UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[ X ] Quarterly Report Under Section 13 or 15 (d) of

[ X ]	Quarterly Report Under Section 13 or 15(d) of
	the Securities Exchange Act of 1934
	For the Quarterly Period Ended March 31, 2004

[ ]	Transition Report Pursuant to Section 13 or 15(d) of
	the Securities Exchange Act of 1934
	For the Transition Period from _________ to _________

the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2003

[ ] Transition Report Pursuant to Section 13 or 15 (d) of

the Securities Exchange Act of 1934

For the Transition Period from _________ to _________

Commission File Number: 0-24526

Coastal Bancorp, Inc.

(Exact name of Registrant as specified in its charter)

Texas		76-0428727
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

5718 Westheimer, Suite 600

Houston, Texas 77057

(Address of principal executive office)

(713) 435-5000

(Registrant's telephone number)

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

YES

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

Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date.

Common Stock Outstanding: 5,~~235~~297,~~099~~692 as of ~~October~~ 31April 23, ~~2003~~ 2004

Coastal Bancorp, Inc. and Subsidiaries

Form 10-Q

Table of Contents

Part I. Financial Information

Item 1	Financial Statements (unaudited)
	Consolidated Statements of Financial Condition at September 30, 2003 and December 31, 2002
	Consolidated Statements of Financial Condition at March 31, 2004 and December 31, 2003	1
	Consolidated Statements of Income for the Nine-Month Periods Ended September 30, 2003 and 2002
	Consolidated Statements of Income for the Three-Month Periods Ended March 31, 2004 and 2003	2
	Consolidated Statements of Income for the Three-Month Periods Ended September 30, 2003 and 2002
	Consolidated Statements of Comprehensive Income for the Three-Month Periods Ended March 31, 2004 and 2003	3
	Consolidated Statements of Comprehensive Income for the Nine-Month and Three-Month Periods Ended September 30, 2003 and 2002
	Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 2004 and 2003	4
	Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2003 and 2002
	Notes to Consolidated Financial Statements	6
	Notes to Consolidated Financial Statements
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	16
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3	Quantitative and Qualitative Disclosures About Market Risk	20
Item 3	Quantitative and Qualitative Disclosures About Market Risk
Item 4	Controls and Procedures	20
Item 4	Controls and Procedures

Part II. Other Information

Item 1	Legal Proceedings	21
Item 2	Changes in Securities, ~~and~~ Use of Proceeds and Issuer Purchases of Equity Securities	21
Item 3	Defaults upon Senior Securities	21
Item 4	Submission of Matters to a Vote of Security Holders	21
Item 5	Other Information	21
Item 6	Exhibits and Reports on Form 8-K	21

Signatures

Item 1. FINANCIAL STATEMENTS
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands, except share data)
	September 30,				December 31,
	2003				2002
	(Unaudited)
ASSETS
Cash and cash equivalents		$	35,347			$	39,766
Federal funds sold			1,490				27,755
Loans receivable held for sale			-				49,886
Loans receivable, net (note 4)			1,951,987				1,812,785
Mortgage-backed securities available-for-sale, at fair value (note 3)			527,668				475,022
Other securities available-for-sale, at fair value			2,271				1,788
Accrued interest receivable			9,466				9,781
Property and equipment			29,804				27,341
Stock in the Federal Home Loan Bank of Dallas ("FHLB")			45,243				41,221
Goodwill			21,429				21,429
Prepaid expenses and other assets			16,351				19,370
		$	2,641,056			$	2,526,144
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 5)		$	1,638,914			$	1,614,368
Advances from the FHLB (note 6)			792,031				696,085
Company obligated mandatorily redeemable 9.0% trust
preferred securities of Coastal Capital Trust I
(note 7)			50,000				50,000
Company obligated mandatorily redeemable variable rate
trust preferred securities of Coastal Capital Trust II
(note 7)			10,000				-
Advances from borrowers for taxes and insurance			8,304				2,407
Other liabilities and accrued expenses			10,514				10,399
Total liabilities			2,509,763				2,373,259
Commitments and contingencies (notes 4 and 9)
Stockholders' equity (notes 1, 3, 10, 12 and 13):
Preferred stock, no par value; authorized shares 5,000,000;
9.12% Cumulative, Series A, 1,100,000 shares issued
and outstanding			-				27,500
Common stock, $.01 par value; authorized shares
30,000,000; 7,929,485 shares issued and 5,182,610
shares outstanding at September 30, 2003; 7,867,029
shares issued and 5,141,010 outstanding at
December 31, 2002			79				79
Additional paid-in capital			36,475				35,736
Retained earnings			148,699				141,986
Accumulated other comprehensive income (loss) - net
unrealized gain (loss) on securities available-for-sale			(315	)			619
Treasury stock at cost (2,746,875 shares in 2003 and
2,726,019 shares in 2002)			(53,645	)			(53,035	)
Total stockholders' equity			131,293				152,885
		$	2,641,056			$	2,526,144
See accompanying Notes to Consolidated Financial Statements

Item 1. FINANCIAL STATEMENTS
COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands, except per share data)
(In Thousands, except share data)
	Nine Months Ended
		March 31,			December 31,
	September 30,
		2004			2003
	2003			2002
		(Unaudited)
	(Unaudited)
ASSETS
Interest income:
Cash and cash equivalents	$	35,389		$	40,814
Loans receivable	$	74,880		$	90,357
Federal funds sold		24,732			10,440
Mortgage-backed securities		10,403			13,060
Loans receivable held for sale		35,341			8,078
FHLB stock, federal funds sold and other interest-earning assets		829			1,203
Loans receivable, net (note 4)		1,967,328			1,981,924
		86,112			104,620
Mortgage-backed securities available-for-sale, at fair value (note 3)		501,543			504,402
Interest expense:
Other securities available-for-sale, at fair value		4,855			6,787
Deposits		22,934			30,859
Accrued interest receivable		8,762			9,198
Advances from the FHLB		12,749			15,303
Property and equipment		33,174			32,563
Senior Notes payable (note 8)		-			378
Stock in the Federal Home Loan Bank of Dallas ("FHLB")		45,641			45,471
Company obligated mandatorily redeemable trust preferred securities		3,487			1,275
Goodwill		21,429			21,429
		39,170			47,815
Prepaid expenses and other assets		20,165			21,884
Net interest income		46,942			56,805
	$	2,698,359		$	2,682,990
Provision for loan losses (note 4)		2,700			2,700
LIABILITIES AND STOCKHOLDERS' EQUITY
Net interest income after provision for loan losses		44,242			54,105
Liabilities:
Noninterest income:
Deposits (note 5)	$	1,680,116		$	1,676,131
Service charges on deposit accounts		8,859			6,732
Advances from the FHLB (note 6)		801,512			799,875
Loan fees		681			888
Subordinated debentures (note 7)		61,856			61,856
Gain on sale of loans receivable held for sale		798			40
Advances from borrowers for taxes and insurance		4,023			2,482
Gain (loss) on derivative instruments (note 9)		15			(18	)
Other liabilities and accrued expenses		11,066			8,954
Gain (loss) on real estate owned		(23	)		207
Total liabilities		2,558,573			2,549,298
Gain on sale of mortgage-backed securities available-for-sale		302			-
Commitments and contingencies (note 4)		-			-
Other		748			668
Stockholders' equity (notes 1, 3, 8, 9 and 10):
		11,380			8,517
Common stock, $.01 par value; authorized shares 30,000,000; 8,043,802 shares
Noninterest expense:
issued and 5,297,692 shares outstanding at March 31, 2004; 7,981,434 shares
Compensation, payroll taxes and other benefits		22,699			23,821
issued and 5,235,324 shares outstanding at December 31, 2003		80			80
Office occupancy		7,225			7,629
Additional paid-in capital		38,187			37,179
Data processing		1,355			1,235
Retained earnings		154,485			151,167
Advertising		905			1,396
Accumulated other comprehensive income (loss) - net unrealized gain (loss) on
Postage and delivery		1,163			1,206
securities available-for-sale		664			(1,104	)
Other		7,343			6,128
Treasury stock at cost (2,746,110 shares in 2004 and 2003)		(53,630	)		(53,630	)
		40,690			41,415
Total stockholders' equity		139,786			133,692
Income before provision for Federal income taxes and minority interest		14,932			21,207
	$	2,698,359		$	2,682,990
Provision for Federal income taxes		4,735			6,289
Income before minority interest		10,197			14,918
Minority interest - preferred stock dividends of Coastal Banc ssb		-			1,507
Net income	$	10,197		$	13,411
Net income available to common stockholders	$	8,727		$	11,530
Basic earnings per common share (note 10)	$	1.69		$	2.06
Diluted earnings per common share (note 10)	$	1.62		$	1.97
See accompanying Notes to Consolidated Financial Statements

COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, except per share data)
	~~Three Months Ended~~		Three Months Ended
	September 30,
			March 31,
	2003		2002
			2004			2003
	~~(Unaudited)~~			(Unaudited)
Interest income:
Loans receivable	$	~~24,049~~	$	2924,~~649~~670		$	25,612
Mortgage-backed securities		~~3,251~~		43,~~034~~646			3,667
FHLB stock, federal funds sold and other interest-earning assets		~~250~~		~~348~~269			325
		27,550		34,031
				28,585			29,604
Interest expense:
Deposits		~~7,128~~		96,~~616~~806			8,048
Advances from the FHLB		~~4,291~~		4,~~944~~061			4,225
Company obligated mandatorily redeemable trust preferred securities		1,229		1,112
Subordinated debentures				1,270			1,160
		12,648		15,672
				12,137			13,433
Net interest income		~~14,902~~		1816,~~359~~448			16,171
Provision for loan losses (note 4)		~~900~~		~~900~~450			900
Net interest income after provision for loan losses		~~14,002~~		1715,~~459~~998			15,271
Noninterest income:
Service charges on deposit accounts		~~3,013~~		2,~~599~~893			2,902
Loan fees		~~259~~		~~266~~244			219
Gain on sale of loans receivable held for sale		6		-18			734
Gain on derivative instruments (note 9)		2		6
Gain on sale of mortgage-backed securities available-for-sale				200			-
Gain (loss) on real estate owned		73		(33	)
Gain (loss) on sale of real estate owned, net				114			(130	)
Gain on sale of mortgage-backed securities available-for-sale		302		-
Gain (loss) on sale of repossessed assets, net				180			(8	)
Other		~~226~~		~~216~~389			276
		3,881		3,054
				4,038			3,993
Noninterest expense:
Compensation, payroll taxes and other benefits		~~7,245~~		7,~~968~~834			8,008
Office occupancy		~~2,505~~		2,~~408~~389			2,317
Data processing		~~461~~		~~413~~479			433
Advertising		~~336~~		~~546~~314			275
Postage and delivery		~~406~~		~~411~~375			379
Other		~~2,458~~		2,~~134~~307			2,508
		13,411		13,880
				13,698			13,920
Income before provision for Federal income taxes and minority interest		4,472		6,633
Income before provision for Federal income taxes				6,338			5,344
Provision for Federal income taxes		~~1,498~~		2,~~045~~226			1,659
Income before minority interest		2,974		4,588
Net income			$	4,112		$	3,685
Minority interest - preferred stock dividends of Coastal Banc ssb		-		213
Net income available to common stockholders			$	4,112		$	3,058
Net income	$	2,974	$	4,375
Basic earnings per common share (note 8)			$	0.78		$	0.59
Net income available to common stockholders	$	2,758	$	3,748
Diluted earnings per common share (note 8)			$	0.75		$	0.57
Basic earnings per common share (note 10)	$	0.53	$	0.72
See accompanying Notes to Consolidated Financial Statements
Diluted earnings per common share (note 10)	$	0.51	$	0.68
See accompanying Notes to Consolidated Financial Statements

COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
	Nine Months Ended
	Three Months Ended
	September 30,
	March 31,
	2003		2002
	2004		2003
	(Unaudited)
Net income	$	104,~~197~~112	$	133,~~411~~685
Other comprehensive income, net of tax:
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities available-for-sale arising during period
Unrealized gains (losses) on securities available-for-sale
arising during period		1,638		(185	)
Reclassification adjustment for gains included in net income		130		-
Total comprehensive income	$	5,880	$	3,500
See accompanying Notes to Consolidated Financial Statements

(1,130

COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)

	Three Months Ended
	March 31,

	2004			2003

	(Unaudited)
Cash flows from operating activities:
Net income	$	4,112		$	3,685
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		2,864			2,302
Net premium amortization		1,458			592
Provision for loan losses		450			900
Originations and purchases of loans receivable held for sale		(37,341	)		(92,166	)
Sales of loans receivable held for sale		10,021			132,425
Gain on sale of loans receivable held for sale		(18	)		(734	)
Gain on sale of mortgage backed securities available-for-sale		(200	)		-
Gain on sale of real estate owned, net		(114	)		130
Gain on sale of repossessed assets, net		(180	)		8
Stock dividends from the FHLB		(170	)		(254	)
Decrease (increase) in:
Accrued interest receivable		436			39
Other, net		1,813			3,332


Net cash provided by (used in) operating activities		(16,869	)		50,259


Cash flows from investing activities:
Net change in federal funds sold		(14,292	)		19,355
Purchase of mortgage-backed securities available-for-sale		(75,757	)		(38,840	)
Principal repayments on mortgage-backed securities
available-for-sale		33,074			46,910
Principal repayments on other securities available-for-sale		35			-
Proceeds from maturity of other securities available-for-sale		2,000			-
Proceeds from sale of mortgage-backed securities available-for-sale		47,580			-
Origination of loans receivable		(188,542	)		(168,885	)
Purchases of loans receivable		(39,129	)		(160,898	)
Principal repayments and principal reduction of loans receivable		240,539			252,921
Purchases of property and equipment, net		(1,441	)		(1,433	)


Net cash provided by (used in) investing activities		4,067			(50,870	)




(Table continued on next page)

)

COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(In Thousands)



	Three Months Ended
	March 31,

	2004			2003

	(Unaudited)

Cash flows from financing activities:
Net change in deposits	$	3,985			$	6,719
Advances from the FHLB		747,150				4,485,991
Principal payments on advances from the FHLB		(745,513	)			(4,494,417	)
Net increase in advances from borrowers for taxes and insurance		1,541				1,839
Exercise of stock options for purchase of Common Stock		1,008				50
Issuance of treasury shares		-				27
Dividends paid		(794	)			(1,244	)

Net cash provided by (used in) financing activities		7,377				(1,035	)

Net decrease in cash and cash equivalents		(5,425	)			(1,646	)
Cash and cash equivalents at beginning of period		40,814				39,766

Cash and cash equivalents at end of period	$	35,389			$	38,120


Supplemental schedule of cash flows-interest paid	$	12,281			$	13,835


Supplemental schedule of noncash investing
and financing activities:
Net transfer of loans to (from) held for sale category	$	-			$	(6,175	)
Real estate owned acquired through foreclosure
of loans receivable		599				811



See accompanying Notes to Consolidated Financial Statements

1,626

Reclassification adjustment for gains included in net income

196

Total comprehensive income

9,263

15,037

Three Months Ended

September 30,

2003

2002

(Unaudited)

Net income

2,974

4,375

Other comprehensive income, net of tax:

Unrealized gains (losses) on securities available-for-sale arising during period

(2,065

)

1,562

Reclassification adjustment for gains included in net income

196

Total comprehensive income

1,105

5,937

See accompanying Notes to Consolidated Financial Statements

COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
		Nine Months Ended
		September 30,
		2003			2002
		(Unaudited)
Cash flows from operating activities:
Net income		$	10,197		$	13,411
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of property and equipment
and prepaid expenses and other assets			6,924			6,476
Net amortization (accretion) of premiums, discounts and loan fees			7,211			3,558
Provision for loan losses			2,700			2,700
Originations and purchases of mortgage loans held for sale			(127,784	)		(8,592	)
Sales of mortgage loans held for sale			153,443			11,758
Gain on sale of mortgage loans held for sale			(798	)		(40	)
Gain on sale of mortgage backed securities available-for-sale			(302	)		-
Stock dividends from the FHLB			(731	)		(905	)
(Gain) loss on derivative instruments			(15	)		18
Decrease (increase) in:
Accrued interest receivable			315			1,899
Other, net			6,923			4,065
Net cash provided by operating activities			58,083			34,348
Cash flows from investing activities:
Net decrease in federal funds sold			26,265			15,960
Purchase of mortgage-backed securities available-for-sale			(242,998	)		(70,138	)
Principal repayments on mortgage-backed securities available-for-sale			152,954			115,898
Sales of mortgage-backed securities available-for-sale			33,078			-
Purchase of other securities available-for-sale			(511	)		(243	)
Proceeds from maturity of other securities available-for-sale			-			41,000
Purchases of loans receivable			(452,670	)		(387,843	)
Sales of loans receivable			-			10,111
Net decrease in loans receivable			324,263			261,129
Purchase of FHLB stock			(3,291	)		-
Net purchases of property and equipment			(4,976	)		(2,861	)
Net cash provided (used) by investing activities			(167,886	)		(16,987	)
	(Table continued on next page)

COASTAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(In Thousands)
	Nine Months Ended
	September 30,
	2003			2002
	(Unaudited)
Cash flows from financing activities:
Net increase (decrease) in deposits	$	24,546		$	(16,705	)
Advances from the FHLB		12,606,474			15,601,400
Principal payments on advances from the FHLB		(12,510,528	)		(15,559,494	)
Proceeds from issuance of trust preferred securities		9,850			48,125
Net increase in advances from borrowers for taxes and insurance		5,897			6,109
Exercise of stock options for purchase of Common Stock, net		717			105
Purchase of treasury stock		(652	)		(21,162	)
Issuance of treasury shares		63			83
Redemption of Senior Notes payable		-			(43,875	)
Redemption of Coastal Banc ssb 9.0% Noncumulative Preferred Stock		-			(28,750	)
Redemption of 9.12% Cumulative Series A Preferred Stock		(27,500	)		-
Dividends paid		(3,483	)		(3,912	)
Net cash provided (used) by financing activities		105,384			(18,076	)
Net decrease in cash and cash equivalents		(4,419	)		(715	)
Cash and cash equivalents at beginning of period		39,766			41,537
Cash and cash equivalents at end of period	$	35,347		$	40,822
Supplemental schedule of cash flows-interest paid	$	40,066		$	49,801
Supplemental schedule of noncash investing and financing activities:
Transfer of loans to the held for sale category	$	-		$	9,075
Transfer of loans from held for sale to loans receivable		19,644			-
Foreclosures of loans receivable		2,151			4,289
See accompanying Notes to Consolidated Financial Statements

Coastal Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

(1) Basis of Presentation

The accompanying unaudited Consolidated Financial Statements were prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of financial condition, results of operations, comprehensive income and cash flows in conformity with accounting principles generally accepted in the United States of America. All adjustments, which are, in the opinion of management, of a normal recurring nature and are necessary for a fair presentation of the interim financial statements, have been included. The results of operations for the period ended ~~September~~March 3031, ~~2003~~2004 are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period.

Recent Accounting Pronouncements

InOn ~~November~~January ~~2002~~17, 2003, the Financial Accounting Standards Board “("FASB"”) issued FASB Interpretation No. 4546, "~~Guarantor's~~Consolidation ~~Accounting~~of ~~and~~Variable ~~Disclosure~~Interest ~~Requirements~~Entities" ~~for~~(“FIN ~~Guarantees~~46”), ~~Including~~which ~~Indirect~~addresses ~~Guarantees~~consolidation by business enterprises of ~~Indebtedness~~variable tointerest ~~Others,~~entities. anFIN ~~interpretation~~46 clarifies the application of ~~FASB~~Accounting ~~Statements~~Research Bulletin (“ARB”) No. 551, 57"Consolidated ~~and~~Financial ~~107~~Statements", ~~and~~to acertain ~~rescission~~entities in which equity investors do not have the characteristics of ~~FASB~~a ~~Interpretation~~controlling ~~No.~~financial ~~34"~~interest ~~("FIN~~or ~~45").~~do ~~This~~not ~~Interpretation~~have ~~elaborates~~sufficient onequity at risk for the ~~disclosures~~entity to befinance ~~made~~its byactivities awithout ~~guarantor~~additional insubordinated ~~its~~financial ~~interim~~support from other parties. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and ~~annual~~to ~~financial~~variable ~~statements~~interest ~~about~~entities ~~its~~in ~~obligations~~which ~~under~~an ~~guarantees~~enterprise ~~issued~~obtains an interest after that date. ~~The~~It ~~Interpretation~~applies ~~also~~in ~~clarifies~~the ~~that~~first afiscal ~~guarantor~~year isor ~~required~~interim toperiod ~~recognize~~beginning after December 15, at2003, ~~inception~~to ofvariable ainterest ~~guarantee,~~entities in which an enterprise holds a ~~liability~~variable ~~for~~interest ~~the~~that ~~fair~~it ~~value~~acquired ofbefore ~~the~~February ~~obligation~~1, ~~undertaken~~2003. ~~The~~Coastal ~~initial~~has ~~recognition~~two ~~and~~statutory ~~measurement~~business ~~provisions~~trusts, one of ~~the~~which ~~Interpretation~~was ~~are~~formed ~~applicable~~subsequent to ~~guarantees~~January ~~issued~~31, or2003, ~~modified~~for ~~after~~the ~~December~~sole ~~31,~~purpose ~~2002~~of ~~and~~issuing ~~did~~trust ~~not~~preferred ~~have~~securities aas ~~material~~further ~~effect~~described onin ~~Coastal's~~Note 7 to the accompanying consolidated financial statements. ~~for~~FIN ~~the~~46 ~~nine~~was ~~months~~revised ~~ended~~and ~~September~~reissued ~~30,~~in December 2003.

On ~~January~~December 1731, 2003, ~~the~~Coastal ~~FASB~~retroactively ~~issued~~implemented FASB Interpretation No. 4646R, "“Consolidation of Variable Interest Entities", ~~which~~an ~~addresses~~Interpretation ~~consolidation by business enterprises~~ of ~~variable~~ARB ~~interest entities. FIN 46 clarifies the application of Accounting Research Bulletin~~ No. 51 ~~"Consolidated Financial Statements"~~”, toresulting ~~certain entities~~ in ~~which equity investors do not have~~ the ~~characteristics~~deconsolidation of aCoastal ~~controlling~~Capital ~~financial~~Trust ~~interest~~I 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~~Capital ~~two~~Trust ~~statutory and business trusts~~II, ~~one~~both of which ~~was~~were ~~formed~~created ~~subsequent to January 31, 2003,~~ for the sole purpose of issuing trust preferred securities. asThe ~~further~~implementation ~~described~~of inthis ~~Note~~Interpretation 7resulted toin ~~our~~Coastal ~~accompanying~~Bancorp, ~~consolidated~~Inc’s ~~financial~~investment ~~statements. Coastal~~in ~~currently believes~~ the ~~continued~~common ~~consolidation~~equity of ~~these~~the two trusts isbeing ~~appropriate~~included ~~under~~in ~~Interpretation No. 46. However,~~ the ~~application~~consolidated statements of ~~Interpretation~~financial ~~No.~~condition 46as toother ~~these~~assets ~~types~~and ofsubordinated ~~trusts~~debentures isand anthe ~~emerging~~interest ~~issue~~income and ainterest ~~possible~~expense ~~unintended~~received ~~consequence~~from ofand ~~Interpretation~~paid ~~No.~~to ~~46 is~~ the ~~deconsolidation of these types of~~ trusts~~. Coastal~~, isrespectively, ~~currently~~being ~~evaluating~~included in the ~~impact~~consolidated ~~that~~statements ~~deconsolidation~~ of ~~these~~income ~~trusts~~as ~~would~~interest ~~have~~income onand ~~its consolidated financial statements~~expense.

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 ("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 is not expected to 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.

Treasury Stock

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 ~~September~~March 3031, ~~2003~~2004, a total of 2,752,575 shares had been repurchased under all of the authorized repurchase plans.

As of ~~September~~March 3031, ~~2003~~2004, 2,746,~~875~~110 shares of common stock were held in treasury at an average price of $19.53 per share for a total cost of $53.6 million. Book value per common share at ~~September~~March 3031, ~~2003~~2004 was $2425.4966.

Common Stock Dividends

On July 31, 2003, Coastal announced an increase in its quarterly common stock dividend from $0.12 to $0.15 per common share. Future dividend increases will be determined by the Board of Directors based upon Coastal's results of operations and financial condition, in addition to general economic and other factors.

Stock Options

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 FASB Statement 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 three months ~~and nine months~~ ended ~~September~~March 3031, ~~2003~~2004 and ~~2002~~2003 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. The following ~~tables~~table ~~illustrate~~illustrates the effects 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.

Coastal Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited)

		Three Months Ended
		March 31,

		2004		2003

		(In thousands, except per share data)
Net income available to common stockholders, as reported	$	4,112	$	3,058
Deduct: Total stock-based compensation expense determined
under the fair value based method for all awards,
net of related tax effects		(30)		(49)

Proforma net income available to common stockholders	$	4,082	$	3,009

Earnings per common share:
Basic – as reported	$	0.78	$	0.59

Basic – proforma	$	0.77	$	0.58

Diluted – as reported	$	0.75	$	0.57

Diluted – proforma	$	0.74	$	0.56

		Nine Months Ended
		September 30,
		2003			2002
	(In thousands, except per share data)
Net income available to common stockholders, as reported		$	8,727		$	11,530
Deduct: Total stock-based compensation expense determined under the fair value
based method for all awards, net of related tax effects			(184	)		(319	)
Proforma net income available to common stockholders		$	8,543		$	11,211
Earnings per common share:
Basic – as reported		$	1.69		$	2.06
Basic – proforma		$	1.66		$	2.00
Diluted – as reported		$	1.62		$	1.97
Diluted – proforma		$	1.59		$	1.91

		Three Months Ended
		September 30,
		2003			2002
	(In thousands, except per share data)
Net income available to common stockholders, as reported		$	2,758		$	3,748
Deduct: Total stock-based compensation expense determined under the fair value
based method for all awards, net of related tax effects			(61	)		(106	)
Proforma net income available to common stockholders		$	2,697		$	3,642
Earnings per common share:
Basic – as reported		$	0.53		$	0.72
Basic – proforma		$	0.52		$	0.70
Diluted – as reported		$	0.51		$	0.68
Diluted – proforma		$	0.50		$	0.67

Coastal Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited)

(2) Principles of Consolidation

The accompanying unaudited Consolidated Financial Statements include the accounts of Coastal Bancorp, Inc. ("Bancorp") and its wholly-owned ~~subsidiaries~~subsidiary, Coastal Banc Holding Company, Inc., ~~Coastal Capital Trust I and Coastal Capital Trust II~~ (collectively "Coastal"). Coastal Banc Holding Company Inc.'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.




Coastal Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited)

(3) Mortgage-backed Securities

Mortgage-backed securities at ~~September~~March 3031, ~~2003~~2004 were as follows (in thousands):

Gross

Amortized

Unrealized

Fair

Cost

Gains

Losses

Value

Available-for-sale:

Agency securities

~~445~~432,~~018~~288

1,~~132~~789

(~~978~~327

)

~~445~~433,~~172~~750

CMOs – Non-agency

8166,~~429~~731

-7

(~~672~~469

)

8066,~~757~~269

Non-agency securities

1,~~709~~502

3022

1,~~739~~524

~~528~~500,~~156~~521

1,~~162~~818

(~~1,650~~796

)

~~527~~501,~~668~~543

As overall interest rates increase, the fair value of Coastal's mortgage-backed securities could be negatively affected by decreasing any unrealized gains and possibly resulting in additional net unrealized losses in future periods.

Mortgage-backed securities at December 31, ~~2002~~2003 were as follows (in thousands):

Gross

Amortized

Unrealized

Fair

Cost

Gains

Losses

Value

Available-for-sale:

Agency securities

~~387~~432,~~636~~065

~~1,983~~888

(~~470~~1,771

)

~~389~~431,~~149~~182

CMOs – Non-agency

8472,~~376~~315

67-

(~~644~~721

)

8371,~~799~~594

Non-agency securities

21,~~060~~603

1423

21,~~074~~626

~~474~~505,~~072~~983

~~2,064~~911

(12,~~114~~492

)

~~475~~504,~~022~~402

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 March 31, 2004 is as follows (in thousands):

	Less than 12 months					12 months or longer				Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss


Agency securities	$	144,032	$	(327	)	$	--	$	--	$	144,032	$	(327	)
CMOs – Non-agency		49,970		(469	)		--		--		49,970		(469	)

	$	194,002	$	(796	)	$	--	$	--	$	194,002	$	(796	)




Coastal Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited)

(4) Loans Receivable

Loans receivable at ~~September~~March 3031, ~~2003~~2004 and December 31, ~~2002~~2003 were as follows (dollars in thousands):

	September 30, 2003			December 31, 2002
	March 31, 2004			December 31, 2003
Real estate mortgage loans:
First-lien mortgage, primarily residential	$	968,~~608~~947		$	~~855~~1,~~633~~007,566
Commercial		~~373~~380,~~921~~665			~~317~~360,~~692~~858
Multifamily		~~102~~110,~~238~~494			~~116~~107,~~020~~903
Residential construction		~~125~~111,~~116~~992			~~123~~114,~~085~~445
Acquisition and development		~~138~~129,~~402~~423			~~143~~134,~~463~~179
Commercial construction		~~189~~175,~~042~~529			~~241~~183,~~128~~273
Commercial, financial and industrial		~~176~~177,~~226~~512			~~135~~175,~~209~~869
Loans secured by deposits		12,~~839~~662			1413,~~465~~019
Consumer and other loans		3132,~~371~~779			3332,~~430~~594
		2,117,763			1,980,125
Loans in process		(116,633	)		(132,072	)
Loans in process		(150,223	)		(147,769	)
Allowance for loan losses		(19,585	)		(19,389	)
Allowance for loan losses		(19,066	)		(18,118	)
Unearned interest and loan fees		(3,059	)		(3,134	)
Unearned interest and loan fees		(3,055	)		(2,910	)
Premium on purchased loans, net		6,602			6,813
Premium on purchased loans, net		6,568			1,457
	$	1,967,328		$	1,981,924
	$	1,951,987		$	1,812,785
Weighted average yield		4.86	%		4.94	%
Weighted average yield		4.73	%		5.52	%

At ~~September~~March 3031, ~~2003~~2004, Coastal had outstanding commitments to originate or purchase $16.68 million of real estate mortgage and other loans and had commitments under lines of credit to originate primarily construction and other loans of approximately $~~187~~158.35 million. In addition, at ~~September~~March 3031, ~~2003~~2004, Coastal had $1715.42 million of outstanding standby letters of credit. Management anticipates the funding of these commitments through normal operations.

Standby letters of credit are written for conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The Bank's policies generally require that letters of credit arrangements contain security and debt covenants similar to those contained in loan agreements. Under the standby letters of credit, the Bank is required to make payments to the beneficiary of the letters of credit upon request by the beneficiary so long as all performance criteria have been met. At ~~September~~March 3031, ~~2003~~2004, the maximum potential amount of future payments under standby letters of credit was $1715.42 million. As of ~~September~~March 3031, ~~2003~~2004, the fair value of these guarantees, which is the liability recorded when fees are collected, was immaterial to the consolidated financial statements.

At ~~September~~March 3031, ~~2003~~2004 and December 31, ~~2002~~2003, the carrying value of loans that were considered to be impaired totaled approximately $67.90 million and $87.53 million, respectively, and the related allowance for loan losses on those impaired loans totaled $1.9 million and $21.49 million at ~~September~~March 3031, ~~2003~~2004 and December 31, ~~2002~~2003, respectively. Of the impaired loans outstanding, ~~one~~two ~~loan~~loans with a balance of $3283,000 at ~~September~~March 3031, ~~2003~~2004 and ~~eight~~three loans with a balance of $~~551~~332,000 at December 31, ~~2002~~2003 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 ~~nine~~three months ended ~~September~~March 3031, ~~2003~~2004 and ~~2002~~2003 was $7.80 million and $38.42 million, respectively.

An analysis of activity in the allowance for loan losses for the three months ended March 31, 2004 and 2003 is as follows (in thousands):


	Three Months Ended March 31,

	2004			2003


Balance, beginning of period	$	19,389		$	18,118
Provision for loan losses		450			900
Charge-offs		(392	)		(908	)
Recoveries		138			191


Balance, end of period	$	19,585		$	18,301

Coastal services for others loans receivable which are not included in the Consolidated Financial Statements. The total amounts of such loans were $166.6 million and $209.0 million at March 31, 2004 and December 31, 2003, respectively.




Coastal Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited)

An analysis of activity in the allowance for loan losses for the nine months ended September 30, 2003 and 2002 is as follows (in thousands):

	Nine Months Ended
	September 30,
	2003			2002
Balance, beginning of period	$	18,118		$	15,385
Provision for loan losses		2,700			2,700
Charge-offs		(2,372	)		(2,785	)
Recoveries		620			704
Balance, end of period	$	19,066		$	16,004

Coastal services for others loans receivable which are not included in the Consolidated Financial Statements. The total amounts of such loans were $53.6 million and $68.8 million at September 30, 2003 and December 31, 2002, respectively.

Coastal Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited)

(5) Deposits

Deposits, their stated rates and the related weighted average interest rates, at ~~September~~March 3031, ~~2003~~2004 and December 31, ~~2002~~2003, are summarized below (dollars in thousands). Effective January 1, 1998, Coastal implemented a program whereby a portion of the balances in noninterest-bearing and interest-bearing checking accounts is reclassified to money market demand accounts under Federal Reserve Regulation D. The amount of such reclassification, reflected in the following table, was approximately $~~247~~237.40 million ($~~138~~131.92 million from noninterest-bearing and $~~108~~105.58 million from interest-bearing) at ~~September~~March 3031, ~~2003~~2004 and $~~250~~261.92 million ($~~131~~151.32 million from noninterest-bearing and $~~119~~110.60 million from interest-bearing) at December 31, ~~2002~~2003.

		Stated Rate			~~September~~March 3031, ~~2003~~2004			December 31, ~~2002~~2003
Noninterest-bearing checking			0.00	%	$	5573,~~292~~023		$	5160,~~029~~793
Interest-bearing checking			0.00 - 1.00			1319,~~990~~141			1418,~~353~~625
Savings accounts			0.25 - 1.24			4446,~~730~~063			4445,~~603~~459
Money market demand accounts			0.00 - 2.13			~~594~~629,~~795~~390			~~530~~621,~~659~~571
						708,807			640,644
						767,617			746,448
Certificate accounts			Less than 2.00			465,424			442,044
	Less than 2.00					388,378			104,358
			2.00 - 2.99			236,659			275,106
		2.00 - 2.99				328,875			558,337
			3.00 - 3.99			138,247			138,779
		3.00 - 3.99				137,187			206,645
			4.00 - 4.99			47,124			47,108
		4.00 - 4.99				47,641			63,234
			5.00 - 5.99			22,791			23,769
		5.00 - 5.99				24,812			34,447
			6.00 - 6.99			2,235			2,858
		6.00 - 6.99				3,194			6,524
			7.00 - 7.99			19			19
		7.00 - 7.99				19			106
						912,499			929,683
		8.00 - 8.99				1			73
					$	1,680,116		$	1,676,131
						930,107			973,724
Weighted average interest rate						1.63	%		1.64	%
					$	1,638,914		$	1,614,368
Weighted average interest rate						1.69	%		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 ~~September~~March 3031, ~~2003~~2004 and December 31, ~~2002~~2003 (in thousands):

	September 30, 2003		December 31, 2002
	March 31, 2004		December 31, 2003
Noninterest-bearing checking	$	~~194~~204,~~206~~258	$	~~182~~212,~~290~~003
Interest-bearing checking		~~122~~124,~~444~~928		~~134~~128,~~034~~610
Money market demand accounts		~~347~~392,~~427~~368		~~279~~360,~~717~~376

~~Coastal~~The ~~Bancorp,~~scheduled ~~Inc.~~maturities ~~and~~of ~~Subsidiaries~~certificate ~~Notes~~accounts tooutstanding ~~Consolidated~~at ~~Financial~~March ~~Statements~~31, 2004 were as follows (~~Unaudited~~in thousands):

The scheduled maturities of certificate accounts outstanding at September 30, 2003 were as follows (in thousands):

	March 31, 2004


0 through 12 months	$	660,585
13 through 24 months		170,516
25 through 36 months		17,212
37 through 48 months		35,531
49 through 60 months		28,558
Over 60 months		97

	$	912,499

	September 30, 2003
0 through 12 months		$	694,369
13 through 24 months			163,843
25 through 36 months			13,080
37 through 48 months			29,528
49 through 60 months			29,142
Over 60 months			145
		$	930,107

(6) Advances from the FHLB

The weighted average interest rates on advances from the FHLB at ~~September~~March 3031, ~~2003~~2004 and December 31, ~~2002~~2003 were 1.9991% and 2.7102%, respectively. The scheduled maturities and related weighted average interest rates on advances from the FHLB at ~~September~~March 3031, ~~2003~~2004 are summarized as follows (dollars in thousands):

	Weighted
	Average
Due during the year	Average
Due during the year ending December 31,	Interest Rate			Amount
ending December 31,	Interest Rate			Amount
2003		3.83	%	$	3,452
2004		1.37	%	$	262,507
2004		1.64			295,400
2005		2.01			382,564
2005		2.04			356,025
2006		1.71			115,217
2006		1.70			105,754
2007		4.38			2,888
2007		4.38			2,999
2008		3.78			10,913
2008		3.85			5,562
2009		7.97			3,063
2009		7.99			3,244
2010		4.78			4,248
2010		5.38			2,055
2011		6.62			708
2011		6.64			729
2012		5.76			292
2013		5.4623			810,~~671~~521
2014		5.4429			23,~~869~~691
2015		6.6665			1,~~601~~568
2017		5.43			1,~~973~~958
2018		5.05			1,~~405~~374
		1.99	%	$	792,031
		1.91	%	$	801,512

Advances from the FHLB are secured by certain first-lien mortgage and multifamily loans and mortgage-backed securities owned by Coastal.

~~Coastal Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements~~ (~~Unaudited~~7) Subordinated Debentures

~~(7)~~On ~~Company~~December ~~Obligated~~31, ~~Mandatorily~~2003, ~~Redeemable~~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 ~~Preferred~~I ~~Securities~~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 expense. The increase to other interest income and interest expense totaled $35,000 for the three months ended March 31, 2003.

On June 23, 2003, ~~Bancorp~~Coastal, through Coastal Capital Trust II (~~a consolidated trust subsidiary) (~~"CCTII"), issued to a private institutional investor, 10,000 floating rate pooled 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 ~~the~~ CCTII and have substantially the same payment terms as these Trust Preferred Securities II. The junior subordinated ~~notes~~debentures are the only assets of ~~the~~ CCTII and interest payments from the ~~notes~~debentures finance the distributions paid on the Trust Preferred Securities II. Distributions on the ~~securities~~debentures are payable quarterly at a variable interest rate, reset quarterly, equal to LIBOR plus 3.05%, and are included in interest expense in the consolidated statements of income. Interest was paid on the Trust Preferred Securities II at the rate of 4.0775% for the quarter ended September 30, 2003. Effective October 1, 2003 the rate reset at 4.19% for the fourth quarter of 2003.

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 ~~all of~~ Bancorp's 9.12% Series A Cumulative Preferred Stock (Nasdaq:CBSAO).

On June 18, 2002, Coastal, through Coastal Capital Trust I (~~a consolidated trust subsidiary) (~~"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 Bancorp's junior subordinated debentures, which were purchased by ~~the~~ CCTI. The junior subordinated debentures are the only assets of ~~the~~ CCTI and interest payments from the debentures finance the distributions paid on the Trust Preferred Securities I. Distributions on the ~~securities~~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 distributions on the junior subordinated debentures from time to time for a period not to exceed 20 consecutive quarters.

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

~~Coastal~~(8) ~~Bancorp,~~Earnings ~~Inc.~~Per ~~and Subsidiaries Notes to Consolidated Financial Statements (Unaudited)~~Share

The following summarizes information related to the computation of basic and diluted earnings per share (8"EPS") ~~Senior~~for ~~Notes~~the ~~Payable~~three-month periods ended March 31, 2004 and 2003 (dollars in thousands, except share and per share data):

On June 30, 1995, Coastal issued $50.0 million of 10.0% Senior Notes due June 30, 2002. The Senior Notes became redeemable at Coastal's option, in whole or in part, on June 30, 2000, at par, plus accrued interest to the redemption date. Interest on the Senior Notes was payable quarterly. During 2001 and 1999, Coastal repurchased in the open market $3.0 and $3.1 million, respectively, of the Senior Notes outstanding at par. On February 1, 2002, Coastal redeemed all of the remaining Senior Notes outstanding ($43.9 million) at par plus accrued interest to the redemption date.

	Three Months Ended
	March 31,

	2004		2003


Net income	$	4,112	$	3,685
Preferred stock dividends		-		627

Net income available to common stockholders	$	4,112	$	3,058

Weighted average number of common shares
outstanding used in basic EPS calculation		5,283,602		5,144,407
Add assumed exercise of outstanding stock
options as adjusted for dilutive securities		225,194		242,159

Weighted average number of common shares
outstanding used in diluted EPS calculation		5,508,796		5,386,566

Basic EPS	$	0.78	$	0.59

Diluted EPS	$	0.75	$	0.57

(9) ~~Derivative~~Coastal ~~Instruments~~Bancorp, Inc. Preferred Stock

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. For the nine months ended September 30, 2003 and 2002, Coastal recorded a fair value gain (loss) on these derivative instruments of $15,000 and ($18,000), respectively. As of September 30, 2003 and December 31, 2002, interest rate cap agreements were Coastal's only derivative instruments and were recorded at fair value.

Payments on the interest rate cap agreements are based on the notional principal amount of the agreements; no funds were actually borrowed or are to be repaid. No payments are required to be made upon the expiration of the agreements. The fair value of the interest rate cap agreements was zero at September 30, 2003 and December 31, 2002, which is the recorded book value of the agreements at such dates. The interest rate cap agreements are used to alter the interest rate sensitivity of a portion of Coastal's mortgage-backed securities and loans receivable portfolios. As such, the amortization of any purchase price and interest income from the interest rate cap agreements is recorded in interest income in the accompanying consolidated statements of income, as applicable. The net decrease in interest income related to the interest rate cap agreements for the nine months ended September 30, 2003 and 2002 was approximately $15,000 and $19,000, respectively. No payments were made to Coastal under the interest rate cap agreements during the nine months ended September 30, 2003 or 2002. As of September 30, 2003, Coastal had one interest rate cap agreement with a third party with a notional amount totaling $4.3 million. The current agreement provides for the third party to make payments to Coastal whenever a defined floating rate exceeds 9.0%. This agreement expires in 2003.

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 its assets and liabilities to expected market level changes in an instantaneous shock of plus and minus 200 basis points on a quarterly basis. This process 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 cap agreement and attempts to control this risk through credit monitoring procedures. The notional principal amount does not represent Coastal's exposure to credit loss.

Coastal Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited)

(10) Earnings Per Share

The following summarizes information related to the computation of basic and diluted earnings per share ("EPS") for the nine- and three-month periods ended September 30, 2003 and 2002 (dollars in thousands, except share and per share data):

	Nine Months Ended
	September 30,
	2003		2002
Net income	$	10,197	$	13,411
Preferred stock dividends		1,470		1,881
Net income available to common stockholders	$	8,727	$	11,530
Weighted average number of common shares outstanding used in basic EPS calculation

5,159,564

5,596,525

Add assumed exercise of outstanding stock options as adjusted for dilutive securities

229,003

262,176

calculation

5,388,567

5,858,701

Basic EPS

1.69

2.06

Diluted EPS

1.62

1.97

Three Months Ended

September 30,

2003

2002

Net income

2,974

4,375

Preferred stock dividends

216

627

Net income available to common stockholders

2,758

3,748

Weighted average number of common shares outstanding used in basic EPS calculation

5,168,964

5,226,334

Add assumed exercise of outstanding stock options as adjusted for dilutive securities

218,383

248,101

EPS calculation

5,387,347

5,474,435

Basic EPS

0.53

0.72

Diluted EPS

0.51

0.68

(11) Coastal Banc ssb Preferred Stock

On October 21, 1993, the Bank issued 1,150,000 shares of 9.0% Noncumulative Preferred Stock, no par value, Series A, at a price of $25 per share to the public (Nasdaq:CBSAP). Dividends on the 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, the 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.

Coastal Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited)

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 9.0% Series A Noncumulative Preferred Stock on July 15, 2002 (see note 7). 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.

Pursuant to Coastal's tax benefit agreement with the FDIC, Coastal received a tax benefit for dividends paid on this Preferred Stock. This benefit ceased upon the redemption of this Preferred Stock.

(12) Coastal Bancorp, Inc. Preferred Stock

On May 11, 1999, Coastal Bancorp, Inc. ("Bancorp") issued 1,100,000 shares of 9.12% Series A Cumulative Preferred Stock, no par value, at a price of $25 per share (Nasdaq:CBSAO) to the public ("Bancorp Preferred Stock"). Dividends on the Bancorp 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 (see note 7) and a capital distribution of $17.9 million from the Bank, Bancorp redeemed from the stockholders of record all of the 9.12% Series A ~~Noncumlative~~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 to the date of redemption.

Pursuant to Coastal's tax benefit agreement with the ~~FDIC~~FRF, Coastal received a tax benefit for dividends paid on this ~~Bancorp~~preferred ~~Preferred Stock~~stock. This benefit ceased upon the redemption of the Bancorp Preferred Stock. The benefit amounted to a reduction in Coastal'’s ~~effective~~provision ~~tax~~for ~~rate~~Federal ofincome ~~approximately~~taxes 3%of $219,000 for the ~~nine~~three months ended ~~September~~March 3031, 2003 ~~and 2002~~. ~~Excluding~~ ~~this~~The ~~tax benefit and the tax benefit for the minority interest expense in 2002, the~~ effective tax rate for the ~~nine~~three months ended ~~September~~March 3031, ~~2003~~2004 and ~~2002~~2003 was approximately 35%, excluding this tax benefit in 2003.

(1310) Statutory Capital Requirements

The applicable regulations require federally insured institutions, which are not the highest rated, to have a minimum regulatory tier 1 (core) capital to total assets ratio equal to a minimum of 4.0%, a tier 1 risk-based capital to risk-weighted assets ratio of 4.0% and a total risk-based capital to risk-weighted assets ratio of 8.0%.

At ~~September~~March 3031, ~~2003~~2004, the Bank's regulatory capital in relation to its existing regulatory capital requirements for capital adequacy purposes was as follows (dollars in thousands):

Minimum For Capital

~~Minimum For Capital~~

Well-Capitalized

~~Well-Capitalized~~

Actual

Adequacy Purposes

~~Adequacy Purposes~~

Requirements

~~Requirements~~

Capital Requirement

Amount

Ratio

Amount

Ratio

Amount

Ratio

Tier 1 (core)

~~164~~169,~~765~~462

6.2935

~~104~~106,~~696~~812

4.00

~~130~~133,~~870~~515

5.00

Tier 1 risk-based

~~164~~169,~~765~~462

9.2128

7173,~~561~~005

4.00

~~107~~109,~~342~~507

6.00

Total risk-based

~~183~~189,~~831~~046

10.2836

~~143~~146,~~123~~009

8.00

~~178~~182,~~904~~511

10.00

As of ~~September~~March 3031, ~~2003~~2004, the most recent notification from the Federal Deposit Insurance Corporation ("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 ratios as set forth in the table above. There are no conditions or events since that notification that management believes have changed the institution's category.

Coastal Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited)

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

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 required regulatory approvals have been granted. Coastal’s shareholders voted in favor of the merger at the annual meeting held on April 22, 2004. If all other customary conditions are met, the merger is expected to close on May 12, 2004.

Financial Condition

Total assets increased slightly by $~~114~~15.94 million from December 31, ~~2002~~2003 to ~~September~~March 3031, ~~2003~~2004. The net increase was primarily due to increases of $~~139~~27.23 million in loans receivable held for sale and $5214.63 million in ~~mortgage-backed~~federal ~~securities~~funds ~~available-for-sale~~sold, ~~somewhat~~ offset by decreases of $4914.96 million in loans receivable ~~held for sale~~ and $265.34 million in ~~federal~~cash ~~funds~~and ~~sold~~cash equivalents when comparing the two periods. There were also small changes in other asset categories. The increase in loans receivable ~~was~~held ~~primarily~~for sale was due to the purchase of $~~452~~35.70 million in ~~single-family~~ mortgage loans, ~~offset~~held byfor ~~principal~~sale ~~payments~~in ~~received~~March onof ~~mortgage~~2004, ~~and~~offset ~~other~~by ~~types~~the ofsale ~~loans. The increase~~ in ~~mortgage-backed~~February ~~securities~~2004 ~~was due to the purchase~~ of $~~243~~8.0 million of ~~securities,~~mortgage ~~offset~~loans byheld ~~sales~~for ofsale ~~$33.1~~purchased ~~million~~in ~~and~~December ~~principal~~of ~~payments received~~2003. The decrease in loans receivable ~~held for sale~~ was due ~~primarily~~ to ~~the~~principal ~~sale~~payments toreceived ~~third~~that ~~party~~more ~~investors~~than inoffset ~~January~~the ~~2003~~purchases ofand aproduction ~~loan~~during ~~package purchased in November of 2002,~~ the ~~majority of which was intended to be sold~~period.

From December 31, ~~2002~~2003 to ~~September~~March 3031, ~~2003~~2004, total liabilities increased by $~~136~~9.53 million primarily ~~to fund asset purchases and~~ due to ~~the~~deposit ~~issuance~~growth ofand ~~Trust~~borrowing ~~Preferred Securities II~~ to ~~partially~~ fund ~~the~~asset ~~redemption of the 9~~purchases.~~12%~~ ~~Series A Preferred Stock.~~ When comparing the two periods, ~~advances~~deposits ~~from the FHLB~~ increased $954.90 million and ~~deposits~~advances ~~increased~~from ~~$24.5 million. During~~ the ~~nine~~FHLB ~~months~~increased ~~ended September 30, 2003, Coastal issued~~ $101.06 million. inThere ~~Trust~~were ~~Preferred~~also ~~Securities~~small ~~II through~~changes ain ~~consolidated~~other ~~trust~~liability ~~subsidiary (see note 7 to the Consolidated Financial Statements)~~categories. Stockholders' equity ~~decreased~~increased 14$6.1% ~~or $21.6~~ million from December 31, ~~2002~~2003 to ~~September~~March 3031, ~~2003~~2004 primarily as a result of ~~the redemption of the 9.12% Series A Cumulative Preferred Stock (see note 12 to the Consolidated Financial Statements). Other changes included~~ net income, offset by dividends declared, and ~~increases~~a of $~~934,000~~1.8 ~~and~~million ~~$610,000~~increase in accumulated other comprehensive ~~loss~~gain ~~and~~on ~~Treasury~~securities ~~Stock, respectively~~available-for-sale.

Results of Operations for the ~~Nine~~Three Months Ended ~~September~~March 3031, ~~2003~~2004 and ~~2002~~ 2003

General

For the ~~nine~~three months ended ~~September~~March 3031, ~~2003~~2004, net income available to common stockholders was $104.21 million compared to $133.41 million for the ~~nine~~three months ended ~~September~~March 3031, ~~2002~~2003. The ~~decrease~~$1.0 million increase was primarily due to the following: a $~~9.9~~277,000 ~~million~~increase ~~decrease~~ in net interest income, as a ~~result~~$450,000 ~~of a 0.56%~~ decrease in ~~net~~the ~~interest~~provision ~~margin,~~for toloan ~~2.54%~~losses, ~~and~~ a $~~9.6~~222,000 ~~million~~ decrease in ~~average~~noninterest ~~net~~expense ~~interest-earning~~and ~~assets when comparing the first nine months of 2003 to the same period in 2002. This decrease in net interest income was somewhat offset by~~ a $~~2.9~~45,000 ~~million~~ increase in noninterest income, offset by a $~~725~~567,000 ~~decrease~~increase in ~~noninterest expense, a $1.6 million decrease in~~ the provision for Federal income taxes. ~~and~~In aaddition, ~~$1.5~~dividends ~~million~~on ~~decrease~~preferred instock ~~the~~decreased ~~expense~~$627,000 ~~for~~due ~~minority~~to ~~interest~~the ~~(related~~July to31, ~~preferred~~2003 ~~stock~~redemption of ~~Coastal~~the ~~Banc~~9.12% ~~ssb~~Series ~~which~~A ~~was~~Cumulative ~~redeemed~~Preferred onStock ~~July~~of 15Coastal Bancorp, ~~2002)~~Inc.

Interest Income

~~Due~~Interest ~~primarily to principal paydowns, amortization of related premiums and the replacement of assets at lower yields (interest rates), interest~~ income decreased $181.50 million to $8628.16 million for the ~~nine~~three months ended ~~September~~March 3031, ~~2003~~2004 from $~~104~~29.6 million for the ~~nine~~three months ended ~~September~~March 3031, ~~2002~~2003. This decrease was due primarily to principal paydowns, amortization of related premiums and the replacement of assets at lower yields (interest rates). The decrease was comprised of a $~~15.5~~942,000 ~~million~~ decrease in interest income on loans receivable, a $~~2.7~~21,000 ~~million~~ decrease in interest income on mortgage-backed securities and a $~~374~~56,000 decrease in interest income on FHLB stock, federal funds sold and other interest-earning assets.

When comparing the ~~two~~quarter ~~periods~~ended March 31, 2004 to the same period in 2003, average interest-earning assets increased $18209.26 million while the average yield decreased 10.0558% ~~from~~to 54.7239% in ~~2002~~2004 tofrom 4.6797% in 2003. The $18209.26 million increase in average interest-earning assets consisted primarily of a $23142.82 million increase in the average balance of ~~mortgage-backed~~loans ~~securities~~receivable ~~available-for-sale,~~and ~~offset~~a ~~by an~~ $853.4 million ~~decrease~~increase in ~~other~~the average balance of mortgage-backed securities available-for-sale. The 10.0558% decrease in the average yield was primarily due to decreases of 10.1160% and 0.9034% in the average yield on loans receivable and mortgage-backed securities, respectively,. ~~due~~The average yield on loans receivable decreased to ~~significant~~4.90% ~~principal~~from ~~paydowns~~5.50% and the ~~replacement~~average ofyield ~~assets~~on atmortgage-backed ~~lower~~securities ~~yields~~available-for-sale ~~(interest~~decreased ~~rates)~~to ~~during~~2.80% ~~the~~from ~~nine~~3.14%, ~~months~~when comparing the quarter ended ~~September~~March 3031, 2004 to the same period in 2003.

During 2003, Coastal ~~has~~ 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 refinancings of ~~its~~ mortgage assets. ~~The~~Since ~~paydowns, on an annualized basis, were approximately 43% on mortgage-backed securities and 50% on single-family mortgage loans during~~ the ~~nine months ended September 30, 2003. Because the~~ majority of Coastal's single-family mortgage assets have been acquired primarily through bulk purchases at a premium, the significant paydowns ~~Coastal has experienced have~~ resulted in greater premium amortization (and therefore a lower yield) on those purchased assets. InWhile ~~addition,~~Coastal ~~due~~purchased tomortgage-backed ~~the~~securities ~~lower~~and ~~interest~~single-family ~~rate~~mortgage ~~environment,~~loans ~~Coastal~~receivable isto ~~replacing~~replace ~~these~~the paid down assets, ~~with~~the purchased assets were at lower ~~yielding~~interest ~~assets,~~rates ~~again~~due ~~with~~to ~~many~~the ~~being~~lower ~~purchased~~market atrates aof ~~premium~~interest.

Interest Expense

Interest expense on interest-bearing liabilities was $3912.21 million for the ~~nine~~three months ended ~~September~~March 3031, ~~2003~~2004, as compared to $4713.84 million for the same period in ~~2002~~2003. The decrease in interest expense was again primarily due to the lower overall market rates of interest ~~that declined throughout 2002 and have continued to decline during the first nine months of 2003~~, offset by the increase in interest expense due to ~~the~~increased 9liabilities.~~0% Trust Preferred Securities I issued in June of 2002 and the floating rate Trust Preferred Securities II issued in June of 2003.~~

When comparing the two periods, the average rate paid on interest-bearing liabilities decreased 0.46% to 2.3807% for the ~~nine~~three months ended ~~September~~March 3031, ~~2003~~2004 from 2.9453% for the same period in ~~2002~~2003 ~~and~~while average interest-bearing liabilities increased by $27208.84 million. The 0.5646% decrease in the average rate paid on interest-bearing liabilities was due primarily to a 0.6943% decrease in the average ~~rates~~rate paid on ~~advances~~deposits ~~from the FHLB~~ and a 0.6456% decrease in the average rate paid on ~~interest-bearing~~advances ~~deposits~~from the FHLB. The increase in average interest-bearing liabilities consisted primarily of aincreases of $50153.42 million ~~increase~~ in advances from the FHLB ~~and~~to afund ~~$34.4~~purchases ~~million increase in the average balance~~ of ~~Trust~~mortgage ~~Preferred~~loans ~~Securities~~and ~~due~~mortgage-backed tosecurities, ~~the issuance of~~ $5044.09 million ofin the ~~Trust~~average ~~Preferred~~balance ~~Securities~~of Ideposits ondue ~~June~~to ~~18,~~deposit ~~2002~~growth ~~at 9.0%~~ and $10.~~0 million of the Trust Preferred Securities II on June 23, 2003 at a floating rate (LIBOR plus~~ 3~~.05).~~ ~~These increases were somewhat offset by a $52.1~~ million ~~decrease~~ in ~~average~~subordinated ~~interest-bearing~~debentures ~~deposits (primarily~~ due to the ~~sale~~issuance ~~of the Hill Country branches~~ in ~~December~~June ~~2002) and a $5.0 million decrease in the average balance~~ of ~~Senior Notes due to their redemption on February 1, 2002~~2003.

Net Interest Income

Net interest income was $4616.94 million for the ~~nine~~three months ended ~~September~~March 3031, ~~2003~~2004 ~~and~~compared to $5616.82 million for the same period in ~~2002~~2003. As discussed above, the ~~decrease~~increase was due primarily to principal paydowns, amortization of related premiums and the replacement of assets at lower yields (interest rates). Net interest margin ("Margin") was 2.5453% for the ~~nine~~three months ended ~~September~~March 3031, ~~2003~~2004 compared to 32.1071% for the ~~nine~~three months ended ~~September~~March 3031, ~~2002~~2003. Margin represents net interest income as a percentage of average interest-earning assets. Net interest spread ("Spread"), defined to exclude noninterest-bearing deposits, decreased to 2.2932% for the ~~nine~~three months ended ~~September~~March 3031, ~~2003~~2004 from 2.7844% for the ~~nine~~three months ended ~~September~~March 3031, ~~2002~~2003. Management also calculates an alternative Spread which includes noninterest-bearing deposits. Under this calculation, the alternative Spreads for the ~~nine~~three months ended ~~September~~March 3031, ~~2003~~2004 and ~~2002~~2003 were 2.4748% and 2.9963%, respectively. Margin and Spread are affected by the changes in the amount and composition of interest-earning assets and interest-bearing liabilities. When comparing the two periods, average interest-earning assets increased $18209.26 million and average interest-bearing liabilities increased $27208.84 million. in the 2004 period.

Management's overall goal is to continue to improve the asset/liability composition to be less vulnerable to market interest rate fluctuations, primarily through the addition of loans tied to variable rates such as LIBOR and local and regional prime rates. Management attempts to mitigate margin compression in a declining interest rate environment by requiring interest rate floors on certain variable rate loans.

Provision for Loan Losses and the Allowance for Loan Losses - Critical Accounting Policy

~~The~~During the quarter ended March 31, 2004, Coastal recorded a provision for loan losses ~~was~~of $~~2.7~~450,000 ~~million~~compared to $900,000 for the ~~nine~~same ~~months~~period ~~ended~~in ~~September~~2003. ~~30,~~The provision recorded in the first quarter of 2004 is less than the amount recorded in the first quarter of 2003 based upon the current level of unallocated reserves and the decrease in nonperforming loans. At March 31, 2004, the allowance for loan losses as a percentage of total loans (excluding loans held for sale which are recorded at the ~~nine~~lower ~~months~~of ~~ended~~cost ~~September~~or 30fair value) was 1.00% compared to 0.98% at December 31, ~~2002~~2003. At ~~September~~March 3031, ~~2003~~2004, Coastal had nonperforming loans totaling $1514.49 million, which was a decrease of $35.13 million, or 1726%, when compared to December 31, ~~2002~~2003. This decrease was primarily a result of the decrease in nonperforming first lien residential (single-family) mortgage loans ~~due to management's increased focus on ongoing collection efforts~~. Nonperforming loans are those loans on nonaccrual status as well as those loans greater than ninety days delinquent and still accruing interest. ~~The~~At March 31, 2004, nonperforming assets (which include nonperforming loans, real estate owned and repossessed assets) were $17.4 million and the ratio of nonperforming assets to total assets was 0.7064% ~~at September 30~~, ~~2003,~~ compared to 0.9185% at December 31, ~~2002~~2003. At ~~September~~March 3031, ~~2003~~2004, the allowance for loan losses as a percentage of nonperforming loans (excluding nonperforming loans held for sale which are recorded at the lower of cost or fair value) was ~~123~~131.807% compared to 9795.766% at December 31, ~~2002~~2003.

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 material 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. 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 at the time to recognize losses on loans, there can be no assurance that future additions to the allowance will not be necessary.

Noninterest Income

For the ~~nine~~three months ended ~~September~~March 3031, ~~2003~~2004, noninterest income ~~increased~~amounted ~~$2.9 million~~ to $~~11.~~4.0 million, ~~compared~~a toslight increase of $~~8.5~~45,000, ~~million~~when ~~for~~compared to the ~~nine~~three months ended ~~September~~March 3031, ~~2002~~2003. The $~~2.9~~45,000 ~~million~~ increase in noninterest income was ~~primarily~~comprised ~~due~~of tothe following: a $~~2.1~~244,000 ~~million~~ increase in ~~service~~the ~~charges on deposit accounts, a $758,000~~ gain on ~~the~~ sale of ~~loans~~real ~~receivable~~estate ~~held~~owned, ~~for sale and~~ a $~~302~~200,000 ~~gain~~increase onin the gain on sale of mortgage-backed securities available- for- sale., ~~The~~a ~~increased~~$188,000 ~~income~~increase ~~from~~in ~~service~~the ~~charges~~gain on ~~deposit~~sale ~~accounts~~of isrepossessed assets due to ~~Coastal's~~the ~~continued~~sale ~~focus~~of onone ~~increasing~~asset ~~transaction-type~~during ~~accounts~~the ~~and~~first ~~the~~quarter ~~related~~of ~~fee~~2004, ~~income~~a $113,000 ~~including~~increase ~~Coastal's~~in ~~Free~~other ~~Checking~~noninterest income and ~~Bounce~~a ~~Protection~~$25,000 ~~features~~increase onin ~~retail~~loan ~~checking~~fees, ~~accounts~~largely ~~introduced~~offset ~~during~~by ~~August~~a ~~2002.~~$716,000 ~~The~~decrease ~~increase~~ in the gain on ~~the~~ sale of ~~mortgage~~ loans held for sale, ~~was~~ due to ~~routine~~gains ~~sales~~of ~~transactions~~$734,000 byin ~~Coastal~~the ~~Banc~~quarter ~~ssb~~ended ~~(the~~March ~~"Bank")~~31, ~~which were facilitated by Coastal Banc Mortgage Corp. ("CBMC")~~2003, ancompared ~~affiliate of the Bank. The loans sold were purchased by the Bank in packages with the intention~~ to ~~resell~~$18,000 ~~all or part of the loans~~ in the ~~packages to third party investors. CBMC was formed during the third~~ quarter ofended ~~2002~~March ~~for~~31, ~~the~~2004 ~~purpose of facilitating the purchase~~ and ~~sale~~a of$9,000 ~~whole~~decrease ~~loans~~in ~~and~~service ~~participations~~charges toon ~~third~~deposit ~~parties~~accounts. ~~These~~The ~~increases in other noninterest income were somewhat offset by a~~ $~~230~~734,000 ~~decrease in the~~ gain on ~~the~~ sale of ~~real~~loans ~~estate~~held ~~owned~~for ~~and~~sale aduring ~~$207,000~~the ~~decrease~~first inquarter ~~loan~~of ~~fees.~~2003 ~~The decrease in loan fees~~ was due to ~~decreased~~the ~~construction~~sale ~~loan~~of ~~activity,~~mortgage noloans ~~warehouse~~held ~~activity~~for insale ~~2003~~that ~~and~~were ~~decreased~~purchased ~~single-family~~in ~~mortgage~~packages ~~loan~~with ~~fees~~the ~~due~~intention to ~~the~~resell ~~fact~~all ~~that~~or ~~the~~part ~~number~~ of ~~Coastal's~~the ~~mortgage~~ loans ~~that~~to ~~are~~third ~~being~~party ~~serviced by Coastal has decreased~~investors.

Noninterest Expense

For the ~~nine~~three months ended ~~September~~March 3031, ~~2003~~2004, noninterest expense decreased $~~725~~222,000 to $13.7 million from $13.9 million for the ~~nine~~three months ended ~~September~~March 3031, ~~2002~~2003. When comparing the ~~nine~~three months ended ~~September~~March 3031, ~~2003~~2004 to the same period in ~~2002~~2003, the $~~725~~222,000 net decrease in noninterest expense was comprised ~~primarily~~ of a decrease in compensation, payroll taxes and benefits of $~~1.1 million~~174,000, a decrease of $~~404~~201,000 in ~~office occupancy and a $491,000 decrease in advertising, somewhat offset by a $1.2 million increase in~~ other noninterest expense., ~~The~~due ~~$1.1~~largely ~~million~~to ~~decrease in compensation related expense is primarily comprised of the following:~~ a ~~$555,000~~ decrease ~~in incentive and bonus expense because~~ of ~~the overall lower net income results, a~~ $~~444~~119,~~000~~0000 ~~decrease due to the sale of the five Hill Country branches~~ in ~~December~~expenses ~~2002,~~related ato ~~$373~~loans,~~000~~ ~~decrease~~repossessed ~~due~~assets toand ~~the~~real ~~outsourcing~~estate ofowned ~~the~~and ~~internal audit department in September of 2002, offset by~~ a $~~281~~4,000 ~~increase in compensation paid to CBMC employees including brokerage commissions related to the loan sales mentioned previously. The~~ decrease in ~~office~~postage ~~occupancy was due to various assets becoming fully depreciated in 2002~~ and indelivery ~~2003 and to the sale of the five Hill Country branches in December of 2002. The decrease in advertising~~ expense ~~was due to management's decision to reduce this spending in 2003~~. ~~The~~These ~~increase~~decreases inwere ~~other~~somewhat ~~noninterest~~offset ~~expense~~by ~~was~~increases ~~primarily comprised~~ of ~~the following: a~~ $~~349~~72,000 ~~increase~~ in ~~audit~~office ~~and accounting fees~~occupancy, a $~~353~~46,000 ~~increase~~ in ~~legal~~data ~~fees~~processing and ~~insurance premiums, a~~ $~~122~~39,000 ~~increase~~ in ~~the provision for losses on deposit accounts and a $379,000 increase in expenses related to loans, repossessed assets and real estate owned~~advertising.

Provision for Federal Income Taxes

The provision for Federal income taxes for the ~~nine~~three months ended ~~September~~March 3031, ~~2003~~2004 was $42.72 million compared to $61.37 million for the ~~nine~~three months ended ~~September~~March 3031, ~~2002~~2003. The $~~1.6~~567,000 ~~million~~increase ~~decrease~~ was due to the ~~lower~~increased amount of income before provision for Federal income taxes ~~and minority interest~~, with the effective tax rate for the periods being approximately 3235% for ~~the~~three ~~nine~~ months ended ~~September~~March 3031, ~~2003~~2004 and 3231% for the same period in ~~2002 (when taking into account the tax benefit for the minority interest expense in 2002)~~2003. As discussed in the notes to the Consolidated Financial Statements, Coastal received a tax benefit for the dividends paid on the Bancorp Preferred Stock pursuant to an agreement with the FDIC. The provision for Federal income taxes ~~includes benefits of $514,000 and $658,000~~ for the ~~nine~~quarter ~~months~~ ended ~~September~~March 3031, 2003 ~~and~~included ~~2002,~~a ~~respectively~~tax benefit of $219,0000. This benefit ceased upon redemption of the Bancorp Preferred Stock on July 31, 2003.

Results of Operations for the Three Months Ended September 30, 2003 and 2002

General

For the three months ended September 30, 2003, net income was $3.0 million compared to $4.4 million for the three months ended September 30, 2002. The decrease was primarily due to a $3.5 million decrease in net interest income, as a result of a 0.63% decrease in net interest margin when comparing the third quarter of 2003 to the same period in 2002. This decrease in net interest income was partially offset by an $827,000 increase in noninterest income, a $469,000 decrease in noninterest expense, a $547,000 decrease in the provision for Federal income taxes and a $213,000 decrease in the expense for minority interest (related to the preferred stock of Coastal Banc ssb which was redeemed on July 15, 2002).

Interest Income

Due primarily to principal paydowns, amortization of related premiums and the replacement of assets at lower yields (interest rates), interest income decreased $6.5 million to $27.6 million for the three months ended September 30, 2003 from $34.0 million for the three months ended September 30, 2002. The decrease was comprised of a $5.6 million decrease in interest income on loans receivable, a $783,000 decrease in interest income on mortgage-backed securities and a $98,000 decrease in interest income on FHLB stock, federal funds sold and other interest-earning assets.

When comparing the two periods, average interest-earning assets increased $78.0 million while the average yield decreased 1.19% from 5.49% in 2002 to 4.30% in 2003. The $78.0 million increase in average interest-earning assets consisted primarily of a $74.4 million increase in the average balance of mortgage-backed securities. The 1.19% decrease in the average yield was primarily due to decreases of 1.14% and 1.12% in the average yield on loans receivable and mortgage-backed securities, respectively, due to significant principal paydowns and the replacement of assets at lower yields (interest rates).

During 2003, Coastal has 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 refinancings of its mortgage assets. These paydowns, on an annualized basis, were approximately 49% on mortgage-backed securities and over 60% on single-family mortgage loans during the three months ended September 30, 2003. Because the majority of Coastal’s single-family mortgage assets have been acquired through bulk purchases, the significant paydowns Coastal has experienced have resulted in greater premium amortization (and therefore a lower yield) on those purchased assets. In addition, due to the lower interest rate environment, Coastal is replacing these paid down assets with lower yielding assets, again with many being purchased at a premium.

Interest Expense

Interest expense on interest-bearing liabilities was $12.6 million for the three months ended September 30, 2003, as compared to $15.7 million for the same period in 2002. The decrease in interest expense was again primarily due to the lower overall market rates of interest that declined throughout 2002 and have continued to decline during the first nine months of 2003, offset by the increase in interest expense due to the floating rate Trust Preferred Securities II issued in June of 2003.

When comparing the two periods, the average rate paid on interest-bearing liabilities decreased to 2.19% for the three months ended September 30, 2003 from 2.81% for the same period in 2002 and average interest-bearing liabilities increased $78.6 million. The 0.62% decrease in the average rate paid on interest-bearing liabilities was due primarily to a 0.75% decrease in the average rate paid on advances from the FHLB and a 0.59% decrease in the average rate paid on interest-bearing deposits. The increase in average interest-bearing liabilities consisted primarily of a $120.5 million increase in the average balance of FHLB advances and an increase in Trust Preferred Securities due to the issuance of $10.0 million of the Trust Preferred Securities II on June 23, 2003 at a floating rate (LIBOR plus 3.05%). These increases were somewhat offset by a $51.9 million decrease in average interest-bearing deposits, primarily due to the December 2002 branch sale.

Net Interest Income

Net interest income was $14.9 million for the three months ended September 30, 2003 and $18.4 million for the same period in 2002. As discussed above, the decrease was due primarily to principal paydowns, amortization of related premiums and the replacement of assets at lower yields (interest rates). Net interest margin ("Margin") was 2.34% for the three months ended September 30, 2003 compared to 2.97% for the three months ended September 30, 2002. Margin represents net interest income as a percentage of average interest-earning assets. Net interest spread ("Spread"), defined to exclude noninterest-bearing deposits, decreased to 2.11% for the three months ended September 30, 2003 from 2.68% for the three months ended September 30, 2002. Management also calculates an alternative Spread which includes noninterest-bearing deposits. Under this calculation, the alternative Spreads for the three months ended September 30, 2003 and 2002 were 2.27% and 2.88%, respectively. Margin and Spread are affected by the changes in the amount and composition of interest-earning assets and interest-bearing liabilities. When comparing the two periods, average interest-earning assets increased $78.0 million and average interest-bearing liabilities increased $78.6 million.

Provision for Loan Losses and the Allowance for Loan Losses - Critical Accounting Policy

The provision for loan losses was $900,000 for the three months ended September 30, 2003 and for the three months ended September 30, 2002. At September 30, 2003, Coastal had nonperforming loans totaling $15.4 million, which was a decrease of $3.1 million, or 17%, when compared to December 31, 2002. This decrease was primarily a result of the decrease in nonperforming first lien residential (single-family) mortgage loans due to management's increased focus on ongoing collection efforts. Nonperforming loans are those loans on nonaccrual status as well as those loans greater than ninety days delinquent and still accruing interest. The ratio of nonperforming assets to total assets was 0.70% at September 30, 2003, compared to 0.91% at December 31, 2002. At September 30, 2003 the allowance for loan losses as a percentage of nonperforming loans (excluding nonperforming loans held for sale which are recorded at the lower of cost or fair value) was 123.8% compared to 97.7% at December 31, 2002.

Noninterest Income

For the three months ended September 30, 2003, noninterest income increased $827,000 to $3.9 million, compared to $3.0 million for the three months ended September 30, 2002. The $827,000 increase in noninterest income was primarily due to a $414,000 increase in service charges on deposit accounts, a $302,000 gain on the sale of mortgage-backed securities available-for-sale and a $106,000 increase in the gain on the sale of real estate owned. 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 2002.

Noninterest Expense

For the three months ended September 30, 2003, noninterest expense decreased $469,000 from the three months ended September 30, 2002. When comparing the third quarter of 2003 to the same period in 2002, the $469,000 net decrease in noninterest expense was comprised primarily of a decrease in compensation, payroll taxes and benefits of $723,000 and a decrease of $210,000 in advertising. These decreases were somewhat offset by a $324,000 increase in other noninterest expense, and increases of $97,000 and $48,000 in office occupancy and in data processing, respectively. The decrease in compensation related expenses was primarily comprised of the following: decreased incentive and bonus expense of $298,000 because of the overall lower net income results, a $121,000 decrease due to the outsourcing of the internal audit department in September of 2002, a $151,000 decrease due to the sale of the five Hill Country branches in December 2002, in addition to other overall staffing changes to gain efficiencies throughout Coastal. The decrease in advertising expense was due to management's decision to reduce this spending in 2003. The $324,000 increase in other noninterest expense was primarily comprised of a $114,000 increase in audit and accounting fees related to the outsourcing of the internal audit department and a $251,000 increase in expenses related to loans, repossessed assets and real estate owned.

Provision for Federal Income Taxes

The provision for Federal income taxes for the three months ended September 30, 2003 was $1.5 million compared to $2.0 million for the three months ended September 30, 2002. The $547,000 decrease was primarily due to the lower amount of income before provision for Federal income taxes and minority interest, with the effective tax rate for the periods being approximately 33% for the quarter ended September 30, 2003 and 32% for the same period in 2002 (when taking into account the tax benefit for the minority interest expense in 2002). As discussed in the notes to the Consolidated Financial Statements, Coastal received a tax benefit for the dividends paid on the Bancorp Preferred Stock pursuant to an agreement with the FDIC. The provision for Federal income taxes includes the tax benefit received from the dividends on the Series A Preferred Stock of Coastal Bancorp, Inc. of $76,000 and $219,000 for the quarters ended September 30, 2003 and 2002, respectively. This benefit ceased upon redemption of the Bancorp Preferred Stock on July 31, 2003.

Liquidity and Capital Resources

Coastal's primary sources of funds consist of deposits bearing market rates of interest, advances from the FHLB, principal payments on loans receivable and mortgage-backed securities and other types of borrowings. 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 dividends and stock purchases and acquisitions of other banks and thrifts, either on a branch office or whole bank acquisition basis. At ~~September~~March 3031, ~~2003~~2004, Coastal had binding commitments to originate or purchase loans totaling approximately $16.68 million and had $~~150~~116.26 million of undisbursed loans in process. ~~Scheduled~~The scheduled maturities of certificates of deposit during the 12 months following ~~September~~March 3031, ~~2003~~2004, totaled $~~694~~660.46 million at ~~September~~March 3031, ~~2003~~2004. Management believes that Coastal has adequate resources to fund all of its commitments.

During the ~~nine~~three months ended ~~September~~March 3031, ~~2003~~2004, Coastal opened a new branch in ~~the~~The ~~City of Rosenberg~~Woodlands, Texas. As of ~~September~~March 3031, ~~2003~~2004, Coastal operated 44 retail banking offices in Texas cities, including Houston, Austin, Corpus Christi, the Rio Grande Valley and small cities in the southeast quadrant of Texas ~~(including this new branch in Rosenberg)~~.

Forward-Looking Information

The Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in this Form 10-Q should be read in conjunction with the information contained in the Consolidated Financial Statements and the Notes thereto.

The statements contained in this Quarterly Report on Form 10-Q which are not historical facts contain forward looking information 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"). Such discussion 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 that 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, ~~Coastal's~~the ~~acquisition~~risk ~~strategy,~~that ~~including~~the ~~risks~~merger ofwith ~~adversely~~Hibernia ~~changing~~will ~~results~~not ofbe ~~operations~~completed, ~~and~~continuing ~~factors~~interest ~~affecting~~margin ~~Coastal's~~compression, ~~ability~~changes ~~to consummate further acquisitions; risks involved~~ in ~~Coastal's~~the ~~ability~~volume toof ~~quickly~~loan ~~and~~originations ~~efficiently~~or ~~integrate~~purchases, the ~~operations~~timing of ~~acquired~~repayments ~~entities~~and ~~with~~prepayments ~~those~~ of ~~Coastal;~~loans, 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 in Coastal's Annual Report on Form 10-K for the year ended December 31, ~~2002~~2003, as filed with the SEC on March 2512, ~~2003~~2004.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in Coastal's interest rate risk position since December 31, ~~2002~~2003. Coastal's principal market risk exposure is to interest rates. ~~See note 9 of the Notes to Consolidated Financial Statements.~~

Item 4. Controls and Procedures

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Coastal's management has reviewed the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of Coastal or caused such disclosure controls and procedures to be designed under management's supervision, particularly during the period in which this quarterly report was being prepared. Disclosure controls and procedures are the controls and other procedures of Coastal that are designed to ensure that the information required to be disclosed by Coastal in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by Coastal in its reports filed under the Exchange Act is accumulated and communicated to Coastal's management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Management believes that such disclosure controls and procedures as of the end of the period covered by this report were adequate to ensure that material information relating to Coastal, including its consolidated subsidiaries, is made known to management by others within Coastal and its consolidated subsidiaries. To management's knowledge, there were no significant changes in internal control over financial reporting or in other factors that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Coastal is, and has been involved, from time to time, in various claims, complaints, proceedings and litigation relating to activities arising from the normal course of its operations. Based on the facts currently available to management, management believes that the matters pending at ~~September~~March 3031, ~~2003~~2004 are without merit, or will be covered by insurance and any other matters are of such amounts, which upon resolution, are not likely to have a material adverse effect on Coastal's consolidated financial condition, results of operations or cash flows.

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

OnNot ~~June 23, 2003, Bancorp, through the CCTII, issued to a private institutional investor, 10,000 floating rate Trust Preferred Securities II with a liquidation preference of $1,000 per security~~applicable. The Trust Preferred Securities II represent an interest in the related junior subordinated debentures of Bancorp, which were purchased by the CCTII and have substantially the same payment terms as these Trust Preferred Securities II. The junior subordinated notes are the only assets of the CCTII and interest payments from the notes finance the distributions paid on the Trust Preferred Securities II. Distributions on the securities are payable quarterly at a variable interest rate, reset quarterly, equal to LIBOR plus 3.05%, and are included in interest expense in the consolidated statements of income.

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). All 1,100,000 shares were redeemed from stockholders of record on July 31, 2003 at par plus accrued but unpaid dividends to the redemption date.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

Reports on Form 8-K.

1) Form 8-K filed with the SEC on ~~July~~January 316, ~~2003~~2004 concerning the announcement that Coastal Bancorp, ~~had~~Inc. issued a press release after the market closed on January 15, 2004 regarding the results of operations and financial condition for the quarterly period ended December 31, 2003.

2) Form 8-K/A filed with the SEC on January 16, 2004 concerning the announcement that Coastal Bancorp, Inc. issued a press release after the market closed on January 15, 2004 regarding the ~~redemption~~results of ~~all~~operations ofand ~~its~~financial ~~Series~~condition Afor ~~Cumulative~~the ~~Preferred~~quarterly ~~Stock~~period onended ~~July~~December 31, 2003.

23) Form 8-K filed with the SEC on ~~July~~January 1720, ~~2003~~2004 concerning the announcement that ~~Bancorp~~the ~~had~~Company ~~issued~~held a web cast on January 16, 2004 to discuss the press release issued after the market close on January 15, 2004 regarding the results of operations and financial condition for the quarterly period ended ~~June~~December 3031, 2003.

3) Form 8-K filed with the SEC on August 1, 2003 concerning the announcement that Bancorp's Board of Directors voted to increase the second quarter of 2003 common stock dividend.

Exhibits.

31.1 Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of the Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.1 Statement of Factors Under Private Securities Litigation Reform Act of 1995.

Signatures

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

Dated: 114/1430/03 04 By: /s/ Manuel J. Mehos

Manuel J. Mehos

Chairman of the Board

Chief Executive Officer

(Principal Executive Officer)

Dated: 114/1430/03 04 By: /s/ Catherine N. Wylie

Catherine N. Wylie

Chief Financial Officer

(Principal Financial and

Accounting Officer)

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