  |                 |        |              |   |                           |  |                   |       |                                               |   |               |   |       | 277   
|Net income for 2001                                                                                                                |  |                 |        |              |   |                           |  |                   |       |                                               |   | 21,802         |   |       |      
|                                                                                                                                   |  |                 |         |              |   |                            |  |                   |        |                                               |   |                |   |       |       
|BalanceDecember 31, 2001                                                                                                          |  |                 | 27,500  |              |   | 78                         |  |                   | 35,366 |                                               |   | 127,425        |   |       | (1,590
|Dividends on Preferred Stock (Note 22)                                                                                             |  |                 |        |              |   |                           |  |                   |       |                                               |   | (2,508         | ) |       |      
|Dividends on Common Stock (Note 22)                                                                                                |  |                 |        |              |   |                           |  |                   |       |                                               |   | (2,647         | ) |       |      
|Exercise of stock options (Note 19)                                                                                                |  |                 |        |              |   | 1                          |  |                   | 325    |                                               |   |               |   |       |      
|Purchase of treasury stock at cost (Note 22)                                                                                       |  |                 |        |              |   |                           |  |                   |       |                                               |   |               |   |       |      
|Issuance of treasury shares                                                                                                        |  |                 |        |              |   |                           |  |                   | 45     |                                               |   |               |   |       |      
|Change in net unrealized gain (loss) on securities available-for-sale, net of tax effects (Note 5)                                 |  |                 |        |              |   |                           |  |                   |       |                                               |   |               |   |       | 2,209 
|Net income for 2002                                                                                                                |  |                 |        |              |   |                           |  |                   |       |                                               |   | 19,716         |   |       |      
|                                                                                                                                   |  |                 |         |              |   |                            |  |                   |        |                                               |   |                |   |       |       
|BalanceDecember 31, 2002                                                                                                          |  |                 | 27,500  |              |   | 79                         |  |                   | 35,736 |                                               |   | 141,986        |   |       | 619   
|Dividends on Preferred Stock (Note 22)                                                                                             |  |                 |        |              |   |                           |  |                   |       |                                               |   | (1,470         | ) |       |      
|Dividends on Common Stock (Note 22)                                                                                                |  |                 |        |              |   |                           |  |                   |       |                                               |   | (2,799         | ) |       |      
|Exercise of stock options (Note 19)                                                                                                |  |                 |        |              |   | 1                          |  |                   | 1,411  |                                               |   |               |   |       |      
|Purchase of treasury stock at cost (Note 22)                                                                                       |  |                 |        |              |   |                           |  |                   |       |                                               |   |               |   |       |      
|Issuance of treasury shares                                                                                                        |  |                 |        |              |   |                           |  |                   | 32     |                                               |   |               |   |       |      
|Preferred stock redeemed                                                                                                           |  |                 | (27,500 | )            |   |                           |  |                   |       |                                               |   |               |   |       |      
|Change in net unrealized gain (loss) on securities available-for-sale, net of reclassification adjustment and tax effects (Note 5) |  |                 |        |              |   |                           |  |                   |       |                                               |   |               |   |       | (1,723
|Net income for 2003                                                                                                                |  |                 |        |              |   |                           |  |                   |       |                                               |   | 13,450         |   |       |      
|                                                                                                                                   |  |                 |         |              |   |                            |  |                   |        |                                               |   |                |   |       |       
|BalanceDecember 31, 2003                                                                                                          |  | $               |        |              | $ | 80                         |  | $                 | 37,179 |                                               | $ | 151,167        |   | $     | (1,104
|                                                                                                                                   |  |                 |         |              |   |                            |  |                   |        |                                               |   |                |   |       |       

See accompanying notes to Consolidated Financial Statements.

36

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COASTAL BANCORP, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS  Years ended December 31, 2003, 2002 and 2001  (In thousands)

|                                      |                                                                                                                          | 2003                                                |   | 2002      |          | 2001 |          
|------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------- | - | --------- | -------- | ---- | ---------
|Cash flows from operating activities: |                                                                                                                          |                                                     |   |           |          |      |          
|                                      | Net income                                                                                                               |                                                     | $ | 13,450    |          | $    | 19,716   
|                                      | Adjustments to reconcile net income to net cash provided by (used in) operating activities:                              |                                                     |   |           |          |      |          
|                                      | Depreciation and amortization of property and equipment, mortgage servicing rights and prepaid expenses and other assets |                                                     |   | 9,498     |          |      | 8,714    
|                                      | Net premium amortization (discount accretion)                                                                            |                                                     |   | 9,296     |          |      | 4,583    
|                                      | Provision for loan losses                                                                                                |                                                     |   | 3,300     |          |      | 5,800    
|                                      | Amortization of goodwill                                                                                                 |                                                     |   |          |          |      |         
|                                      | Originations and purchases of loans receivable held for sale                                                             |                                                     |   | (164,228  | )        |      | (67,300  
|                                      | Sales of loans receivable held for sale                                                                                  |                                                     |   | 181,103   |          |      | 22,858   
|                                      | Gain on sale of branch offices                                                                                           |                                                     |   |          |          |      | (4,395   
|                                      | Gain on sale of loans receivable                                                                                         |                                                     |   |          |          |      | (359     
|                                      | (Gain) loss on derivative instruments                                                                                    |                                                     |   | (15       | )        |      | 12       
|                                      | Gain on sale of loans receivable held for sale                                                                           |                                                     |   | (926      | )        |      | (124     
|                                      | Gain on sale of mortgage-backed securities available-for-sale                                                            |                                                     |   | (493      | )        |      |         
|                                      | Decrease (increase) in:                                                                                                  |                                                     |   |           |          |      |          
|                                      |                                                                                                                          | Accrued interest receivable                         |   |           | 583      |      |          
|                                      |                                                                                                                          | Other, net                                          |   |           | 1,135    |      |          
|                                      | Stock dividends from the FHLB                                                                                            |                                                     |   | (959      | )        |      | (1,189   
|                                      |                                                                                                                          |                                                     |   |           |          |      |          
|                                      |                                                                                                                          | Net cash provided by (used in) operating activities |   |           | 51,744   |      |          
|                                      |                                                                                                                          |                                                     |   |           |          |      |          
|Cash flows from investing activities: |                                                                                                                          |                                                     |   |           |          |      |          
|                                      | Net change in federal funds sold                                                                                         |                                                     |   | 17,315    |          |      | (11,045  
|                                      | Purchases of mortgage-backed securities available-for-sale                                                               |                                                     |   | (303,826  | )        |      | (112,579 
|                                      | Purchases of other securities available-for-sale                                                                         |                                                     |   | (5,162    | )        |      | (1,786   
|                                      | Principal repayments on mortgage-backed securities held-to- maturity                                                     |                                                     |   |          |          |      |         
|                                      | Principal repayments on mortgage-backed securities available-for- sale                                                   |                                                     |   | 203,599   |          |      | 151,880  
|                                      | Proceeds from maturity of U.S. Treasury securities held-to-maturity                                                      |                                                     |   |          |          |      |         
|                                      | Proceeds from maturity of other securities available-for-sale                                                            |                                                     |   |          |          |      | 42,500   
|                                      | Proceeds from sales of mortgage-backed securities available-for- sale                                                    |                                                     |   | 64,555    |          |      |         
|                                      | Originations of loans receivable                                                                                         |                                                     |   | (808,801  | )        |      | (857,498 
|                                      | Purchases of loans receivable                                                                                            |                                                     |   | (565,722  | )        |      | (421,371 
|                                      | Sales of loans receivable                                                                                                |                                                     |   |          |          |      | 84,241   
|                                      | Principal repayments and principal reductions of loans receivable                                                        |                                                     |   | 1,214,441 |          |      | 1,225,469
|                                      | Purchases of property and equipment, net                                                                                 |                                                     |   | (8,573    | )        |      | (3,908   
|                                      | Purchases of FHLB stock                                                                                                  |                                                     |   | (3,291    | )        |      |         
|                                      | Proceeds from sales of FHLB stock                                                                                        |                                                     |   |          |          |      |         
|                                      | Sale of branch offices                                                                                                   |                                                     |   |          |          |      | (70,127  
|                                      |                                                                                                                          |                                                     |   |           |          |      |          
|                                      |                                                                                                                          | Net cash provided by (used in) investing activities |   |           | (195,465 | )    |          
|                                      |                                                                                                                          |                                                     |   |           |          |      |          
|                                      |                                                                                                                          |                                                     |   |           |          |      |          

37

---

|Cash flows from financing activities:                                |                                                                                          |                                                      |   |             |         |   |             |         |   |           
|-------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ---------------------------------------------------- | - | ----------- | ------- | - | ----------- | ------- | - | ----------
|                                                                     | Net change in deposits                                                                   |                                                      | $ | 61,689      |         | $ | 29,257      |         | $ | (14,540   
|                                                                     | Advances from the FHLB                                                                   |                                                      |   | 13,323,712  |         |   | 22,097,904  |         |   | 8,031,619 
|                                                                     | Principal payments on advances from the FHLB                                             |                                                      |   | (13,219,922 | )       |   | (22,092,696 | )       |   | (8,491,047
|                                                                     | Proceeds from securities sold under agreements to repurchase and federal funds purchased |                                                      |   |            |         |   |            |         |   | 3,591,744 
|                                                                     | Repayments of securities sold under agreements to repurchase and federal funds purchased |                                                      |   |            |         |   |            |         |   | (3,591,744
|                                                                     | Proceeds from issuance of subordinated debentures                                        |                                                      |   | 10,135      |         |   | 49,349      |         |   |          
|                                                                     | Redemption of 9.12% Cumulative Series A Preferred Stock                                  |                                                      |   | (27,500     | )       |   |            |         |   |          
|                                                                     | Redemption or repurchase of Senior Notes payable                                         |                                                      |   |            |         |   | (43,875     | )       |   | (3,025    
|                                                                     | Redemption of Coastal Banc ssb 9.0% Noncumulative Preferred Stock                        |                                                      |   |            |         |   | (28,750     | )       |   |          
|                                                                     | Net increase (decrease) in advances from borrowers for taxes and insurance               |                                                      |   | 75          |         |   | (1,852      | )       |   | (791      
|                                                                     | Exercise of stock options for purchase of Common Stock                                   |                                                      |   | 1,412       |         |   | 326         |         |   | 2,055     
|                                                                     | Purchase of treasury stock                                                               |                                                      |   | (652        | )       |   | (21,753     | )       |   |          
|                                                                     | Issuance of treasury shares                                                              |                                                      |   | 89          |         |   | 108         |         |   |          
|                                                                     | Dividends paid                                                                           |                                                      |   | (4,269      | )       |   | (5,155      | )       |   | (5,171    
|                                                                     |                                                                                          |                                                      |   |             |         |   |            
|                                                                     |                                                                                          | Net cash provided by (used in) financing activities  |   |             | 144,769 |   |             | (17,137 | ) |           
|                                                                     |                                                                                          |                                                      |   |             |         |   |            
|                                                                     |                                                                                          | Net increase (decrease) in cash and cash equivalents |   |             | 1,048   |   |             | (1,771  | ) |           
|                                                                     | Cash and cash equivalents at beginning of year                                           |                                                      |   | 39,766      |         |   | 41,537      |         |   | 69,730    
|                                                                     |                                                                                          |                                                      |   |             |         |   |            
|                                                                     | Cash and cash equivalents at end of year                                                 |                                                      | $ | 40,814      |         | $ | 39,766      |         | $ | 41,537    
|                                                                     |                                                                                          |                                                      |   |             |         |   |            
|Supplemental schedule of cash flows:                                 |                                                                                          |                                                      |   |             |         |   |             |         |   |           
|                                                                     | Interest paid                                                                            |                                                      | $ | 52,388      |         | $ | 64,400      |         | $ | 126,730   
|                                                                     | Income taxes paid                                                                        |                                                      |   | 9,324       |         |   | 12,977      |         |   | 13,113    
|                                                                     |                                                                                          |                                                      |   |             |         |   |            
|Supplemental schedule of noncash investing and financing activities: |                                                                                          |                                                      |   |             |         |   |             |         |   |           
|                                                                     | Net transfer of loans to (from) held for sale category                                   |                                                      | $ | (20,261     | )       | $ | 8,749       |         | $ |          
|                                                                     | Real estate owned acquired through foreclosure of loans receivable                       |                                                      |   | 2,906       |         |   | 6,260       |         |   | 5,450     
|                                                                     | Net transfer of mortgage-backed securities to available-for-sale category                |                                                      |   |            |         |   |            |         |   | 811,748   
|                                                                     |                                                                                          |                                                      |   |             |         |   |            

See accompanying notes to Consolidated Financial Statements.December 31, 2003 and 2002

38

---



COASTAL BANCORP, INC. AND SUBSIDIARIES        Notes to Consolidated Financial Statements

December 31, 2003 and 2002

(1) Organization and Background

Coastal Banc Savings Association (the "Association") was acquired by an investor group in 1986 as a vehicle to take advantage of the failures and consolidation in
the Texas banking and thrift industries. The Association acquired deposits in transactions with the federal government and other private institutions as a base for developing an ongoing thrift and
banking business. The Association's first acquisition was in 1988 under the Federal Savings and Loan Insurance Corporation's ("FSLIC") Southwest Plan, whereby the FSLIC provided financial and other
forms of assistance in connection with the acquisition of insolvent FSLIC-insured institutions (the "Acquired Associations").

Coastal
Bancorp, Inc. ("Bancorp") was incorporated on March 8, 1994 as a first-tier subsidiary of the Association in connection with the proposed reorganization
of the Association into the holding company form of organization. The reorganization of the Association into the holding company form of organization occurred on July 29, 1994. In addition,
effective July 29, 1994, the Association converted to a Texas-chartered savings bank known as Coastal Banc ssb.

On
November 30, 1996, Coastal Banc Holding Company, Inc. ("HoCo") was created as a Delaware unitary savings bank holding company in accordance with the terms of an
agreement and plan of reorganization dated August 19, 1996 (the "Agreement"). Pursuant to the terms of the Agreement, Coastal Banc ssb became a subsidiary of HoCo and HoCo became a wholly-owned
subsidiary of Bancorp.

The
reorganizations were accounted for in a manner similar to that in pooling-of-interests accounting and all financial statements issued after consummation of
the reorganization reflect the consolidated operations as if the reorganization had taken place prior to the periods covered by such consolidated financial statements.

Coastal
Banc ssb is a financial services provider to consumers and businesses. At December 31, 2003, Coastal Banc ssb operated 43 branch offices in metropolitan Houston, Austin,
Corpus Christi, the Rio Grande Valley and small cities in the southeast quadrant of Texas.

(2) Summary of Significant Accounting
Policies and Basis of Presentation

The following significant accounting policies, together with those disclosed elsewhere in the Consolidated Financial Statements or notes thereto, are followed by
Coastal Bancorp, Inc. and subsidiaries in preparing and presenting the consolidated financial statements.



The consolidated financial statements include the accounts of Coastal Bancorp, Inc. and its wholly-owned subsidiary, HoCo (collectively, "Coastal"). HoCo's
wholly-owned subsidiaries are Coastal Banc ssb, Coastal Banc Capital Corp. and Coastal Banc Mortgage Corp. Coastal Banc ssb's wholly-owned subsidiaries are CoastalBanc Financial Corp. and Coastal Banc
Insurance Agency, Inc. (collectively, the "Bank"). All significant intercompany balances and transactions have been eliminated in consolidation.

Bancorp
owns two statutory business trusts, Coastal Capital Trust I ("CCTI") and Coastal Capital Trust II ("CCTII"), both formed for the sole purpose of issuing trust preferred
securities. On December 31, 2003, Coastal retroactively implemented Financial Accounting Standards Board

39

---

Interpretation
No. 46R, "Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51", resulting in the deconsolidation of CCTI and CCTII. See
Note 14.

Certain
amounts within the accompanying consolidated financial statements and the related notes have been reclassified to conform to the current year presentation. Such reclassifications
had no effect on net income or total stockholders' equity as previously reported.



The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of income and expenses during the reporting period. Actual results may differ from those estimates.



Cash and cash equivalents are comprised primarily of cash on hand and interest-earning and noninterest-earning deposits in other banks with original maturities of
three months or less.



Loans receivable are stated at the principal balance outstanding adjusted for loans in process, the allowance for loan losses, unearned interest and loan fees and
the premium on purchased loans. Interest on loans receivable is primarily computed on the outstanding principal balance at appropriate rates of interest. The net premium or discount on purchased loans
is being amortized or accreted using the level yield method, adjusted for prepayments.

Periodically,
loans receivable may be transferred to the held for sale category. When moved, the loan is recorded in the held for sale category at the lower of cost or market with any
writedowns to market value recorded as a charge-off to the allowance for loan losses. If a loan is moved from the held for sale category to the loans receivable portfolio, the loan is
moved at the current carrying value of the loan.

It
is the general policy of Coastal to stop accruing interest income and place the recognition of interest on a cash basis when any loan is past due more than 90 days as to
principal and interest. However, other factors may cause management to continue to accrue interest on such loans. When a loan is placed on nonaccrual, any interest previously accrued but not collected
is 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.

Coastal
considers a loan to be impaired when, based upon current information and events, it is probable that Coastal will be unable to collect all amounts due according to the
contractual terms of the loan agreement. In determining impairment, Coastal 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

40

---

difficulty.
Coastal bases the measurements of collateral-dependent impaired loans on the fair value of that 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.

Larger
groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, Coastal does not separately identify individual consumer and residential loans
for impairment disclosures.



The allowance for loan losses is maintained at a level determined to be adequate by management to absorb probable losses on loans receivable. The adequacy of the
allowance is based on management's evaluation of the type, size, quality and risks of the loans in the loans receivable portfolio and its consideration of such factors as historical and peer group
loss experience, identification of adverse situations which may affect the ability of borrowers to repay, assessment of current and future economic conditions and the estimated net realizable value of
the underlying collateral. This evaluation is inherently subjective, as it requires material estimates that are susceptible to significant change. While management uses available information to
estimate losses on loans receivable, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review Coastal's allowance for loan losses. Such agencies may require Coastal to recognize additions to the allowance based on their judgments about information
available to them at the time of their examination.



Loans are sold periodically to institutional and private investors. When Coastal sells whole mortgage loans, it may retain the right to service the loans. Gains
or losses on such sales are recognized at the time of sale and depend, in part, on the previous carrying amount of the assets involved in the sale, allocated between the assets sold and the retained
interests based on their relative fair value at the date of transfer.



Loans receivable held for sale are carried at the lower of cost or market as determined by outstanding commitments from investors or current investor market yield
requirements calculated on the aggregate loan basis.



Loan origination and commitment fees, as well as certain direct loan origination and commitment costs, are deferred and amortized into income over the lives of
the related loans using a method that approximates the level yield method. When the loans receivable are paid off or sold, the remaining loan fees are recognized as income in that period.

41

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Coastal classifies securities as held-to-maturity, available-for-sale or trading. Securities are classified as
held-to-maturity when Coastal has the positive intent and ability to hold
such securities to maturity. Securities held-to-maturity are recorded at amortized cost. Securities available-for-sale are securities other than those
held-to-maturity or trading 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 classified as available-for-sale are recorded in earnings in the year of sale based on the
specific identification of each individual security sold. Trading securities are carried at fair value with any realized or unrealized gains or losses recognized in current earnings. Coastal held no
held-to-maturity or trading account securities at December 31, 2003 or 2002.

Coastal
records mortgage-backed and other securities transactions as of the settlement date. At December 31, 2003, there was one pending purchase transaction totaling
$14.0 million. See Note 24.

Premiums
and discounts on mortgage-backed and other 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.



Property and equipment are recorded at cost less accumulated depreciation and amortization. Coastal computes depreciation and amortization on a
straight-line basis over the estimated useful lives (15-30 years for buildings and 2-10 years for furniture and equipment) of the respective assets.
Leasehold improvements are amortized on a straight-line basis over the lesser of the terms of the respective lease or the estimated useful lives of the related assets.



As a member of the FHLB System, Coastal is required to purchase and maintain stock in the FHLB in an amount equal to the sum of a membership investment
requirement (0.20% of the member's total assets as of the previous December 31) and an activity-based investment requirement (4.25% of currently outstanding advances and certain new loans).
FHLB stock is redeemable at par value at the discretion of the FHLB.



On January 1, 2002, Coastal adopted Statement of Financial Accounting Standards No. 141, "Business Combinations" ("Statement 141") and Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("Statement 142"). Statement 141 eliminated the pooling of interests method of accounting for business
combinations and required that the purchase method of accounting be used for all business combinations. Statement 141 also required, effective January 1, 2002, that Coastal evaluate its
existing intangible assets and goodwill that were acquired in prior purchase business combinations and make any necessary reclassifications in order to conform with the new criteria in Statement 141
for recognition apart from goodwill. Statement 142 changed the accounting for goodwill from an amortization method to an impairment-only approach. Statement 141

42

---

required
that Coastal reclassify amounts originally recorded as goodwill pursuant to Statement of Financial Accounting Standard No. 72, "Accounting for Certain Acquisitions of Banking or Thrift
Institutions" ("Statement 72") to other intangible assets, as those amounts, under Statement 142, were not subject to non-amortization provisions.

On
October 1, 2002, Statement of Financial Accounting Standards No. 147, "Acquisitions of Certain Financial Institutions" ("Statement 147") was issued. Statement 147
amended Statement 72, to exclude from its scope, the acquisitions of financial institutions (other than transactions between two or more mutual enterprises) and provide certain transition provisions
for existing intangible assets. Under Statement 147 transition provisions, if the transaction that gave rise to an unidentifiable other intangible asset was considered a business combination, the
carrying amount of that asset amount would be reclassified to goodwill and be subject to the non-amortization provisions as of the effective date of the implementation of Statement 142,
which in Coastal's case was January 1, 2002.

In
connection with the adoption of these statements, Coastal tested for impairment in accordance with the provisions of Statement 142 during the first quarter of 2002 and did not
recognize any transitional impairment losses as the cumulative effect of a change in accounting principle. Coastal performed annual impairment tests during 2002 and 2003 and no impairment losses were
recognized.

In
years 2001 and prior, goodwill resulting from acquisitions was amortized on a straight-line basis over the estimated period of benefit, not to exceed fifteen years. During
these years, Coastal evaluated the recorded goodwill amounts for impairment to determine whether events and circumstances had developed to warrant revision of the estimated benefit periods. No
impairment losses were recognized during 2001.



The amount capitalized as mortgage servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenues. Coastal periodically
evaluates the carrying value of the mortgage servicing rights for impairment based on the fair value of those rights. The fair value of mortgage servicing rights is determined by discounting the
present value of the estimated future net servicing revenues using a discount rate commensurate with the risks involved based on management's best estimate of remaining loan lives. This method of
valuation incorporates assumptions that market participants would use in their estimate of future servicing income and expense, including assumptions about prepayments, defaults and interest rates.
For purposes of measuring impairment, the loans underlying the mortgage servicing rights are stratified on the basis of interest rate and type (fixed or adjustable). The amount of impairment is the
amount by which the mortgage servicing rights, net of accumulated amortization, exceed their fair value by strata. Impairment, if any, is recognized through a valuation allowance and a charge to
current operations.



Real estate owned represents real estate acquired through foreclosure and is initially recorded at the lower of unpaid principal balance adjusted for any
acquisition premiums or discounts remaining less any applicable valuation allowance or estimated fair value 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.

43

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Coastal files a consolidated Federal income tax return with all of its subsidiaries. Federal income taxes are allocated on the basis of each entity's contribution
to consolidated taxable income.

Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.



Coastal is a party to derivative instruments in the normal course of business to reduce its exposure to fluctuations in interest rates. These derivative
instruments have included interest rate swap agreements and interest rate cap agreements.

Effective
January 1, 2001, Coastal adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and for Hedging Activities"
("Statement 133"). Statement 133 requires companies to recognize all derivatives as either assets or liabilities in the statement of financial condition and measure all derivatives at fair value. The
interest rate swap and cap agreements held by Coastal on December 31, 2000 were determined to not qualify for hedge accounting, therefore on implementation of Statement 133, Coastal recorded a
transition adjustment to record these derivative instruments at fair value. See Note 16. Prior to the adoption of Statement 133 (in years 2000 and prior), the fair values of any derivative
instruments were not recognized in the consolidated financial statements.



Statement of Financial Accounting Standards No. 148 ("Statement 148"), "Accounting for Stock-Based CompensationTransition and Disclosure" was
issued in December 2002. Statement 148 amends Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("Statement 123") to provide alternative
methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, Statement 148 amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on
reported results. Coastal has adopted the disclosure provisions included in Statement 148 in the notes to the consolidated financial statements for the years ended December 31, 2003, 2002 and
2001 contained herein.

As
provided by Statement 123, Coastal accounts for its stock compensation programs in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. Under this method, no stock-based compensation expense is reflected in net income, as all options granted had an exercise price
equal to the market value of the underlying common stock on the date of grant.

44

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The
following table illustrates the effect on net income and earnings per share as if Coastal had applied the fair value recognition provisions of Statement 123 as amended by Statement
148.

|                                                                                                                                       |  | Year Ended December 31, |       
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------
|
|
|Net income available to common stockholders, as reported                                                                               |  | $                       | 11,980
|Deduct: Total stock-based compensation expense determined
under the fair value based method for all awards, net of
related tax effects |  |                         | (245  
|                                                                                                                                       |  |                         |       
|Proforma net income available to common stockholders                                                                                   |  | $                       | 11,735
|                                                                                                                                       |  |                         |       
|Earnings per common share:                                                                                                             |  |                         |       
|Basicas reported                                                                                                                      |  | $                       | 2.31  
|                                                                                                                                       |  |                         |       
|Basicproforma                                                                                                                         |  | $                       | 2.27  
|                                                                                                                                       |  |                         |       
|Dilutedas reported                                                                                                                    |  | $                       | 2.22  
|                                                                                                                                       |  |                         |       
|Dilutedproforma                                                                                                                       |  | $                       | 2.17  
|                                                                                                                                       |  |                         |       



Basic earnings per common share ("EPS") is calculated by dividing net income available to common stockholders by the weighted average number of common shares
outstanding during the period. The computation of diluted EPS assumes the issuance of common shares for all dilutive-potential common shares outstanding during the reporting period. The dilutive
effect of stock options is considered in earnings per common share calculations, if dilutive, using the treasury stock method.



For purposes of reporting cash flows, cash and cash equivalents include cash and amounts due from depository institutions with original maturities of three months
or less.



In November 2002, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation
No. 34" ("FIN 45"). This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The
Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and
measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and did not have a material effect on Coastal's consolidated financial
statements for the year ended December 31, 2003.

45

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In
April 2003, the FASB issued Statement No. 149 ("Statement 149"), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". Statement 149 amends FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" and clarifies financial accounting and reporting for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. Statement 149 improves financial reporting by requiring that contracts with comparable characteristics be accounted for similarly.
In particular, Statement 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, clarifies when a derivative contains a financing
component, amends the definition of underlying to conform to the language in FIN 45 and amends certain other existing pronouncements. Statement 149 is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30, 2003. However, the provisions of Statement 149 that related to Statement 133 implementation issues that have
been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. The adoption of Statement 149 did not
have a material impact on Coastal's consolidated financial statements.

In
May 2003, the FASB issued Statement No. 150 ("Statement 150"), "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity".
Statement 150 requires certain financial instruments that have characteristics of both liabilities and equity to be classified as a liability on the consolidated statements of financial condition.
Prior to the issuance of Statement 150, Coastal classified trust preferred securities as liabilities on the consolidated statements of financial condition and the related interest cost as interest
expense on the consolidated statements of income, which is consistent with the requirements of Statement 150. Statement 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Statement 150 will be effected by reporting the cumulative effect of
a change in accounting principle for contracts created before the issuance date and still existing at the beginning of that interim period. The adoption of Statement 150 did not have an impact on
Coastal's consolidated financial statements.

On
January 17, 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which addresses consolidation by business
enterprises of variable interest entities. FIN 46 clarifies the application of Accounting Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements" to certain entities in which
equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated
financial support from other parties. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains
an interest after that date. It applies in the first fiscal year or interim period beginning after December 15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. Coastal has two statutory business trusts, one of which was formed subsequent to January 31, 2003, for the sole purpose of issuing
trust preferred securities as further described in Note 14 to the accompanying consolidated financial statements. FIN 46 was revised and reissued in December 2003.

46

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On
December 31, 2003, Coastal retroactively implemented FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51",
resulting in the deconsolidation of Coastal Capital Trust I and Coastal Capital Trust II, both of which were created for the sole purpose of issuing trust preferred securities. The implementation of
this Interpretation resulted in Bancorp's $1.9 million investment in the common equity of the two trusts being included in the consolidated statements of financial condition as other assets and
subordinated debentures, and the interest income and interest expense received from and paid to the trusts, respectively, being included in the consolidated statements of income as interest income and
interest expense. The increase to other interest income and interest expense totaled $146,000 for the year ended December 31, 2003 and $74,000 for the year ended December 31, 2002.

(3) Sale of Branch Offices

On December 12, 2002, Coastal consummated the sale of five of its branches in central Texas (located in Llano, Burnet, Mason, Kingsland and Marble Falls,
Texas) to First State Bank Central Texas. As a result of this sale, Coastal recorded a $4.4 million gain before applicable income taxes. Coastal acquired these locations in the 1994 acquisition
of Texas Trust Savings Bank, FSB. In connection with the sale of these branch offices, Coastal recorded the following reductions of assets and liabilities (in thousands):

Deposits sold

$
75,275Accrued interest payable sold


128Property and equipment sold


443Reduction of goodwill


382Other assets sold


368


(4) Federal Funds Sold

An analysis of federal funds sold for the years ended December 31, 2003, 2002 and 2001 is as follows (dollars in thousands):

2003

2002

2001Federal funds sold:Balance outstanding at December 31,

$
10,440

$
27,755

$
16,710Maximum outstanding at any month-end


10,440


38,980


17,011Average balance outstanding


10,111


9,337


7,776Average interest rate


1.04
%

1.62
%

3.42
%


47

---

(5) Mortgage-backed Securities Available-for-Sale

Mortgage-backed securities available-for-sale at December 31, 2003 are as follows (in thousands):

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
ValueAgency securities

$
432,065

$
888

$
(1,771
)
$
431,182CMOsNon-agency


72,315





(721
)

71,594Non-agency securities


1,603


23





1,626$
505,983

$
911

$
(2,492
)
$
504,402


Mortgage-backed
securities available-for-sale at December 31, 2002 are as follows (in thousands):

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
ValueAgency securities

$
387,636

$
1,983

$
(470
)
$
389,149CMOsNon-agency


84,376


67


(644
)

83,799Non-agency securities


2,060


14





2,074$
474,072

$
2,064

$
(1,114
)
$
475,022


Effective
September 30, 2001, Coastal transferred all of its mortgage-backed securities held-to-maturity to the available-for-sale
category. This was due to management's intent to restructure a portion of the asset base to be less vulnerable to market interest rate fluctuations. In late November 2001, Coastal sold
$845 million of its mortgage-backed securities. 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. All of the securities purchased and the remaining securities not sold were placed in the available-for-sale category.

Proceeds
from sales of mortgage-backed securities available-for-sale were $64.6 million and $844.9 million during 2003 and 2001, respectively. Gross
gains of $493,000 were realized on those sales in 2003 and gross gains of $2.5 million and gross losses of $2.3 million were realized on those sales in 2001. There were no sales of
mortgage-backed securities available-for-sale during 2002.

A
portion of Coastal's mortgage-backed securities portfolio is pledged as collateral to secure advances from the FHLB. See Note 12.

An
analysis of gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position
at December 31, 2003 is as follows (in thousands):

Less than 12 months

12 months or longer

TotalFair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
LossAgency securities

$
217,892

$
(1,771
)
$


$


$
217,892

$
(1,771
)CMOsNon-agency


29,772


(371
)

41,822


(350
)

71,594


(721
)$
247,664

$
(2,142
)
$
41,822

$
(350
)
$
289,486

$
(2,492
)


48

---

The
securities that have been in a continuous unrealized loss position for twelve months or longer are Non-agency CMOs with interest rates that adjust monthly based upon the
Monthly Treasury Average ("MTA") index. The declining interest environment that typified much of 2003 in combination with elevated prepayment levels tended to depress the market price of these
securities. With lower prepayments and expectations for higher interest rates, the market prices for these adjustable rate securities have begun to return to more normal levels. This recovery is
expected to continue as the MTA index stabilizes and begins to increase in concert with higher Treasury rates.

(6) Loans Receivable

Loans receivable at December 31, 2003 and 2002 are as follows (dollars in thousands):

2003

2002Real estate mortgage loans:First lien mortgage, primarily residential

$
1,007,566

$
855,633Commercial


360,858


317,692Multifamily


107,903


116,020Residential construction


114,445


123,085Acquisition and development


134,179


143,463Commercial construction


183,273


241,128Commercial, financial and industrial


175,869


135,209Loans secured by deposits


13,019


14,465Consumer and other loans


32,594


33,4302,129,706


1,980,125Loans in process


(132,072
)

(147,769
)Allowance for loan losses


(19,389
)

(18,118
)Unearned interest and loan fees


(3,134
)

(2,910
)Premium on purchased loans, net


6,813


1,457$
1,981,924

$
1,812,785Weighted average yield


4.94
%

5.52
%


In
the normal course of business, Coastal enters into various transactions which, in accordance with accounting principles generally accepted in the United States of America, are not
included on the balance sheets. These transactions are referred to as "off-balance sheet commitments." Coastal enters into these transactions to meet the financing needs of its customers.
These transactions include commitments to extend credit which involve elements of credit risk in excess of the amounts
recognized in the balance sheets. Coastal minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.

Coastal
enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Customers use
credit commitments to ensure that funds will be available for working capital purposes, for capital expenditures and to ensure access to funds under specified terms and conditions. Substantially all
of Coastal's commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan

49

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funding.
Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for loan losses.

At
December 31, 2003, Coastal had outstanding commitments to originate or purchase approximately $17.0 million of first lien mortgage and other loans and had commitments
under lines of credit to originate primarily construction and other loans of approximately $151.4 million. In addition, at December 31, 2003, Coastal had standby letters of credit of
approximately $16.3 million outstanding.

A
portion of Coastal's first lien and multifamily mortgage loan portfolio is pledged as collateral to secure advances from the FHLB. See Note 12.

Included
in loans receivable at December 31, 2003 and 2002 are loans totaling approximately $17.7 million and $17.8 million, respectively, which are on nonaccrual
(loans which are 90 days or more delinquent or on which the collection of interest is considered doubtful). During the years ended December 31, 2003, 2002 and 2001, Coastal recognized
interest income on these nonaccrual loans (outstanding as of the period end) of approximately $471,000, $632,000 and $811,000, respectively. Approximately $633,000, $745,000 and $1.4 million,
respectively, in additional interest income would have been recorded if such loans had been performing in accordance with their original terms.

At
December 31, 2003 and 2002, the carrying value of impaired loans was approximately $7.3 million and $8.5 million, respectively, and the related allowance for loan
losses on those impaired loans totaled $1.9 million and $2.4 million, respectively. Of the impaired loans outstanding, three loans with a balance of $332,000 at December 31, 2003
and eight loans with a balance of $551,000 at December 31, 2002 did not have specific portions of the allowance for loan losses allocated to them at each respective date. The average recorded
investment in impaired loans during the years ended December 31, 2003, 2002 and 2001 was approximately $7.6 million, $3.8 million and $4.4 million, respectively. For the
years ended December 31, 2003, 2002 and 2001, Coastal did not recognize interest income on loans considered impaired.

An
analysis of activity in the allowance for loan losses is as follows (in thousands):

Years ended December 31,2003

2002

2001Balance, beginning of year

$
18,118

$
15,385

$
14,507Provision for loan losses


3,300


5,800


3,900Charge-offs


(2,881
)

(3,878
)

(4,073
)Recoveries


852


811


1,051Balance, end of year

$
19,389

$
18,118

$
15,385


During
the first quarter of 2002, management made the decision to liquidate a portion of its under-performing single-family mortgage loans. On March 22, 2002, Coastal sold
$10.8 million of these under-performing loans to a third party investor. Prior to the sale, Coastal wrote these 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, Coastal 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

50

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of
these under-performing loans held for sale were sold to the same third party investor. As of December 31, 2002, Coastal had reclassified the remaining $3.0 million of these loans held
for sale back to the loans receivable portfolio at their current carrying value.

During
the fourth quarter of 2002, management decided to liquidate a group of loans that were acquired in three separate transactions. In December 2002, Coastal sold
$74.4 million of these loans to a third party investor (some of these loans were sold servicing retained). Prior to the sale, Coastal wrote these loans down to fair value and recorded a
charge-off to the allowance for loan losses of $277,000. In connection with this sale, Coastal recorded a gain of $359,000 on the sale of these loans as a result of Coastal recognizing the
estimated fair value of the mortgage servicing rights retained. In addition, as of December 31, 2002, Coastal wrote down to fair value and reclassified $2.6 million of additional loans,
which are under a contract for sale, 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 December 31, 2002
through a charge-off to the allowance for loan losses of $32,000.

(7) Accrued Interest Receivable

Accrued interest receivable at December 31, 2003 and 2002 is as follows (in thousands):

2003

2002Loans receivable

$
7,426

$
7,946Mortgage-backed securities


1,728


1,807FHLB stock, federal funds sold and other interest-earning assets


44


28$
9,198

$
9,781


(8) Goodwill

On January 1, 2002, Coastal adopted Statement 141. Statement 141 eliminated the pooling of interests method of accounting for business combinations and
required that the purchase method of accounting be used for all business combinations. Statement 141 also required, effective January 1, 2002, that Coastal evaluate its existing intangible
assets and goodwill that were acquired in prior purchase business combinations and make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Statement 142 changed the accounting for goodwill from an amortization method to an impairment-only approach.

Statement
141 required that Coastal reclassify amounts originally recorded as goodwill pursuant to Statement 72 to other intangible assets, as those amounts, under Statement 142, were
not subject to the non-amortization provisions. As of January 1, 2002, Coastal had unamortized goodwill that was subject to the non-amortization provision of Statements
141 and 142 of $5.5 million. As of that same date, Coastal reclassified $16.3 million to other intangible assets and continued to amortize these amounts in 2002.

On
October 1, 2002, Statement 147 was issued. Statement 147 amended Statement 72, to exclude from its scope, the acquisitions of financial institutions (other than transactions
between two or more mutual enterprises) and provide certain transition provisions for existing intangible assets. Under Statement 147 transition provisions, if the transaction that gave rise to an
unidentifiable other intangible asset was considered a business combination, the carrying amount of that asset amount

51

---

would
now be reclassified to goodwill and be subject to the non-amortization provisions as of the effective date of the implementation of Statement 142, which in Coastal's case was
January 1, 2002. Based on the implementation of Statement 147, Coastal has reclassified the $16.3 million mentioned above to goodwill and removed the amortization expense recorded in
2002, through restatement of its 2002 financial statements as required by Statement 147.

In
connection with the adoption of these statements, Coastal tested for impairment in accordance with the provisions of Statement 142 during the first quarter of 2002 and did not
recognize any transitional impairment losses as the cumulative effect of a change in accounting principle. Coastal performed annual impairment tests during 2002 and 2003 and no impairment losses were
recognized.

Pursuant
to the transition provisions of Statement 142, presented below are as adjusted net income and earnings per share amounts to exclude the amortization expense (net of any tax
effect) recognized in the periods prior to the implementation related to the goodwill that is no longer being amortized (in thousands, except per share data).

Year Ended
December 31,2003

2002

2001Net income:As reported

$
13,450

$
19,716

$
21,802Add back: goodwill amortization, net of tax








2,036As adjusted

$
13,450

$
19,716

$
23,838Basic earnings per share:As reported

$
2.31

$
3.13

$
3.34Add back: goodwill amortization, net of tax








0.35As adjusted

$
2.31

$
3.13

$
3.69Diluted earnings per share:As reported

$
2.22

$
2.99

$
3.17Add back: goodwill amortization, net of tax








0.34As adjusted

$
2.22

$
2.99

$
3.51


52

---



(9) Mortgage Servicing Rights

In December 2003, Coastal purchased the servicing rights applicable to $160.5 million of mortgage loans for $1.7 million. In
December 2002, Coastal sold $70.1 million of mortgage loans with servicing retained and recognized the estimated fair value of those servicing rights retained of $359,000. The carrying
value of mortgage servicing rights is included in prepaid expenses and other assets.

As
of December 31, 2003, Coastal services for others approximately $209.0 million of such loans which are not included in the consolidated financial statements.

An
analysis of the activity of mortgage servicing rights for the years ended December 31, 2003 and 2002 is as follows (in thousands):

2003

2002Balance, beginning of year

$
359

$
Additions


1,717


359Amortization


(119
)

Balance, end of year

$
1,957

$
359


The
amount capitalized as mortgage servicing rights is amortized in proportion to, and over the period of, estimated servicing revenues. Estimated amortization expense for mortgage
servicing rights is as follows (in thousands):

Year ending December 31,

Amount2004

$
4792005


3962006


2862007


2112008


146Subsequent years


439


(10) Real Estate Owned

Included in prepaid expenses and other assets is real estate owned at December 31, 2003 and 2002 of approximately $2.5 million and
$4.1 million, respectively.

(11) Deposits

Deposits, their stated rates and the related weighted average interest rates at December 31, 2003 and 2002 are summarized below (dollars in thousands).
Effective January 1, 1998, Coastal implemented a program whereby a portion of the balance of 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,

53

---

2003
and $250.9 million ($131.3 million from noninterest-bearing and $119.6 million from interest-bearing) at December 31, 2002.

2003

2002Stated Rate

Amount

Stated Rate

AmountNoninterest-bearing checking

0.00
%
$
60,793

0.00
%
$
51,103Interest-bearing checking

0.00-0.25


18,625

0.50-1.00


14,353Savings accounts

0.25-0.75


45,459

0.50-1.24


44,603Money market demand accounts (including amounts reclassified from noninterest and interest-bearing checking)

0.00-1.98


621,571

0.00-2.13


530,659746,448




640,718Certificate accounts

Less than 2.00
%
$
442,044

Less than 2.00
%
$
104,3582.00-2.99


275,106

2.00-2.99


558,3373.00-3.99


138,779

3.00-3.99


206,6454.00-4.99


47,108

4.00-4.99


63,2345.00-5.99


23,769

5.00-5.99


34,4476.00-6.99


2,858

6.00-6.99


6,5247.00-7.99


19

7.00-7.99


1068.00-8.99




8.00-8.99


73929,683




973,724$
1,676,131



$
1,614,442Weighted average rate




1.64
%



2.12
%


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 and 2002 (in thousands):

December 31, 2003

December 31, 2002Noninterest-bearing checking

$
212,003

$
182,364Interest-bearing checking


128,610


134,034Money market demand accounts


360,376


279,717


54

---

The
scheduled maturities of certificate accounts outstanding at December 31, 2003 were as follows (in thousands):

Year Ending December 31,2004

$
656,4992005


197,9172006


11,7062007


34,7432008


28,696Subsequent years


122$
929,683


The
aggregate amount of certificate accounts with balances of $100,000 or more was approximately $228.6 million and $237.0 million at December 31,
2003 and 2002, respectively.

(12) Advances from the Federal Home Loan Bank of Dallas

Advances from the FHLB for the years ended December 31, 2003, 2002 and 2001 are summarized as follows (dollars in thousands):

2003

2002

2001Balance outstanding at end of year

$
799,875

$
696,085

$
690,877Average balance outstanding


741,378


683,454


795,009Maximum outstanding at any month-end


888,003


760,139


1,218,145Average interest rate during the year


2.27
%

2.95
%

4.90
%Average interest rate at end of year


2.02
%

2.71
%

3.46
%


The
scheduled maturities and related weighted average interest rates on advances from the FHLB at December 31, 2003 are summarized as follows (dollars in
thousands):

Due during the year
ending December 31,

Weighted Average
Interest Rate

Amount2004

1.65
%
$
295,3292005

2.07


358,2252006

1.72


105,4862007

4.38


2,9502008

3.78


11,0372009

7.98


3,1552010

4.78


4,2752011

6.62


7192012

5.76


2922013

5.23


10,6102014

5.45


2,8562015

6.66


1,5852017

5.43


1,9662018

5.05


1,3902.02
%
$
799,875


The
FHLB advances are secured by certain first lien and multifamily mortgage loans and mortgage-backed securities with an aggregate carrying value of approximately
$800.7 million at December 31, 2003.

55

---

(13) Securities Sold Under Agreements to Repurchase

Coastal enters into sales of securities under agreements to repurchase ("reverse repurchase agreements"). Fixed coupon reverse repurchase agreements are treated
as financing arrangements and the obligations to repurchase securities sold are reflected as a liability in the consolidated statements of financial condition. The dollar amounts of securities
underlying the agreements are recorded in the respective asset accounts.

Coastal
did not have any securities sold under agreements to repurchase at December 31, 2003 or 2002. However, securities sold under agreements to repurchase averaged
approximately $283.6 million during 2001, and the maximum outstanding amounts at any month-end during 2001 was approximately $493.0 million.

(14) Subordinated Debentures

On June 18, 2002, Coastal, through Coastal Capital Trust I, 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 Bancorp's junior subordinated debentures, 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 within the trust
indenture. Bancorp has the option to defer distribution 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 Bancorp
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 to Coastal Banc ssb.

On
June 23, 2003, Coastal, through Coastal Capital Trust II, 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 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
Trust Preferred Securities II 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

56

---

of
June 23, 2033, at the option of Bancorp on or after June 23, 2008, 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 within 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.

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
December 31, 2003, Coastal retroactively implemented FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51",
resulting in the deconsolidation of CCTII as well as CCTI established in 2002, both of which were created for the sole purpose of issuing trust preferred securities. The implementation of this
Interpretation resulted in Bancorp's $1.9 million investment in the common equity of the two trusts being included in the consolidated statements of financial condition as other assets and
subordinated debentures, and the interest income and interest expense received from and paid to the trusts, respectively, being included in the consolidated statements of income as interest income and
interest expense. The increase to other interest income and interest expense totaled $146,000 for the year ended December 31, 2003 and $74,000 for the year ended December 31, 2002.

(15) Senior Notes Payable

On June 30, 1995, Coastal issued $50.0 million of 10.0% Senior Notes due June 30, 2002. The Senior Notes were redeemable at Coastal's option,
in whole or in part, on or after June 30, 2000, at par, plus accrued interest to the redemption date. Interest on the Senior Notes was payable quarterly. On January 28, 1999, the Board
of Directors authorized the repurchase, on an unsolicited basis, of the Senior Notes in an amount and on such terms considered appropriate by management. During 2001 and 1999, Coastal repurchased $3.0
and $3.1 million, respectively, of the Senior Notes outstanding at par.

On
February 1, 2002, (the "Redemption Date"), Coastal redeemed all of its remaining 10.0% Senior Notes outstanding ($43.9 million). The redemption price was par plus
accrued interest to the Redemption Date.

57

---



(16) Derivative Instruments

Coastal is a party to derivative instruments in the normal course of business to reduce its exposure to fluctuations in interest rates. These derivative
instruments have included interest rate swap agreements where Coastal makes fixed interest payments and receives payments based on a floating index and interest rate cap agreements, as described
below. Effective January 1, 2001, Coastal adopted Statement 133 as discussed in Note 2. Statement 133 requires companies to recognize all derivatives as either assets or liabilities in
the consolidated statements of financial condition and measure all derivatives at fair value. The interest rate swap and cap agreements held by Coastal on December 31, 2000 were determined to
not qualify for hedge accounting, therefore on implementation of Statement 133, Coastal recorded a transition adjustment to record these derivative instruments at fair value. On January 1,
2001, Coastal recorded a transition adjustment loss of $160,000, or $104,000 net of the tax effect, as the cumulative effect of the change in accounting for derivative instruments to record the fair
value of Coastal's derivative instruments in the consolidated statements of income. For the year ended December 31, 2001, Coastal recorded an additional fair value loss on these derivative
instruments of $422,000. The fair value changes in the derivative instruments during 2001 were primarily attributable to Coastal's interest rate swap agreements, which were totally liquidated in
June 2001. Coastal's interest rate cap agreements expired in 2003 and Coastal had no derivative instruments at December 31, 2003.

At
December 31, 2002, Coastal had interest rate cap agreements with third parties with notional amounts totaling $107.6 million. The agreements provided for the third
parties to make payments to Coastal whenever a defined floating rate exceeded rates ranging from 8.0% to 9.0%, depending on the agreement. Payments on the interest rate cap agreements were based on
the notional principal amount of the agreements; no funds were actually borrowed or were to be repaid. The fair value of the interest rate cap agreements was zero at December 31, 2002, which
was the recorded book value of the agreements at such date pursuant to Statement 133. The interest rate cap agreements were used to alter the interest rate sensitivity of a portion of Coastal's
mortgage-backed securities and loans receivable. As such, Coastal recorded the amortization of the purchase price and interest income from the interest rate cap agreements in "interest income on
mortgage-backed securities or loans receivable" as appropriate. The net decrease in interest income related to interest rate cap agreements was approximately $15,000 for the year ended
December 31, 2003 and $25,000 for each of the years ended December 31, 2002 and 2001. No payments were made to Coastal under the interest rate cap agreements during the years ended
December 31, 2003, 2002 or 2001.

Coastal
totally liquidated its interest rate swap positions in June of 2001. The interest rate swap agreements previously held by Coastal provided for Coastal to make fixed interest
payments and receive payments based on a floating LIBOR index, as defined in each agreement. The weighted average interest rate of payments received on all of the interest rate swap agreements was
approximately 4.84% and the weighted average interest rate of payments made on all of the interest rate swap agreements was approximately 5.21% in 2001. Payments on the interest rate swap agreements
were based on the notional principal amount of the agreements; no funds were actually borrowed or to be repaid. Coastal recorded net interest expense or income related to these agreements on a monthly
basis in interest expense in the accompanying consolidated statements of income. The decrease in net interest income related to these agreements was approximately $35,000 for the year ended
December 31, 2001.

Market
risk, or the risk of loss due to movement in market prices or rates, is quantified by Coastal through a risk monitoring process of marking to market the portfolio to expected
market level changes in an instantaneous shock of plus and minus 200 basis points on a quarterly basis. This process

58

---

discloses
the effects on market values of the assets and liabilities, unrealized gains and losses, including off-balance sheet items, as well as potential changes in net interest income.

Coastal
is exposed to credit loss in the event of nonperformance by the counterparty to the swap or cap and controls this risk through credit monitoring procedures. The notional
principal amount does not represent Coastal's exposure to credit loss.

(17) Fair Value of Financial Instruments

Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires that Coastal disclose estimated fair
values for its financial instruments. The fair value estimates presented herein are based on relevant information available to management as of December 31, 2003 and 2002. Because the reporting
requirements exclude certain financial instruments and all nonfinancial instruments, the aggregate fair value amounts presented herein do not represent management's estimate of the underlying value of
Coastal. The fair value estimates, methods and assumptions used are set forth below for Coastal's financial instruments (in thousands):

|                               |                                                            | At
December 31, 2003 |   | At
December 31, 2002
|------------------------------ | ---------------------------------------------------------- | -------------------- | - | --------------------
|
|Financial assets:              |                                                            |                      |   |                     
|                               | Cash and cash equivalents                                  |                      | $ | 40,814              
|                               | Federal funds sold                                         |                      |   | 10,440              
|                               | Loans receivable held for sale                             |                      |   | 8,078               
|                               | Loans receivable                                           |                      |   | 1,981,924           
|                               | Mortgage-backed securities available-for-sale              |                      |   | 504,402             
|                               | Other securities available-for-sale                        |                      |   | 6,787               
|                               | Stock in the FHLB                                          |                      |   | 45,471              
|                               | Accrued interest receivable                                |                      |   | 9,198               
|Financial liabilities:         |                                                            |                      |   |                     
|                               | Deposits                                                   |                      |   | 1,676,131           
|                               | Advances from the FHLB                                     |                      |   | 799,875             
|                               | Subordinated debentures                                    |                      |   | 61,856              
|                               | Accrued interest payable                                   |                      |   | 3,525               
|Off-balance sheet instruments: |                                                            |                      |   |                     
|                               | Commitments to extend credit and standby letters of credit |                      |   | 118                 



Carrying value approximates fair value because of the short maturity of these instruments and absence of any anticipated credit concerns.



Carrying value approximates fair value because of the short maturity of these instruments and absence of any anticipated credit concerns.

59

---



The fair values of loans receivable are estimated for segregated groupings of loans with similar financial characteristics. Loans are segregated by type, such as
residential mortgage, commercial and consumer. Residential mortgage loans are further subdivided into fixed and adjustable rate loans including single family, multifamily and construction.

The
fair value of single family residential loans is estimated based on current investor market prices and yields for mortgage-backed securities with similar maturities, interest rate
indexes and prepayment characteristics. The fair value of multifamily residential, construction, commercial and consumer loans are estimated using factors that reflect the credit and interest rate
risk in these loans.



The fair values of mortgage-backed and other securities are estimated based on published market prices or market prices from investment dealers and companies. If
a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.



The carrying amount of the stock in the FHLB approximates fair value because it is redeemable at its par value.



Carrying value approximates fair value.



The fair value of deposits with short-term or no stated maturity, such as noninterest-bearing checking, interest-bearing checking, savings accounts
and money market demand accounts is equal to the amounts payable as of December 31, 2003 and 2002. The fair value of certificate accounts is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.



The fair value of advances from the FHLB is estimated based on quoted market prices for similar agreements or current rates offered to Coastal for borrowings with
similar remaining maturities.



The fair value of the subordinated debentures is estimated based on the published market price for the Trust Preferred Securities I plus the carrying value of the
Trust Preferred Securities II and the common
equity in CCTI and CCTII. The carrying value of the Trust Preferred Securities II approximates fair value because of the floating rate that resets quarterly.



Carrying value approximates fair value.

60

---



The carrying amount of commitments to extend credit and standby letters of credit is the net unamortized deferred cost or income received for the commitments. The
estimated fair value is considered to be the carrying value.

(18) Federal Income Taxes

The acquisition of the Acquired Associations under the FSLIC's Southwest Plan on May 13, 1988 qualified for tax-free reorganization status
under Section 368(a)(3)(D) of the Internal Revenue Code of 1986 as amended ("IRC"). Accordingly, the tax bases of assets of the Acquired Associations carried over to Coastal. In connection with
this acquisition, the FSLIC Resolution Fund ("FRF") retained all of the future federal income tax benefits derived from the federal income tax treatment of certain items, in addition to net operating
loss carryforwards related to the acquisition for which Coastal 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 agreement with the FRF was effective March 31, 1994, the FRF will continue to receive the future federal income tax benefits from the net operating loss carryforwards
acquired from the Acquired Associations.

The
components of the provision for federal income tax expense (benefit) for the years ended December 31, 2003, 2002 and 2001 are as follows (in thousands):

2003

2002

2001Current

$
6,322

$
9,349

$
13,153Deferred


176


(209
)

(2,286
)$
6,498

$
9,140

$
10,867


A
reconciliation of the expected federal income taxes using a corporate tax rate of 35% for the years ended December 31, 2003, 2002 and 2001 is as follows (in thousands):

2003

2002

2001Computed expected tax provision

$
6,982

$
10,627

$
12,376FDIC tax benefit of preferred stock dividends


(514
)

(1,405
)

(1,784
)Net purchase accounting adjustments








222Other, net


30


(82
)

53$
6,498

$
9,140

$
10,867


61

---

Significant
temporary differences that give rise to the deferred tax assets and liabilities as of December 31, 2003 and 2002 are as follows (in thousands):

2003

2002Deferred tax assets:Loans receivable, principally due to allowance for loan losses

$
6,698

$
6,002Unrealized loss on securities available-for-sale


595


Intangible assets





122Property and equipment


2,015


2,014Other


140


1069,448


8,244Deferred tax liabilities:Unrealized gain on securities available-for-sale

$


$
333FHLB stock


1,482


1,147Intangible assets


492


Other


84


1262,058


1,606Net deferred tax asset

$
7,390

$
6,638


No
valuation allowance on deferred tax assets has been established as management believes that it is more likely than not that the existing deductible temporary differences will reverse
during periods in which Coastal generates net taxable income.

In
years prior to 1996, Coastal was permitted under the IRC to deduct an annual addition to a reserve for bad debts in determining taxable income. This addition differs from the
provision for loan losses for financial reporting purposes. Due to enacted legislation, commencing in 1996, Coastal was no longer able to utilize a reserve method for determining the bad debt
deduction but is allowed to deduct actual charge-offs. Further, Coastal's post-1987 tax bad debt reserve has been recaptured into income. The reserve was recaptured over a
six-year period. At December 31, 2003, Coastal had no remaining post-1987 tax bad debt reserves, for which deferred taxes have been provided.

Coastal
is not required to provide deferred taxes on its pre-1988 (base year) tax bad debt reserve of $928,000. This reserve may be included in taxable income in future years
if the Bank pays dividends in excess of its accumulated earnings and profits (as defined in the IRC) or in the event of a distribution in partial or complete liquidation of the Bank.

(19) Stock Compensation Programs

In December 1991, the Board of Directors adopted the 1991 Stock Compensation Program (the "1991 Program") for the benefit of officers and other selected
key employees of Coastal. The 1991 Program was approved by stockholders in December 1991. Four kinds of rights, evidenced by four plans, are contained in the 1991 Program and are available for
grant: incentive stock options, compensatory stock options, stock appreciation rights and performance share awards. The maximum aggregate number of shares of Common Stock available pursuant to the
1991 Program was equal to 10% of Coastal's issued and outstanding shares of Common Stock at the date of adoption of the 1991

62

---

Program.
Coastal reserved the shares for future issuance under the 1991 Program. The stock options were granted at a price not less than the fair market value on the date of the grant, are exercisable
ratably over a four-year period and may be outstanding for a period up to ten years from the date of grant. Generally, no stock option may be exercised until the employee has remained in
the continuous employment of Coastal for six months after the option was granted. Stock options become fully vested upon a change in control of Coastal.

On
March 23, 1995 and March 25, 1999, the Board of Directors adopted the 1995 and 1999 Stock Compensation Programs, respectively, (the "New Programs"). The New Programs are
substantially similar to the 1991 Program and were approved by stockholders in April 1995 and April 1999, respectively. The Board of Directors reserved 382,891 and 340,000, respectively,
shares of Common Stock for issuance under the New Programs.

The
fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in
2003, 2002 and 2001:

2003

2002

2001Assumptions:Expected annual dividends (per share)

$
0.48

$
0.48

$
0.48Expected volatility


27.09
%

26.99
%

37.20
%Risk-free interest rate


3.55
%

1.61
%

4.30
%Expected life in years


10


10


10


A
summary of the status of the stock options as of December 31, 2003, 2002 and 2001 and changes during the years then ended is as follows:

|                                                                           |  | 2003 |          | 2002 |   | 2001  
|-------------------------------------------------------------------------- |  | ---- | -------- | ---- | - | ------
|
|Outstanding at beginning of year                                           |  |      | 604,654  |      | $ | 15.639
|Granted                                                                    |  |      | 30,000   |      |   | 28.830
|Exercised                                                                  |  |      | (114,405 | )    |   | 12.339
|Forfeited/cancelled                                                        |  |      | (1,000   | )    |   | 14.750
|                                                                           |  |      |          |      |   |       
|Outstanding at end of year                                                 |  |      | 519,249  |      | $ | 17.130
|                                                                           |  |      |          |      |   |       
|Options exercisable at end of year                                         |  |      | 473,734  |      |   |       
|                                                                           |  |      |          |      |   |       
|Weighted-average fair value of options granted during the year (per share) |  | $    | 9.632    |      |   |       
|                                                                           |  |      |          |      |   |       

63

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The
following table summarizes information about stock options outstanding at December 31, 2003:

|                   |  | Options outstanding |  | Options exercisable
|------------------ |  | ------------------- |  | -------------------
|
|$10.333 to $12.500 |  | 134,334             |  | 1.7 years          
|$14.750 to $20.333 |  | 279,134             |  | 5.1 years          
|$25.125 to $30.960 |  | 105,781             |  | 7.6 years          
|                   |  |                     |  |                    
|                   |  | 519,249             |  | 4.7 years          
|                   |  |                     |  |                    

(20) Employee Benefits

Coastal maintains a 401(k) profit sharing plan. Coastal's contributions to this plan were approximately $550,000, $563,000 and $566,000 for the years ended
December 31, 2003, 2002 and 2001, respectively. Pursuant to this plan, employees can contribute up to 15% of their qualifying compensation into the plan. Beginning January 1, 1990,
Coastal matched 25% of the employee contributions up to 15% of their qualifying compensation. Beginning July 1, 1998, Coastal has matched 50% of the employee contributions up to 6% of their
qualifying compensation and 25% of the employee contributions from 7% to 15% of their qualifying compensation.

(21) Coastal Banc ssb Preferred Stock

On October 21, 1993, the Bank issued 1,150,000 shares of 9.0% Noncumulative Preferred Stock, no par Series A, at a price of $25 per share to the
public. Dividends on this preferred stock were payable quarterly at the annual rate of $2.25 per share, when, as and if declared by the Board of Directors of the Bank. At any time on or after
December 15, 1998, this preferred stock could be redeemed in whole or in part only at the Bank's option at $25 per share plus unpaid dividends (whether or not earned or declared) for the then
current dividend period to the date fixed for redemption. With a portion of the proceeds from the issuance of the Trust Preferred Securities I, the Bank redeemed from the stockholders of record all of
the outstanding 9.0% Series A Noncumulative Preferred Stock on July 15, 2002 (see Note 14). The redemption price was $25.185 per share, which represented the stated value of the
Preferred Stock, plus accrued and unpaid dividends to the date of redemption.

(22) Stockholders' Equity



On May 11, 1999, Bancorp issued 1,100,000 shares of 9.12% Series A Cumulative Preferred Stock, no par value, to the public at a price of $25 per
share ("Bancorp Preferred Stock"). Dividends on the preferred stock were payable quarterly at the annual rate of $2.28 per share. The preferred stock was callable on May 15, 2003 at Bancorp's
option. With the proceeds from the issuance of the Trust Preferred Securities II and a capital distribution of $17.9 million from the Bank, Bancorp redeemed

64

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from
the stockholders of record all of the 9.12% Series A Cumulative Preferred Stock on July 31, 2003. The redemption price was $25.19633 per share, which represented the stated value
plus an amount equal to accrued but unpaid dividends on the date of redemption. Pursuant to Coastal's tax benefit agreement with the FRF, Coastal received a tax benefit for dividends on this preferred
stock. The provision for Federal income taxes includes a tax benefit of $514,000, $878,000 and $878,000 in the years 2003, 2002 and 2001, respectively. This benefit ceased upon redemption of the
Bancorp Preferred Stock on July 31, 2003.



On January 23 and April 24, 2003, Coastal declared a dividend of $0.12 per share of Common Stock outstanding for the stockholders of record as of
February 15 and May 15, 2003, respectively. On July 24 and October 23, 2003, Coastal declared a dividend of $0.15 per share of Common Stock outstanding for the stockholders
of record as of August 15 and November 15, 2003, respectively.

On
January 24, April 25, July 25 and October 24, 2002, Coastal declared a dividend of $0.12 per share of Common Stock outstanding for the stockholders of
record as of February 15, May 15, August 15 and November 15, 2002, respectively.

On
January 25, 2001, Coastal declared a dividend of $0.10 per share of Common Stock outstanding for the stockholders of record as of February 15, 2001. On April 26,
July 26 and October 25, 2001, Coastal declared a dividend of $0.12 per share on Common Stock outstanding for the stockholders of record as of May 15, August 15 and
November 15, 2001, respectively.



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 through an open-market repurchase program and privately
negotiated repurchases, if any. As of December 31, 2003 and 2002, 2,752,575 and 2,729,575 shares, respectively, had been repurchased under all authorized repurchase plans. As of
December 31, 2003, 2,746,110 shares were held in treasury at an average repurchase price of $19.53 per share for a total cost of $53.6 million.

65

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(23) Earnings per Common Share

The following summarizes information related to the computation of basic and diluted EPS for the years ended December 31, 2003, 2002 and 2001 (dollars in
thousands, except per share data):

2003

2002

2001Net income

$
13,450

$
19,716

$
21,802Preferred stock dividends


(1,470
)

(2,508
)

(2,508
)Net income available to common stockholders

$
11,980

$
17,208

$
19,294Weighted average number of common shares outstanding used in basic EPS calculation


5,175,009


5,491,615


5,773,313Add assumed exercise of outstanding stock options as adjustments for dilutive securities


231,688


258,916


305,021Weighted average number of common shares outstanding used in diluted EPS calculation


5,406,697


5,750,531


6,078,334Basic EPS before cumulative effect of ccounting change

$
2.31

$
3.13

$
3.36Basic EPS

$
2.31

$
3.13

$
3.34Diluted EPS before cumulative effect of accounting change

$
2.22

$
2.99

$
3.19Diluted EPS

$
2.22

$
2.99

$
3.17


(24) Commitments and Contingencies

At December 31, 2003 Coastal had one purchase transaction pending settlement. The purchase of approximately $14.0 million in agency mortgage-backed
securities was scheduled to settle on January 26, 2004.

Coastal
had two branch facilities under construction at December 31, 2003. The remaining commitment to complete construction of the two facilities is approximately
$1.3 million.

Coastal
is involved in various litigation arising from acquired entities as well as in the normal course of business. In the opinion of management, the ultimate liability, if any, from
these actions should not be material to the consolidated financial statements.

66

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At
December 31, 2003, Coastal had the following contractual obligations and commitments (in thousands):

Payments Due In2004

2005

2006

2007

2008

Subsequent yearsFHLB Advances

$
295,329

$
358,225

$
105,486

$
2,950

$
11,037

$
26,848Subordinated debentures

















61,856Annual rental commitments under noncancelable operating leases


2,731


2,696


2,528


2,110


1,757


6,108Total contractual obligations

$
298,060

$
360,921

$
108,014

$
5,060

$
12,794

$
94,812


Amount of Commitment Expiring In2004

2005

2006

2007

2008

Subsequent
yearsCommitments to extend credit and undisbursed portion of lines of credit

$
63,307

$
73,883

$
20,529

$
4,121

$
625

$
5,983Standby letters of credit


15,155


554


636








Total commitments

$
78,462

$
74,437

$
21,165

$
4,121

$
625

$
5,983


Rent expense for the years ended December 31, 2003, 2002 and 2001 amounted to approximately $3.4 million, $3.4 million and
$3.2 million, respectively.

In
addition, scheduled maturities of certificates of deposit during the twelve months following December 31, 2003 totaled $656.5 million. Management believes that Coastal
has adequate resources to fund all its commitments.

(25) Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by the FDIC. Failure to meet minimum capital requirements can initiate certain
mandatoryand possibly additional discretionaryactions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.

Quantitative
measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (as defined in the applicable regulations) of Tier 1
(core) capital to total assets, Tier 1 risk-based capital to risk weighted assets and total risk-based capital to risk weighted assets. Management believes, as of
December 31, 2003, that the Bank met the capital adequacy requirements to which it is subject.

As
of December 31, 2003, the most recent notification from the FDIC categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain minimum Tier 1 (core), Tier 1 risk-based and total risk-based

67

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ratios
as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institution's category.

The
Bank's regulatory capital amounts and ratios, as of December 31, 2003 and 2002, in relation to its existing regulatory capital requirements for capital adequacy purposes as of
such dates are as follows (dollars in thousands):

Actual

Minimum For Capital
Adequacy Purposes

Well Capitalized
RequirementsAmount

Ratio

Amount

Ratio

Amount

RatioAs of December 31, 2003:Tier 1 (core)

$
166,563

6.26
%
$
106,506

4.00
%
$
133,133

5.00
%Tier 1 risk-based


166,563

9.23


72,170

4.00


108,254

6.00Total risk-based


185,952

10.31


144,339

8.00


180,424

10.00As of December 31, 2002:Tier 1 (core)

$
177,593

6.88
%
$
103,315

4.00
%
$
129,144

5.00
%Tier 1 risk-based


177,593

10.32


68,816

4.00


103,224

6.00Total risk-based


195,711

11.38


137,632

8.00


172,040

10.00


68

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(26) Parent Company Financial Information

Condensed financial information for Coastal Bancorp, Inc. is as follows (in thousands):

Coastal Bancorp, Inc.Condensed Statements of Financial Condition

|                                      |                                               | December 31,              
|------------------------------------- | --------------------------------------------- | --------------------------
|
|Assets:                               |                                               |                           
|                                      | Cash and cash equivalents                     |                           
|                                      | Investment in subsidiaries                    |                           
|                                      | Mortgage-backed securities available-for-sale |                           
|                                      | Other assets                                  |                           
|                                      |                                               |                           
|                                      |                                               | $                         
|                                      |                                               |                           
|Liabilities and stockholders' equity: |                                               |                           
|                                      | Junior subordinated debentures                |                           
|                                      | Payable to the Bank                           |                           
|                                      | Other liabilities                             |                           
|                                      |                                               |                           
|                                      |                                               | Total liabilities         
|                                      |                                               | Total stockholders' equity
|                                      |                                               |                           
|                                      |                                               | $                         
|                                      |                                               |                           

Coastal Bancorp, Inc.Condensed Statements of Income

|         |                                                                     | Years ended December 31,
|-------- | ------------------------------------------------------------------- | ------------------------
|
|Income:  |                                                                     |                         
|         | Dividends from subsidiaries                                         |                         
|         | Equity in undistributed earnings of subsidiaries, net of income tax |                         
|         | Interest and other income                                           |                         
|         |                                                                     |                         
|         |                                                                     |                         
|         |                                                                     |                         
|Expense: |                                                                     |                         
|         | Interest expense                                                    |                         
|         | Noninterest expense                                                 |                         
|         |                                                                     |                         
|         |                                                                     |                         
|         |                                                                     |                         
|         | Federal income tax benefit                                          |                         
|         |                                                                     |                         
|         |                                                                     | Net income              
|         |                                                                     |                         

69

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Coastal Bancorp, Inc.Condensed Statements of Cash Flows

|                                               |                                                                                             | Years ended December 31, |                                                   
|---------------------------------------------- | ------------------------------------------------------------------------------------------- | ------------------------ | --------------------------------------------------
|
|Cash flows from operating activities:          |                                                                                             |                          |                                                   
|                                               | Net income                                                                                  |                          | $                                                 
|                                               | Adjustments to reconcile net income to net cash provided by (used in) operating activities: |                          |                                                   
|                                               |                                                                                             |                          | Equity in undistributed earnings of subsidiaries  
|                                               |                                                                                             |                          | Net decrease in other assets and other liabilities
|                                               |                                                                                             |                          |                                                   
|                                               |                                                                                             |                          |                                                   
|                                               |                                                                                             |                          |                                                   
|Cash flows from investing activities:          |                                                                                             |                          |                                                   
|                                               | Net decrease in mortgage-backed securities                                                  |                          |                                                   
|                                               |                                                                                             |                          |                                                   
|                                               |                                                                                             |                          | Net cash provided by investing activities         
|                                               |                                                                                             |                          |                                                   
|Cash flows from financing activities:          |                                                                                             |                          |                                                   
|                                               | Redemption or repurchase of Senior Notes payable                                            |                          |                                                   
|                                               | Redemption of Preferred Stock                                                               |                          |                                                   
|                                               | Proceeds from issuance of junior subordinated debentures                                    |                          |                                                   
|                                               | Exercise of stock options for purchase of Common Stock                                      |                          |                                                   
|                                               | Purchase of treasury stock                                                                  |                          |                                                   
|                                               | Issuance of treasury shares                                                                 |                          |                                                   
|                                               | Dividends paid                                                                              |                          |                                                   
|                                               |                                                                                             |                          |                                                   
|                                               |                                                                                             |                          |                                                   
|                                               |                                                                                             |                          |                                                   
|                                               |                                                                                             |                          |                                                   
|Cash and cash equivalents at beginning of year |                                                                                             |                          | 139                                               
|                                               |                                                                                             |                          |                                                   
|Cash and cash equivalents at end of year       |                                                                                             | $                        | 2,158                                             
|                                               |                                                                                             |                          |                                                   

70

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(27) Selected Quarterly Financial Data

Selected quarterly financial data is presented in the following tables for the years ended December 31, 2003 and 2002 (in thousands, except per share
data):

|                                                 |  | 2003 Quarter Ended (unaudited)
|------------------------------------------------ |  | ------------------------------
|
|Interest income                                  |  | $                             
|Interest expense                                 |  |                               
|                                                 |  |                               
|Net interest income                              |  |                               
|Provision for loan losses                        |  |                               
|Noninterest income                               |  |                               
|Noninterest expense                              |  |                               
|                                                 |  |                               
|Income before provision for Federal income taxes |  |                               
|Provision for Federal income taxes               |  |                               
|                                                 |  |                               
|Net income                                       |  | $                             
|                                                 |  |                               
|Basic earnings per common share                  |  | $                             
|                                                 |  |                               
|Diluted earnings per common share                |  | $                             
|                                                 |  |                               

The
financial data below for the quarters ended March 31, and June 30, 2002 have been restated from those amounts previously reported as required by Statement 147 which was
adopted by Coastal effective January 1, 2002.

|                                                                       |  | 2002 Quarter Ended (unaudited)
|---------------------------------------------------------------------- |  | ------------------------------
|
|Interest income                                                        |  | $                             
|Interest expense                                                       |  |                               
|                                                                       |  |                               
|Net interest income                                                    |  |                               
|Provision for loan losses                                              |  |                               
|Noninterest income                                                     |  |                               
|Noninterest expense                                                    |  |                               
|                                                                       |  |                               
|Income before provision for Federal income taxes and minority interest |  |                               
|Provision for Federal income taxes                                     |  |                               
|Minority interestpreferred stock dividends of Coastal
Banc ssb        |  |                               
|                                                                       |  |                               
|Net income                                                             |  | $                             
|                                                                       |  |                               
|Basic earnings per common share                                        |  | $                             
|                                                                       |  |                               
|Diluted earnings per common share                                      |  | $                             
|                                                                       |  |                               

71

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COASTAL BANCORP, INC. AND SUBSIDIARIES

STOCK PRICES AND DIVIDENDS

The following tables set forth the high and low price range and dividends by quarter for the two years ended December 31, 2003 of the Common Stock of
Bancorp (Nasdaq: CBSA), Preferred Stock of Bancorp (Nasdaq: CBSAO), Trust Preferred Securities of Coastal Capital Trust I (Nasdaq: CBSAN) and the Series A Preferred Stock of the Bank (Nasdaq:
CBSAP) as listed and quoted on The Nasdaq Stock Market®:

COASTAL BANCORP, INC. COMMON STOCK ("CBSA"):

|               |  | 2003 |        | 2002
|-------------- |  | ---- | ------ | ----
|
|First Quarter  |  | $    | 32.740 |     
|Second Quarter |  |      | 32.050 |     
|Third Quarter  |  |      | 32.070 |     
|Fourth Quarter |  |      | 41.550 |     

COASTAL BANCORP, INC. CUMULATIVE PREFERRED STOCK, SERIES A ("CBSAO"):

|                  |  | 2003 |        | 2002
|----------------- |  | ---- | ------ | ----
|
|First Quarter     |  | $    | 26.400 |     
|Second Quarter    |  |      | 25.830 |     
|Third Quarter     |  |      | 25.300 |     
|Fourth Quarter(2) |  |      |       |     

COASTAL CAPITAL TRUST I TRUST PREFERRED SECURITIES ("CBSAN"):

|                 |  | 2003   |  | 2002  
|---------------- |  | ------ |  | ------
|
|First Quarter(1) |  | 26.500 |  | 25.630
|Second Quarter   |  | 28.000 |  | 26.150
|Third Quarter    |  | 28.580 |  | 26.070
|Fourth Quarter   |  | 28.170 |  | 26.900

COASTAL BANC ssb NONCUMULATIVE PREFERRED STOCK, SERIES A ("CBSAP"):

|                  |  | 2003 |  | 2002
|----------------- |  | ---- |  | ----
|
|First Quarter     |  |     |  |    
|Second Quarter    |  |     |  |    
|Third Quarter     |  |     |  |    
|Fourth Quarter(3) |  |     |  |    

---

72

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Coastal Bancorp, Inc.STOCKHOLDER INFORMATION

Annual Meeting

The
Annual Meeting of Stockholders of Coastal Bancorp, Inc. will be held at the corporate offices of Coastal Bancorp, Inc. at 5718 Westheimer, Houston, Texas in the Coastal Banc
auditorium, Suite 1101, on April 22, 2004 at 12:00 noon, Central Time.

Transfer Agent and Registrar

Mellon
Investor Services LLC
Overpeck Centre
85 Challenger Road
Ridgefield Park, New Jersey 07660-2104
(800) 851-9677
www.melloninvestor.com

Independent Public Accountants

KPMG
LLP
700 Louisiana Street
Houston, Texas 77002

Special Counsel

Elias,
Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W.
Washington, D.C. 20005

Inquiries, Publications and Financial Information (including copies of the Annual Report and Form 10K at no charge upon written request)

Manuel
J. Mehos Chairman of the Board
  and Chief Executive Officeror
Catherine N. Wylie Senior Executive Vice President
  and Chief Financial Officer

Coastal
Bancorp, Inc.
Coastal Banc Plaza
5718 Westheimer, Suite 600
Houston, Texas 77057
(713) 435-5000
www.coastalbanc.com

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Stock Listing and Other Information

The common stock of Coastal Bancorp, Inc. ("Bancorp") is quoted on The Nasdaq Stock Market® under the symbol "CBSA." As of February 24,
2004, there were 5,295,422 shares of Common Stock of Bancorp issued and outstanding and the approximate number of registered stockholders was 36, representing approximately 825 beneficial stockholders
at such record date.

On
March 25, 1992, Coastal Banc Savings Association (the "Association") issued 3,092,076 shares of Common Stock at $8.33 per share in its initial public offering. As of such date,
the Common Stock of the Association was registered under the Securities Exchange Act of 1934 (the "Exchange Act") and also became listed for quotation on The Nasdaq Stock Market®. The
Common Stock issued by the Association became the Common Stock of Bancorp on July 29, 1994, as a result of the holding company reorganization of the Association.

On
June 18, 2002, the Coastal Capital Trust I issued 2,000,000 Trust Preferred Securities I with a liquidation preference of $25 per security. As of such date, the Trust Preferred
Securities I were registered under the Exchange Act. 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 by Bancorp at maturity on June 30, 2032 or at the option of Bancorp on or after June 30, 2007. The Trust Preferred Securities I are listed and quoted on
The Nasdaq Stock Market®, under the symbol "CBSAN." As of February 24, 2004, there were 2,000,000 Trust Preferred Securities I issued and outstanding.

Bancorp
declared dividends on the Common Stock payable during 2003. A quarterly dividend in the amount of $0.12 per share was paid on March 15 and June 15, and quarterly
dividends in the amount of $0.15 per share were paid on September 15 and December 15, 2003. On January 22, 2004, Bancorp declared a quarterly dividend in the amount of $0.15 per
share on its Common Stock payable on March 15, 2004. Bancorp will continue to review its dividend policy in view of the operating performance of the Bank and may declare dividends on the Common
Stock in the future if such payments are deemed appropriate and in compliance with applicable law and regulations. Prior to the declaration of dividends, Bancorp must notify the Office of Thrift
Supervision, the holding company's primary federal regulator, which may object to the dividends on the basis of safety and soundness.

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

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