Exhibit 13

                                    2002

                                   ANNUAL

                                   REPORT

BancorpRI


<PAGE>


This report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from
those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in the
Company's Form 10-K for the year ended December 31, 2002. The Company has
no significant operating entities other than Bank Rhode Island, therefore
substantially all of the discussion in this document relates to the
operations of the Bank.


<PAGE>


Mission Statement

Bank Rhode Island will be the premier bank in the communities we serve. We
will provide excellent service and a broad range of competitive financial
products to our customers through a team of well-trained professional
employees. We will be a civic leader through direct involvement in local
organizations and activities.

All of these endeavors will result in a strong performance for our
shareholders, a rewarding work environment for our employees, and a
valuable resource for our customers and community.

[CHART]                    [CHART]
1997     $  533            1997     $0.75
1998     $  596            1998     $0.85
1999     $  632            1999     $1.14
2000     $  739            2000     $1.49
2001     $  862            2001     $1.62
2002     $1,013            2002     $1.92
 (In millions)             Earnings Per Share
 Total Assets


[PHOTO]


<PAGE>  1


LETTER TO SHAREHOLDERS

To Our Shareholders:

2002 was a significant year for Bancorp Rhode Island, Inc. We crossed the
billion-dollar mark in total assets, a major milestone. We posted our
seventh straight year of record profits. We continued our expansion on both
the retail and commercial fronts. And we gained heightened visibility
throughout Rhode Island as a result of our advertising campaigns and
continued proactive community involvement.

We also commenced a number of strategic initiatives related to the Bank's
infrastructure that will provide a strong foundation for years to come.
These actions reflect our commitment to provide the support that a high-
touch, service-oriented institution requires to grow and to enhance its
performance.


Financial Performance Summary

Net income for the year rose 21% to $7.7 million. We also saw a 19%
increase in our diluted earnings per share (EPS) which reached $1.92 for
2002. In reporting our income, we were the beneficiary of a change in
accounting principle. It required us to cease amortizing the goodwill
arising at the time of Bank Rhode Island's formation in 1996. However, even
without the change in accounting principle, we achieved a 9% increase in
net income and a 7% increase in EPS.

Our strong performance enabled the Board to increase the dividend.
Effective November 26, 2002, the quarterly dividend rose to $0.14 per
share.

Profitable, sustainable growth and increased earnings have always been
clear objectives of our management group. The strategies we employ to
achieve them are straightforward.


[PHOTO]


<PAGE>  2


First, we look to grow our loan portfolio, particularly, our commercial
loan portfolio. Second, we look to grow our retail banking franchise, with
strong emphasis on increasing our checking and savings account deposit
base. Third, we look to increase our fee income.

A review of our 2002 accomplishments, as well as some of our plans for
2003, illustrates how these objectives drive our business.


Lending

Commercial Lending-
Relationship-based and Experienced

Bank Rhode Island divides commercial lending among three groups. The
Business Lending group manages commercial and industrial account
relationships in excess of $250,000; the Commercial Real Estate Lending
group focuses on construction lending and investment real estate
transactions; and the Small Business Lending group handles business
relationships of $250,000 or less. Each group had an outstanding year.

[SIDEBAR]
[CHART]
1997     $3.5
1998     $3.8
1999     $4.4
2000     $5.6
2001     $6.3
2002     $7.7
(In millions)
 Net Income

[SIDEBAR]
[CHART]
1997     $115
1998     $134
1999     $175
2000     $213
2001     $239
2002     $281
(In millions)
Commercial Loans

[SIDEBAR]
[CHART]
1997     $33
1998     $39
1999     $47
2000     $58
2001     $61
2002     $92
(In millions)
Consumer Loans


[PHOTO]


<PAGE>  3


[SIDEBAR]
"Overall, our commercial portfolio grew by 17%, reaching $281 million at
year-end. We are pleased to say we now have one of the largest and most
experienced commercial lending groups that focuses on servicing the Rhode
Island marketplace."

Overall, our commercial portfolio grew by 17%, reaching $281 million at
year-end. We are pleased to say we now have one of the largest and most
experienced commercial lending groups that focuses on servicing the Rhode
Island marketplace.

Our approach to commercial lending has been consistent since inception.
First, we are relationship-based lenders. When you bank successful
businesses and business people - and those are the kind we want to bank -
they always have additional financing needs. For that reason, it is
important that our customers speak to someone who is knowledgeable about
their business each time they call to discuss their financing needs.

At Bank Rhode Island, we connect business owners with a lender who stays
both with us and with them over time.  Our lenders are seasoned senior
officers whose expert advice can add a valuable dimension to our customers'
businesses. Moreover, the lenders' familiarity with the customers' business
plans helps expedite approval of credit requests.

In addition, our customers have the security of knowing that they have
access to a team of people who are knowledgeable about their accounts. As
our customers' inquiries often require an immediate response, each


[PHOTO]


<PAGE>  4


of our senior lenders works with two or three other specifically dedicated
administrative personnel. They are as familiar with the accounts as the
senior lender. This team approach provides our customers with a responsive
service not readily found at large financial institutions.


Business Lending-
The Bank of Choice for Mid-Sized Businesses

We could not have been more pleased with the results the Business Lending
group posted in 2002. The outstanding balance of the group's portfolio grew
25% to $140 million by year-end and more than 40 new account relationships
were added. Those kinds of numbers are not typical of what other
institutions in the Northeast are experiencing. Clearly, we are becoming
the bank of choice for mid-sized businesses in the State of Rhode Island.
We are especially proud of the fact that a number of high-profile
organizations within the state, which have historically relied on super-
regional lenders for their commercial banking needs, became Bank Rhode
Island customers in 2002.

We have made inroads in the fast growing demographic area of South County,
as well. In 2002 we added a new senior lender who has a dedicated market
emphasis in South County. Almost immediately, we became a major lender in
this developing marketplace. Coupled with the completion of a branch
expansion in North Kingstown, we are well poised to grow business
throughout Bank Rhode Island's footprint during 2003. To that end, we
announced at the close of 2002, a team reorganization that will further
elevate our business generation and service capacities.


Commercial Real Estate-
Solid Performance with Growth Potential

Our Commercial Real Estate group posted yet another solid year. Its
portfolio grew 9% to $113 million and 30 new customers were added. In
addition to experiencing a brisk market for refinancing, the group was
particularly active in construction lending. We financed a number of
single-family house builders who produce a solid product to meet demand in
the Rhode Island marketplace.

For an institution our size, we are having an important impact on the
commercial real estate markets in both the urban and suburban areas of
Rhode Island. In 2002, Bank Rhode Island was the sole financing source for
a successful 125-unit single-family development in Smithfield. Currently,
we are participating in a number of key real


[PHOTO]


<PAGE>  5


estate projects in the Providence downcity area. They include a hotel
development and the rehabilitation of several historic buildings. These and
other projects should enhance the prospects for the region in years to
come.


Small Business Lending-
Solid SBA Lending Results

The third leg of our Commercial Lending area is our small business loan
portfolio. We are proud to have grown this portfolio from $6 million as of
year-end 1998 to $29 million by year-end 2002. While we attempt to expedite
processing of these credits and streamline documentation, we remain
relationship-oriented in this area as well. All of these customers are
welcomed at our branches and forge multiple relationships there.

Our small business lending strength contributed to our maintaining a solid
number three position in the Rhode Island market SBA lending results. We
finished behind a large regional bank and managed to run almost neck-and-
neck with a large multinational institution.

In 2003 we will put increased emphasis on this line of business. We will
add personnel to the new business development staff and will streamline our
underwriting processes for even better customer response time.


Retail Lending

One of the areas in which we made major strides was Retail Lending.
Historically, we emphasized commercial lending and saw relatively modest
growth in our retail loan portfolio. 2002 was different. We ran a highly
successful home equity term loan campaign. As a result, we were able to
increase the outstanding balance of our consumer loan portfolio from $61
million to $92 million. Our ability to generate these loans is a testament
to our increased market visibility and presence.

The Retail Lending area also handles our residential first mortgage loan
production. In the low rate environment, the outstanding balances of
adjustable rate mortgage loans that we originate for retention in our
portfolio, experienced a decline. However, fixed rate residential mortgage
loans, which we sell to others, remained relatively high in 2002, and made
a strong contribution to fee income.


[PHOTO]


<PAGE>  6


As a result of the retail successes, we have looked to reorganize and
expand our retail lending function. We have enhanced our residential
mortgage production process by assigning mortgage specialists to handle all
in-house originations. This will free our branch staff to focus on customer
service, cross-selling and deposit growth initiatives.


Credit

We have achieved the increases in our commercial and other loan portfolios
without adverse credit quality results. Our nonperforming assets stood
under $800,000 as of year-end 2002, and our net charge-offs for the year
were a mere 3 basis points of average assets.

As credit conscious as we remain, the 2002 record, unfortunately, may be
impossible to duplicate going forward. In a pre-emptive move, in 2002 we
created a risk management unit to oversee all credit quality issues across
the Bank. The unit already has made valuable contributions to our overall
credit administration.


Retail Banking

While we seek to drive the asset side of the balance sheet primarily
through quality commercial loan growth, our emphasis on the retail side
always has been to increase checking and savings deposits. 2002 was no
exception. Our checking and savings account balances grew a whopping 28%.
We have to assume that some of this was due to people moving assets out of
the volatile equity markets. However, as our core account growth has
averaged greater than 15% during the last several years, we also believe
that a good portion of the growth was due to our hard work and reputation
for excellent service and products. In fact, in 2002 we introduced our new
Asset Manager account and positioned it as an alternative to money market
accounts offered by the brokerage houses. We will continue to refine our
core product mix and plan to introduce a streamlined checking account
offering in 2003.

2002 saw continued enhancement of our franchise footprint with the
elimination of an older mall branch and the opening of our first "Xpress
Branch" on Plainfield Pike in Cranston. The new branch - small, well-
located and highly visible - has received a very positive reception. It
represents the expansion of the retail delivery models we


[PHOTO]


<PAGE>  7


introduced as part of our long-range plan to extend our footprint over a
broader area. We are excited that we will be opening a new, full-size Xcel
branch in North Kingstown in the latter part of 2003. In the interim, we
have leased temporary space and will open a business development office
there in the first quarter of 2003.

The deposit growth has a number of positive consequences. First, we have
experienced a healthy increase in our average branch size, which is now in
excess of $60 million. As of year-end 2002, we had 6 branches with more
than $70 million in deposits and only two of our newer branches are below
$40 million. Over time, this will lead to greater operating efficiency.

Second, because of the emphasis on transaction accounts, we have seen an
increase in fee income. Third, the larger deposit base has provided a key
referral source for the lending groups as well as one of our other growing
areas - our nondeposit investment program.

One of the real success stories in our retail area is the nondeposit
investment program. We sell mutual funds and annuities through licensed
representatives in our branches. Sales of those products have climbed from
$5 million just two years ago to more than $23 million in 2002. Again, we
believe the growth reflects a combination of our efforts and the public's
response to high quality service and products, as our approach to retail
banking is every bit as relationship-oriented as it is in commercial
banking.


Other Products and Services;
Balance Sheet Items

Sales of mortgages and nondeposit investment products are two ways we have
broadened the range of fee producing lines of business. There are other
changes we made last year and programs we put in place to continue our fee
income growth.

The Bank started purchasing bank-owned life insurance. This represents a
diversification in our investment strategy and is reflected on our income
statement as fee income. Our cash management services area is also growing.
Several years ago we expanded cash management to enable us to fully service
our commercial customers. These services include repurchase agreements
(repos) and overnight money market funds. The demand for these services
continues to increase and we saw repo and sweep balances rise to $48
million as of year-end. The recent addition of a prominent quasi-public
agency to our growing list of customers reflects the strong reputation this
area has gained.


[PHOTO]


<PAGE>  8


Our CampusMate(tm) program also continues to develop. Programming for the
product was completed in 2002 and we have been awarded a provisional
patent. Two colleges are fully live on the product, which meets with rave
reviews. We are marketing to other colleges and universities both within
and outside Rhode Island.

Finally, we signed a strategic alliance agreement with an experienced
national syndicator of historic tax credits, who will create a state
historic tax credit fund in Rhode Island. Recent historic tax credit
legislation should facilitate a market for this product beginning in 2003.

However, we remain a margin-driven institution. Our income is primarily
reflective of the difference between the yield on our assets and the price
we pay for deposits and other borrowings. The low rate environment has
placed pressure on our net interest margin.

You will notice some investments in corporate bonds on our balance sheet as
of year-end. We have contracted with an outside firm to advise us with
respect to both investments and asset/liability strategies. We will be
looking to improve our margin through enhancing asset yield without
incurring undue risk.


[SIDEBAR]
[CHART]
1997     $231
1998     $266
1999     $285
2000     $366
2001     $422
2002     $540
(In millions)
Checking & Savings Deposits


[SIDEBAR]
"As of year-end 2002, we had 6 branches with more than $70 million in
deposits and only two of our newer branches are below $40 million."


[SIDEBAR]
[CHART]
1997     $1.,916
1998     $2,727
1999     $3,222
2000     $3,578
2001     $5,231
2002     $7,083
(In millions)
Noninterest Income


[PHOTO]


<PAGE>  9


Marketing

Our commercial successes and our deposit growth are in part fueled by our
marketing efforts. We continued utilizing television advertising, running a
series of ads directed at the size, sophistication and capacity of our
Commercial Lending group. Additionally, we implemented a number of print
and other media campaigns. In 2001 we introduced our first television-based
image campaign and further refined it in 2002 with the "We treat your
business like big business" tagline. The message in the campaign reinforces
the Bank's position as the smart alternative to the mega banks for
businesses and consumers in the Greater Providence market. The message
demonstrated to the market that Bank Rhode Island has all the products and
services of the big banks delivered by seasoned professionals who can
tailor those offerings to fit the customer's needs.

Future initiatives will continue to utilize a combination of television,
radio, print and direct mail to reinforce the Bank's image as a
relationship-focused commercial bank complemented by an exceptional retail
network.

In 2002 we created a new position in commercial marketing to develop
strategies for growth and to enhance the visibility and reputation of Bank
Rhode Island. We launched BusinessRI, a Rhode Island-focused publication
that promotes successful companies and executives in our marketplace. We
also held a number of customer functions to solidify our relationships. In
2003 we will continue to find ways to maintain and further strengthen
customer contact.

Our appearance constitutes a form of marketing as well, and we continue to
upgrade and enhance the physical appearance of our traditional branch
network. The Smithfield and Governor Francis (Warwick) branches were
remodeled to reinforce our customer-focused delivery strategy. Experience
indicates that updating a branch helps drive growth at that location.


Administration and Operations

All of these front-line successes would not be possible without the support
of our operations and MIS groups. They are as customer-focused as our front
line officers. In order to enable them to be as responsive and efficient as
possible and to provide a solid foundation for future growth, we have
undertaken two major operations initiatives. The first was relocating our
back office to a new


[PHOTO]


<PAGE>  10


operations center in Lincoln. That move was announced in May 2002 and was
completed in January 2003. We also analyzed our data processing needs. We
concluded that a new system and change of vendors were warranted. As a
result, we will be undergoing a data processing conversion in the second
quarter of 2003. Over time, the new systems should enhance our analytical
capacity for marketing and financial management. The conversion should be
largely transparent to our customers. However, the new systems will enable
us to continue to deliver the kind of personal, responsive service our
customers have come to expect.


Community Involvement

As our reputation continues to grow, so does our community involvement.
Last year, Bank Rhode Island contributed financial support to a wide array
of community events, projects and organizations that are aimed at improving
the quality of life throughout Rhode Island. In addition, our employees
continue to serve the community with the gift of their time through myriad
volunteer efforts. More than 60 nonprofit organizations benefited from Bank
Rhode Island employee participation as volunteers or advisors or as members
of boards of trustees.

[SIDEBAR]
"ore than 60 nonprofit organizations benefited from Bank Rhode Island
employee participation as volunteers or advisors or as members of boards of
trustees."


[PHOTO]


<PAGE>  11


[SIDEBAR]
"We are striving to build a first-class organization in every respect. From
our people, to our systems, to our products and services, and ultimately to
our performance, we want to be the best in everything we do."


A few highlights of our community participation during 2002 include working
with the Federal Home Loan Bank of Boston on a grant to the Woonsocket
Neighborhood Housing Corporation to provide affordable, single-family
housing to low income individuals; financial and volunteer support for all
Chambers of Commerce located in the Providence and Kent County marketplace;
and sponsorship of the popular Dominican Festival in Providence.

In 2002, the Arts and Business Council of Rhode Island announced that it
would honor Bank Rhode Island with the prestigious Encore Award. This award
was given in recognition of the Bank's contribution to the arts and to
local arts organizations.

We believe that our support of efforts that provide the basic necessities
of food and shelter for those less fortunate, spur economic development and
increase opportunities for cultural enrichment can strengthen the fabric of
our communities. This is good for our neighbors in the community and makes
good business sense for us.

Finally, our efforts on all fronts-commercial and retail lending;
marketing; administration and operations; and community involvement-have
been successful due to the talent and commitment of our employees. We are


[PHOTO]


<PAGE>  12


appreciative of their dedication to making Bancorp
Rhode Island, Inc. a unique financial institution
for our marketplace, and one that continues to build         [PHOTO]
value for our shareholders and our customers.

We are striving to build a first-class organization
in every respect. From our people, to our systems, to
our products and services, and ultimately to our
performance, we want to be the best in everything we
do. We are committed to producing a meaningful return
for you, our shareholders.


Thank you for your support.


/s/ Malcolm G. Chace
Malcolm G. Chace
Chairman of the Board


/s/ Merrill W. Sherman
Merrill W. Sherman
President & CEO


[PHOTO]


<PAGE>  13


Bancorp Rhode Island, Inc.
and Bank Rhode Island
Boards of Directors

Malcolm G. Chace, Chairman
Karen Adams
Anthony F. Andrade
John R. Berger
Ernest J. Chornyei, Jr.
Meredith A. Curren
Karl F. Ericson
Margaret D. Farrell, Esq.
Mark R. Feinstein
Edward J. Mack
Bogdan (Bob) Nowak
Pablo Rodriguez, MD
Merrill W. Sherman
Cheryl W. Snead
John A. Yena


Bancorp Rhode Island, Inc.
Executive Officers

Merrill W. Sherman
President and CEO

Albert R. Rietheimer, CPA
Chief Financial Officer and Treasurer

Donald C. McQueen
Vice President and Assistant Secretary


Bank Rhode Island
Executive Officers

Merrill W. Sherman
President and CEO

Donald C. McQueen
Executive Vice President,
Chief Credit & Administrative Officer

Albert R. Rietheimer, CPA
Chief Financial Officer and Treasurer

James V. DeRentis
Executive Vice President,
Retail Banking & Marketing

Officers

Accounting and Finance

John E. Westwood
Senior Vice President, Controller

Joan E. Rivelli
Assistant Vice President,
Accounting Manager

Administration

Elizabeth M. Carroll
Senior Vice President,
Administrative Services

Gisele M. Golembeski
Vice President,
Administrative Services

Daniel A. Patenaude
Vice President,
Facilities Manager
& Security Officer

Bernice M. DeMello
Assistant Vice President,
Administrative Services

Debra S. Regan
Vice President,
Human Resources Manager

Susan J. DiCicco
Human Resources Officer

Audit

Steven E. D'Alfonso
Chief Auditor,
Internal Audit

Melissa A. Ogg
Assistant Vice President,
Internal Audit


[PHOTO]


<PAGE>  14


Retail Banking & Marketing

Kathleen C. Orovitz
Senior Vice President,
Branch Sales Manager

Linda A. Geremia
Vice President,
Regional Manager

Kathryn E. Taylor
Vice President,
Regional Manager

Elizabeth A. Hart
Vice President,
Marketing Manager

Michael J. Roy
Vice President,
Retail Banking

Melissa L. Mulhearn
Vice President,
Investment Manager

Lorie L. Bruyere
Assistant Vice President,
Branch Manager

Timothy J. Davis
Assistant Vice President,
Marketing

Todd M. George
Assistant Vice President,
Investment Sales

Glen J. Gibbons
Assistant Vice President,
Investment Sales

Diane Y. Goyette
Assistant Vice President,
Branch Manager

Jonathan E. Mitchell
Assistant Vice President,
Investment Sales

Kathleen M. Morgan
Assistant Vice President,
Branch Manager

Dana A. Sherman
Assistant Vice President,
Investment Compliance Officer

Doreen M. Sousa
Assistant Vice President,
Retail Training Manager

Thomas W. Quinlan, Jr.
Assistant Vice President,
Branch Manager

Madeleine G. Dickie
Retail Banking Officer,
Branch Manager

Tanya S. Fandino Leung
Retail Banking Officer,
Internet Banking Manager

Renay M. Houle
Retail Banking Officer,
Call Center Manager

Leah M. Prata
Retail Banking Officer,
Branch Manager

Maria T. Travassos
Retail Banking Officer,
Branch Manager

Jacqueline N. Binette
Marketing Officer

Lori A. Oliveria
Retail Banking Officer

Penelope P. Boucher
Retail Banking Officer,
Assistant Branch Manager

Pamela J. Mitchell
Retail Banking Officer,
Assistant Branch Manager

Business Lending

Kevin R. Kelly
Senior Vice President,
Head of Business Lending

Emanuel E. Barrows
Senior Vice President,
Business Lending


[PHOTO]


<PAGE>  15


Daniel J. Hagerty
Senior Vice President,
Business Lending

Michael J. Kerr
Senior Vice President,
Business Lending

James P. Tiernan
Senior Vice President,
Business Lending

James C. Kelshaw
Vice President,
Business Lending

Philip M. Regnier
Vice President,
Cash Management Sales Manager

Albert M. Jaffarian
Assistant Vice President,
Portfolio Manager

George T. Menas
Commercial Banking Officer,
Portfolio Manager


Commercial Real Estate Lending

Stephen J. Gibbons
Senior Vice President,
Head of Commercial
Real Estate

Laurel L. Bowerman
Senior Vice President,
Commercial Real Estate

David R. Cunningham
Vice President,
Commercial Real Estate

Rosa C. Medeiros
Vice President,
Commercial Real
Estate Administration

Thomas F. Croteau
Assistant Vice President,
Portfolio Manager


Small Business Lending

Donald L. DiBlasi
Vice President,
Business Development
Team Leader

Joseph P. Hindle
Vice President,
Business Development

Andrew J. Deluski
Assistant Vice President,
Business Development

Joseph F. Sheehan
Assistant Vice President,
Business Development


Consumer & Small Business Lending

Peter Walsh
Senior Vice President,
Retail, Small Business Lending, &
CRA Officer

David L. Goolgasian
Vice President,
Small Business Underwriting

Suzanne D. Joyal
Assistant Vice President,
Retail Lending Manager

Patricia O. Saracino
Assistant Vice President,
Community Relations

Joseph M. D'Amico
Retail Lending Officer

Abigail T. Moore
Small Business Officer,
Portfolio Manager

Eileen F. Tweedie
Morgage Officer


Credit Administration

Paul G. Wielgus
Senior Vice President,
Senior Credit &
Compliance Officer

Gregory E. Kwiatkowski
Vice President,
Loan Review Officer

Maureen F. Snell
Vice President,
Loan Servicing Manager


Operations/MIS

Kenneth L. Senus
Senior Vice President,
Information Technology
& Operations

Donald G. Morash
Vice President, MIS Manager

Tonia R. Ryan
Vice President, Systems Planning
& Project Management

Karen J. Talbot
Vice President,
Operations Manager

Elizabeth A. Limerick
Assistant Vice President,
EFT Operations


CampusMate(tm) Division

Patricia Hanratty
Senior Vice President,
CampusMate President

Alan L. Lehmann
Senior Vice President,
Sales & Marketing Director

Raymond K. Antonio
Vice President,
Systems & Operations
Director


Stock Transfer

Agent
Registrar and Transfer Company
10 Commerce Way
Cranford, NJ 07016

Auditors
KPMG LLP
Providence, RI

Counsel
Hinckley, Allen & Snyder LLP
Providence, RI


Investor Information

The Bancorp Rhode Island, Inc.
2002 annual meeting will be held
on Wednesday, May 21, 2003 at
10:00 a.m. at the Courtyard by Marriott, Providence, RI.

Requests for information, including copies of Bancorp Rhode Island, Inc.'s
annual report, may be obtained at no charge by writing to:

Investor Relations Department
Bancorp Rhode Island, Inc.
One Turks Head Place
Providence, RI 02903


<PAGE>  16


CONTENTS
---------------------------------------------------------------------------

Selected Consolidated Financial Data                     18-19


Management's Discussion and Analysis of
Financial Condition and Results of Operations (MD&A)     20-44


Management's Report                                         45


Independent Auditor's Report                                46


Consolidated Financial Statements                        47-50


Notes to Consolidated Financial Statements               51-77


Stock Information and Locations                             78


<PAGE>  17


SELECTED CONSOLIDATED FINANCIAL DATA


The following table represents selected consolidated financial data as of
and for the years ended December 31, 2002, 2001, 2000, 1999 and 1998. The
selected consolidated financial data is derived from the Company's
Consolidated Financial Statements which have been audited by KPMG LLP. The
selected consolidated financial data set forth below does not purport to be
complete and should be read in conjunction with, and are qualified in their
entirety by, the more detailed information, including the Consolidated
Financial Statements and related Notes, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," appearing
elsewhere herein.

<TABLE>
<CAPTION>

                                                                               As of and for the Year Ended December 31,
                                                                       ----------------------------------------------------------
                                                                         2002(a)      2001        2000        1999        1998
                                                                         -------      ----        ----        ----        ----
                                                                             (Dollars in thousands, except Per Share Data)


                                                                    <c>         <c>         <c>         <c>         <c>
Statement of Operations Data:
  Interest income                                                      $   53,507  $   55,903  $   50,035  $   41,651  $   40,034
  Interest expense                                                         22,180      26,537      23,678      19,600      19,845
                                                                       ----------------------------------------------------------
  Net interest income                                                      31,327      29,366      26,357      22,051      20,189
  Provision for loan losses                                                 1,875       1,669       1,542       1,000       1,017
  Noninterest income                                                        7,083       5,231       3,578       3,222       2,727
  Noninterest expense                                                      25,024      23,196      19,662      17,354      16,043
                                                                       ----------------------------------------------------------
  Income before taxes and change in accounting principle                   11,511       9,732       8,731       6,919       5,856
  Income taxes                                                              3,849       3,417       3,113       2,448       2,022
                                                                       ----------------------------------------------------------
  Income before change in accounting principle                              7,662       6,315       5,618       4,471       3,834
  Cumulative effect of change in accounting principle, net of taxes(b)          -           -           -         109           -
                                                                       ----------------------------------------------------------
  Net income                                                                7,662       6,315       5,618       4,362       3,834
  Dividends on preferred stock                                                  -           -           -          88         793
                                                                       ----------------------------------------------------------
  Net income available to common shareholders                          $    7,662  $    6,315  $    5,618  $    4,274  $    3,041
                                                                       ==========================================================

Per Share Data:
  Basic earnings per common share:
    Income before change in accounting principle                       $     2.04  $     1.69  $     1.51  $     1.18  $     0.87
    Cumulative effect of change in accounting principle                         -           -           -       (0.03)          -
                                                                       ----------------------------------------------------------
    Net income                                                         $     2.04  $     1.69  $     1.51  $     1.15  $     0.87
                                                                       ==========================================================

  Diluted earnings per common share:
    Income before change in accounting principle                       $     1.92  $     1.62  $     1.49  $     1.17  $     0.85
    Cumulative effect of change in accounting principle                         -           -           -       (0.03)          -
                                                                       ----------------------------------------------------------
    Net income                                                         $     1.92  $     1.62  $     1.49  $     1.14  $     0.85
                                                                       ==========================================================

  Dividends per common share                                           $     0.53  $     0.48  $     0.42  $     0.10           -
  Dividend pay-out ratio                                                     27.6%       29.6%       28.2%        8.8%         NA

  Book value per common share                                          $    17.59  $    15.74  $    14.29  $    12.79  $    12.31
  Tangible book value per common share                                 $    14.73  $    12.88  $    11.09  $     9.27  $     8.44
  Average common shares outstanding - Basic                             3,758,214   3,730,910   3,728,688   3,727,010   3,506,573
  Average common shares outstanding - Diluted                           3,996,670   3,900,028   3,768,589   3,741,778   3,584,820
</TABLE>


<PAGE>  18

<TABLE>
<CAPTION>

                                                                               As of and for the Year Ended December 31,
                                                                       ----------------------------------------------------------
                                                                         2002(a)      2001        2000        1999        1998
                                                                         -------      ----        ----        ----        ----
                                                                             (Dollars in thousands, except Per Share Data)


                                                                    <c>         <c>         <c>         <c>         <c>
Balance Sheet Data:
  Total assets                                                         $1,012,877  $  862,250  $  739,420  $  631,977  $  595,964
  Investment securities                                                   101,329      49,453      47,296      50,503      39,703
  Mortgage-backed securities                                              156,114     150,650     117,431      74,793      79,924
  Total loans receivable                                                  670,658     610,964     518,825     458,958     431,402
  Allowance for loan losses                                                10,096       8,524       7,294       5,681       5,018
  Goodwill, net                                                            10,766      10,766      11,930      13,094      14,424
  Deposits                                                                761,911     670,413     631,632     513,416     500,713
  Borrowings                                                              179,305     129,398      51,889      67,911      45,512
  Common shareholders' equity                                              66,427      59,097      53,292      47,675      45,835
  Total shareholders' equity                                               66,427      59,097      53,292      47,675      47,687

Average Balance Sheet Data:
  Total assets                                                         $  947,205  $  818,905  $  679,085  $  616,426  $  565,759
  Investment securities                                                    71,481      49,881      47,034      47,348      44,040
  Mortgage-backed securities                                              177,753     130,342      86,114      79,463      57,627
  Total loans receivable                                                  622,545     584,400     491,327     439,099     421,554
  Allowance for loan losses                                                 9,375       8,056       6,472       5,358       4,799
  Goodwill, net                                                            10,766      11,373      12,540      13,720      15,077
  Deposits                                                                706,338     644,795     572,924     516,610     476,227
  Borrowings                                                              174,668     115,677      54,471      50,496      39,944
  Common shareholders' equity                                              61,922      56,101      48,530      46,169      40,568
  Total shareholders' equity                                               61,922      56,101      48,530      46,631      46,041

Operating Ratios:
  Interest rate spread                                                       3.04%       3.12%       3.44%       3.25%       3.20%
  Net interest margin                                                        3.48%       3.75%       4.10%       3.80%       3.78%
  Efficiency ratio (c)                                                      65.15%      67.05%      65.68%      68.67%      70.01%
  Return on average assets (d)                                               0.81%       0.77%       0.83%       0.73%       0.68%
  Return on average equity (d)                                              12.37%      11.26%      11.58%       9.59%       8.33%

Asset Quality Ratios:
  Nonperforming loans to total loans                                         0.11%       0.12%       0.10%       0.24%       0.36%
  Nonperforming assets to total assets                                       0.08%       0.12%       0.07%       0.18%       0.33%
  Allowance for loan losses to nonperforming loans                        1371.74%    1132.01%    1435.83%     510.88%     321.05%
  Allowance for loan losses to total loans                                   1.51%       1.40%       1.41%       1.24%       1.16%
  Net loans charged-off to average loans outstanding                         0.05%       0.08%      (0.01%)      0.08%       0.08%

Capital Ratios:
  Average shareholders' equity to average total assets                       6.54%       6.85%       7.15%       7.54%       8.14%
  Tier I leverage ratio                                                      6.19%       5.93%       5.91%       5.88%       5.72%
  Tier I risk-based capital ratio                                            9.63%       9.86%       9.50%       9.70%       9.60%
  Total risk-based capital ratio                                            10.88%       11.10%     10.76%      10.96%      10.85%

<FN>
(a)   Earnings for 2002 were positively impacted by the Company's adoption
      of Statement of Financial Accounting Standards ("SFAS") 142,
      "Goodwill and Other Intangible Assets" and SFAS 147, "Acquisitions of
      Certain Financial Institutions." These Statements required the
      Company to cease amortizing its goodwilll and begin reviewing it at
      least annually for impairment. In prior years, the amount of this
      amortization was $1.2 million annually. Also see discussion under
      "Recent Accounting Developments."
(b)   In January 1999, the Bank expensed any remaining unamortized
      organizational costs in accordance with Statement of Position 98-5,
      "Accounting for Costs of a Start -Up Entity."
(c)   Calculated by dividing total noninterest expenses by net interest
      income plus noninterest income.
(d)   Excludes cumulative effect of change in accounting principle, net of
      taxes
</FN>
</TABLE>


<PAGE>  19


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS


Cautionary Statement

Certain statements contained herein are "Forward Looking Statements" within
the meaning of the Private Securities Litigation Reform Act of 1995.
Forward Looking Statements may be identified by reference to a future
period or periods or by the use of forward looking terminology such as
"may," "believes," "intends," "expects," and "anticipates" or similar terms
or variations of these terms. Actual results may differ materially from
those set forth in Forward Looking Statements as a result of certain risks
and uncertainties, including but not limited to, changes in political and
economic conditions, interest rate fluctuations, competitive product and
pricing pressures, equity and bond market fluctuations, credit risk,
inflation, as well as other risks and uncertainties detailed from time to
time in filings with the Securities and Exchange Commission ("SEC").

General

Bancorp Rhode Island, Inc. (the "Company"), a Rhode Island corporation, was
organized by Bank Rhode Island (the "Bank") to be a bank holding company
and to acquire all of the capital stock of the Bank. The reorganization of
the Bank into the holding company form of ownership was completed on
September 1, 2000. The Company has no significant assets other than the
common stock of the Bank. For this reason, substantially all of the
discussion in this document relates to the operations of the Bank and its
subsidiaries.

Bank Rhode Island is a commercial bank chartered as a financial institution
in the State of Rhode Island. The Bank pursues a community banking mission
and is principally engaged in providing banking products and services to
individuals and businesses in Providence and Kent counties. The Bank is
subject to competition from a variety of traditional and nontraditional
financial service providers both within and outside of Rhode Island. The
Bank offers its customers a wide range of deposit products, nondeposit
investment products, commercial, residential and consumer loans, and other
traditional banking products and services designed to meet the needs of
individuals and small- to mid-sized businesses. The Bank also offers both
commercial and consumer on-line banking products and maintains a web site
at http://www.bankri.com. The Company and Bank are subject to regulation by
a number of federal and state agencies and undergo periodic examinations by
certain of those regulatory authorities. The Bank's deposits are insured by
the Federal Deposit Insurance Corporation ("FDIC"), subject to regulatory
limits. The Bank is also a member of the Federal Home Loan Bank of Boston
("FHLB").

Critical Accounting Policies

Accounting policies involving significant judgments and assumptions by
management, which have, or could have, a material impact on the carrying
value of certain assets or net income, are considered critical accounting
policies. The Company considers the following to be its critical accounting
policies: allowance for loan losses and review of goodwill for impairment.
There have been no significant changes in the methods or assumptions used
in accounting policies that require material estimates or assumptions.

Allowance for loan losses

Arriving at an appropriate level of allowance for loan losses necessarily
involves a high degree of judgment. The ongoing evaluation process includes
a formal analysis of the allowance each quarter, which considers, among
other factors, the character and size of the loan portfolio, business and
economic conditions, loan growth, delinquency trends, nonperforming loans
trends, charge-off experience and other asset quality factors.


<PAGE>  20


The Company evaluates specific commercial, commercial real estate and small
business loans deemed to be "impaired" and in excess of a specified dollar
amount. The estimated reserves for each of these credits is determined by
reviewing the fair value of the collateral, the present value of expected
future cash flows, and where available, the observable market price of the
loans. Provisions for losses on the remaining commercial, commercial real
estate, small business, residential mortgage and consumer loans are based
on pools of similar loans using a combination of payment status, historical
loss experience, industry loss experience, market economic factors,
delinquency rates and qualitative adjustments. Management uses available
information to establish the allowance for loan losses at the level it
believes is appropriate. However, future additions to the allowance may be
necessary based on changes in estimates resulting from changes in economic
conditions and other factors. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the
Company's allowance for loan losses. Such agencies may require the Company
to recognize adjustments to the allowance based on their judgments about
information available to them at the time of their examination.

Review of goodwill for impairment

In March 1996, the Bank acquired certain assets and assumed certain
liabilities from Fleet National Bank of Connecticut and related entities.
This acquisition was accounted for utilizing the purchase method of
accounting and generated $17.5 million of goodwill. This goodwill was
amortized in the years prior to 2002, resulting in a net balance of $10.8
million on the Company's balance sheet as of December 31, 2001. Effective
January 1, 2002, in accordance with Statement of Financial Accounting
Standards ("SFAS") 142 "Goodwill and Other Intangible Assets" and SFAS 147
"Acquisitions of Certain Financial Institutions", the Company was required
to cease amortizing this goodwill and to review it at least annually for
impairment. Goodwill is evaluated for impairment using market value
comparisons for similar institutions, such as price to earnings multiples,
price to deposits multiples and price to equity multiples. Based upon this
review, management believes that the goodwill was not impaired as of
December 31, 2002. This valuation technique contains estimates as to the
comparability of the selected market information to the specifics of the
Company.

Results of Operations

Net Interest Income

The Company's operating results depend primarily on its "net interest
income", or the difference between its interest income and its cost of
money, and on the quality of its assets. Interest income depends on the
amount of interest-earning assets outstanding during the year and the
interest rates earned thereon. The Company's cost of money is a function of
the average amount of deposits and borrowed money outstanding during the
year and the interest rates paid thereon. Earnings are further influenced
by the quality of assets through the amount of interest income lost on
nonaccrual loans, the amount of additions to the allowance for loan losses
and the amount of losses and other expenses incurred as a result of
resolving troubled assets.

Net interest income for 2002 was $31.3 million, compared to $29.4 million
for 2001 and $26.4 million for 2000. This increase of $2.0 million, or
6.7%, during 2002 was primarily attributable to the continued growth of the
Company. The Company's net interest margin decreased in 2002 to 3.48%,
compared to 3.75% in 2001 and 4.10% for 2000. Average earning assets
increased $115.9 million, or 14.8%, and average interest-bearing
liabilities increased $101.0 million, or 15.3%, during 2002.


<PAGE>  21


Average Balances, Yields and Costs

The following table sets forth certain information relating to the
Company's average balance sheet and reflects the average yield on assets
and average cost of liabilities for the years indicated. Such yields and
costs are derived by dividing income or expense by the average balance of
assets or liabilities. Average balances are derived from daily balances and
include nonperforming loans.

<TABLE>
<CAPTION>

                                                                              Year Ended December 31,
                                                  --------------------------------------------------------------------------------
                                                             2002                       2001                       2000
                                                  -------------------------- -------------------------- --------------------------
                                                            Interest                   Interest                   Interest
                                                  Average   Earned/  Average Average   Earned/  Average Average   Earned/  Average
                                                  Balance     Paid    Yield  Balance     Paid    Yield  Balance     Paid    Yield
                                                  -------   -------- ------- -------   -------- ------- -------   -------- -------
                                                                               (Dollars in thousands)


                                               <c>       <c>       <c>    <c>       <c>      <c>     <c>       <c>       <c>
Assets:
Earning assets:
  Fed funds sold & overnight investments          $ 19,840  $   313   1.58%  $ 13,642  $   510   3.74%  $ 14,571  $   930   6.38%
  Investment securities                             71,481    3,375   4.72%    49,881    3,044   6.10%    47,034    3,056   6.50%
  Mortgage-backed securities                       177,753    8,428   4.74%   130,342    7,720   5.92%    86,114    5,576   6.48%
  Stock in the FHLB                                  7,528      277   3.68%     4,973      288   5.79%     3,704      282   7.61%
  Loans receivable:
    Residential mortgage loans                     293,117   18,646   6.36%   301,729   21,694   7.19%   243,706   17,982   7.38%
    Commercial loans                               259,673   18,396   7.08%   221,966   18,078   8.14%   197,200   17,737   8.99%
    Consumer and other loans                        69,755    4,072   5.84%    60,705    4,569   7.53%    50,421    4,472   8.87%
                                                  --------  -------          --------  -------          --------  -------
      Total earning assets                         899,147   53,507   5.95%   783,238   55,903   7.14%   642,750   50,035   7.78%
                                                            -------                    -------                    -------
Cash and due from banks                             20,434                     19,889                     17,998
Allowance for loan losses                           (9,375)                    (8,056)                    (6,472)
Premises and equipment                               7,878                      6,641                      6,306
Other real estate owned                                 59                        169                         80
Goodwill, net                                       10,766                     11,373                     12,540
Accrued interest receivable                          4,599                      4,767                      4,126
Bank-owned life insurance                           10,340                          -                          -
Prepaid expenses and other assets                    3,357                        884                      1,757
                                                  --------                   --------                   --------
      Total assets                                $947,205                   $818,905                   $679,085
                                                  ========                   ========                   ========
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
  Deposits:
    NOW accounts                                  $ 65,466      705   1.08%  $ 39,642      209   0.53%  $ 31,555      205   0.65%
    Money market accounts                           10,114      130   1.29%    10,799      221   2.05%    14,113      375   2.66%
    Savings accounts                               275,263    5,083   1.85%   236,608    6,507   2.75%   192,217    6,137   3.19%
    Certificate of deposit accounts                235,822    8,118   3.44%   257,646   13,458   5.22%   252,521   13,685   5.42%
  Overnight and short-term borrowings               23,118      322   1.39%    15,386      461   3.00%    11,474      636   5.54%
  FHLB and other borrowings                        145,961    7,377   5.05%    97,718    5,418   5.54%    42,997    2,640   6.14%
  Capital trust securities                           5,589      445   7.96%     2,573      263  10.22%         -        -      -%
                                                  --------  -------          --------  -------          --------  -------
      Total interest-bearing liabilities           761,333   22,180   2.91%   660,372   26,537   4.02%   544,876   23,678   4.34%
                                                            -------                    -------                    -------
Noninterest-bearing deposits                       119,673                    100,100                     82,518
Other liabilities                                    4,277                      2,332                      3,161
                                                  --------                   --------                   --------
      Total liabilities                            885,283                    762,804                    630,555
Shareholders' equity                                61,922                     56,101                     48,530
                                                  --------                   --------                   --------
      Total liabilities and shareholders' equity  $947,205                   $818,905                   $679,085
                                                  ========                   ========                   ========

Net interest income                                         $31,327                    $29,366                    $26,357
                                                            =======                    =======                    =======

Net interest rate spread                                              3.04%                      3.12%                      3.44%
Net interest rate margin                                              3.48%                      3.75%                      4.10%
</TABLE>


<PAGE>  22


Rate/Volume Analysis

The following table sets forth certain information regarding changes in the
Company's interest income and interest expense for the periods indicated.
For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes
in rate (changes in rate multiplied by old average balance) and (ii)
changes in volume (changes in average balances multiplied by old rate). The
net change attributable to the combined impact of rate and volume was
allocated proportionally to the individual rate and volume changes.

<TABLE>
<CAPTION>

                                                                   Year Ended December 31,
                                            ---------------------------------------------------------------------
                                                      2002 vs 2001                         2001 vs 2000
                                               Increase/(Decrease) Due To           Increase/(Decrease) Due To
                                            -------------------------------      --------------------------------
                                              Rate      Volume       Total         Rate        Volume       Total
                                              ----      ------       -----         ----        ------       -----
                                                                        (In thousands)


                                         <c>         <c>         <c>          <c>          <c>          <c>
Interest income:
  Fed funds sold & overnight investment     $  (370)    $   173     $  (197)     $  (364)     $   (56)     $ (420)
  Investment securities                        (791)      1,122         331       (2,232)       2,220         (12)
  Mortgage-backed securities                 (1,738)      2,446         708         (427)       2,571       2,144
  Stock in the FHLB                            (127)        116         (11)         (17)          23           6
  Residential mortgage loans                 (2,443)       (605)     (3,048)        (447)       4,159       3,712
  Commercial loans                           (2,527)      2,845         318       (1,039)       1,380         341
  Consumer and other loans                   (1,117)        620        (497)        (279)         376          97
                                            ---------------------------------------------------------------------
      Total interest income                  (9,113)      6,717      (2,396)      (4,805)      10,673       5,868
                                            ---------------------------------------------------------------------

Interest expense:
  NOW accounts                                  305         191         496          (11)          15           4
  Money market accounts                         (78)        (13)        (91)         (76)         (78)       (154)
  Savings accounts                           (2,371)        947      (1,424)        (556)         926         370
  Certificate of deposit accounts            (4,277)     (1,063)     (5,340)        (518)         291        (227)
  Overnight & short-term borrowings            (311)        172        (139)        (681)         506        (175)
  FHLB and other borrowings                    (515)      2,474       1,959         (229)       3,007       2,778
  Capital trust securities                      (69)        251         182            -          263         263
                                            ---------------------------------------------------------------------
      Total interest expense                 (7,316)      2,959      (4,357)      (2,071)       4,930       2,859
                                            ---------------------------------------------------------------------

      Net interest income                   $(1,797)    $ 3,758     $ 1,961      $(2,734)     $ 5,743      $3,009
                                            =====================================================================
</TABLE>


COMPARISON OF YEARS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001

General

Net income for 2002 increased $1.3 million, or 21.3%, to $7.7 million, or
$1.92 per diluted common share, from $6.3 million, or $1.62 per diluted
common share, for 2001. The Company's performance represented a return on
average assets of 0.81% and a return on average equity of 12.37% for the
2002 period, as compared to a return on average assets of 0.77% and a
return on average equity of 11.26% for the 2001 period. Earnings for 2002
were positively impacted by the Company's adoption of SFAS 142 "Goodwill
and Other Intangible Assets" and SFAS 147 "Acquisitions of Certain
Financial Institutions." In accordance with SFAS 142, the Company ceased
amortizing its goodwill effective January 1, 2002. Also see discussion
under "Recent Accounting Developments."

Net interest income was $31.3 million for 2002, compared to $29.4 million
for 2001. The net interest margin for 2002 was 3.48%, compared to a net
interest margin of 3.75% for 2001. The increase in net interest income of
$2.0


<PAGE>  23


million or 6.7%, was primarily attributable to the overall growth of the
Company. Average earning assets increased $115.9 million, or 14.8%, and
average interest-bearing liabilities increased $101.0 million, or 15.3%,
over the prior year. The decrease of 27 basis points in the net interest
margin was primarily caused by the dramatic drop in market interest rates
occurring in 2002, coupled with the asset-sensitive nature of the Company's
balance sheet. Also see discussion under "Asset and Liability Management."

Interest Income - Investments

Total investment income (consisting of interest or dividends on federal
funds sold and overnight investments, investment securities, mortgage-
backed securities, and FHLB stock) was $12.4 million for 2002, compared to
$11.6 million for 2001. This increase in total investment income of
$831,000, or 7.2%, was primarily attributable to a $21.6 million, or 43.3%,
increase in the average balance of investment securities and a $47.4
million, or 36.4%, increase in the average balance of mortgage-backed
securities ("MBSs"). Meanwhile, the overall yield on investments decreased
133 basis points, from 5.81% in 2001, to 4.48% in 2002, in response to
dramatically lower market interest rates and accelerated prepayments on
MBSs. The Company's investments at December 31, 2002, were primarily
comprised of Agency securities, Corporate debt securities and MBSs with
either remaining maturities or repricing periods of less than five years.
In addition to assisting in overall tax planning, management believes that
this composition, along with a structured maturity ladder, provides more
stable earnings and predictable cash flows from the portfolio. As a result
of the low interest rate environment, prepayments on MBSs accelerated
during the second half of 2002. If these prepayment speeds remain high, MBS
yields will continue to be negatively impacted as increased cash flows will
be reinvested at lower rates and premiums paid on MBSs will be amortized
more quickly.

Interest Income - Loans

Interest from loans was $41.1 million for 2002, and represented a yield on
total loans of 6.60%, as compared to $44.3 million of interest, and a yield
of 7.59%, for 2001. Declining market interest rates, coupled with higher
residential mortgage loan prepayment activity, resulted in lower interest
income from the loan portfolio. Interest from residential mortgage loans
decreased $3.0 million, or 14.0%, and interest from consumer and other
loans decreased $497,000, or 10.9%, from the prior year. Partially
offsetting these decreases in interest income, interest from commercial
loans increased $318,000, or 1.8%, as a result of strong growth in
commercial outstandings. The Company continues to concentrate its
origination efforts on commercial and consumer loan opportunities, but also
originates residential mortgage loans for its portfolio on a limited basis.
In addition, the Company purchases residential mortgage loans, and to a
lesser degree, leases and automobile loans, as cash flows dictate. The
average balance of the various components of the loan portfolio changed as
follows: residential mortgage loans decreased $8.6 million, or 2.9%,
commercial loans increased $37.7 million, or 17.0%, and consumer and other
loans increased $9.1 million, or 14.9%. Meanwhile, due to declining market
interest rates, coupled with increased prepayment activity, the yields on
the various components of the loan portfolio changed as follows:
residential mortgage loans decreased 83 basis points, to 6.36%; commercial
loans decreased 106 basis points, to 7.08%; and consumer and other loans
decreased 169 basis points, to 5.84%. In recent months prepayment speeds
have increased on residential mortgage loans. If these prepayment speeds
remain high, residential mortgage loan yields will continue to be
negatively impacted as increased cash flows will be reinvested at lower
rates and premiums paid on purchased loans will be amortized more quickly.

Interest Expense - Deposits and Borrowings

Interest paid on deposits and borrowings decreased $4.4 million, or 16.4%,
to $22.2 million for 2002, compared to $26.5 million for 2001. The decrease
in total interest expense was primarily attributable to the dramatic drop
in market interest rates, partially offset by growth in checking and
savings deposits, along with the use of borrowings to fund the overall
growth of the Company. The overall average cost for interest-bearing
liabilities decreased 111 basis points from 4.02% for 2001, to 2.91% for
2002. Deposit and borrowing costs are dependent on a number of factors
including general economic conditions, national and local interest rates,
competition in the local marketplace, interest rate tiers offered, and the
Company's cash flow needs. Partially


<PAGE>  24


offsetting the effect of the decline in market interest rates, the average
balance of interest-bearing liabilities increased $100.9 million, from
$660.4 million in 2001, to $761.3 million in 2002. The Company continued to
experience strong average balance growth in core deposit accounts,
specifically noninterest bearing demand deposit accounts (up $19.6 million,
or 19.6%), savings accounts (up $38.7 million, or 16.3%) and NOW accounts
(up $25.8 million, or 65.1%). In addition, the Company increased its
utilization of FHLB borrowings (average balances up $48.2 million, or
49.4%).

Provision for Loan Losses

The provision for loan losses was $1.9 million for 2002, compared to $1.7
million for 2001. Increases to the provision for loan losses were primarily
in response to a softening economy, some deterioration in commercial credit
quality and growth in loans outstanding. The allowance, expressed as a
percentage of total loans, was 1.51% at December 31, 2002, compared to
1.40% at the prior year-end and stood at 1371.7% of nonperforming loans at
the end of 2002. Management evaluates several factors including new loan
originations, delinquency rates, actual and estimated charge-offs, the risk
characteristics of the loan portfolio and general economic conditions when
determining the provision for each quarter. Also see discussion under
"Asset Quality" and "Allowance for Loan Losses." As the loan portfolio
continues to grow and mature, or if economic conditions worsen, management
believes it highly likely that the level of nonperforming assets will
increase, which in turn may lead to increases to the provision for loan
losses in future periods.

Noninterest Income

Total noninterest income increased $1.9 million, or 35.4%, from $5.2
million for 2001, to $7.1 million for 2002. Service charges on deposit
accounts, which continue to represent the largest source of noninterest
income, rose $312,000, or 9.0%, from $3.5 million for 2001, to $3.8 million
for 2002, primarily as a result of growth in checking and savings accounts.
Commissions on nondeposit investment products increased $443,000, or 82.8%,
from strong growth in mutual fund and annuity sales. Additionally, the
Bank's purchase of $14.2 million of bank-owned life insurance during 2002
resulted in $568,000 of noninterest income not present in the previous
period. Lastly, loan related fees increased $403,000, or 141.4%, primarily
as a result of prepayment penalties received from a handful of commercial
loan customers who chose to payoff their loans with the Bank.

The following table sets forth the components of noninterest income:

<TABLE>
<CAPTION>

                                                  Year Ended December 31,
                                                  -----------------------
                                                      2002       2001
                                                      ----       ----
                                                      (In thousands)


                                                  <c>        <c>
Service charges on deposit accounts                  $3,763     $3,451
Commissions on nondeposit investment products           978        535
Income from bank-owned life insurance                   568          -
Loan related fees                                       688        285
Commissions on loans originated for others              325        288
Gain on sale of MBSs                                     23          4
Other income                                            738        668
                                                     -----------------
      Total noninterest income                       $7,083     $5,231
                                                     =================
</TABLE>


<PAGE>  25


Noninterest Expense

Noninterest expenses for 2002 increased a total of $1.8 million, or 7.9%,
to $25.0 million, from $23.2 million in 2001. After removing the effects of
SFAS 142 and 147, total operating noninterest expense increased $3.0
million, or 13.6%, as the 2002 period does not contain any goodwill
amortization, while the 2001 period included $1.2 million of goodwill
amortization. The increase in operating noninterest expenses occurred
primarily as a result of the overall growth of the Company, along with
development of new products and reparation for an upcoming data processing
conversion, and was centered in the following areas: Salaries and employee
benefits (up $1.9 million, or 16.8%), Occupancy and Equipment (up $384,000,
or 14.6%), Data processing (up $208,000, or 11.7%), Marketing (up $255,000,
or 26.0%) and Professional services (up $497,000, or 56.3%). During 2002
and 2001, the Company continued to experience substantial growth in both
commercial loans and core deposits which resulted in the increased
operating costs evidenced in 2002. In particular, during 2002, the Bank
added 16 full-time equivalent employees ("FTEs") to support its overall
growth. Partially offsetting these increases was a decrease in other real
estate owned ("OREO") expense (down $327,000, or 92.6%). The Company's
efficiency ratio decreased 190 basis points, to 65.15%, during 2002. As a
result of the Company's announced expansion plans for a new operations
center (opened January 2003), a new retail branch in North Kingstown
(opening summer 2003) and a planned data processing conversion (2nd quarter
2003), management anticipates continued upward pressure on noninterest
expenses during 2003.

The following table sets forth the components of noninterest expense:

<TABLE>
<CAPTION>

                                    Year Ended December 31,
                                    -----------------------
                                       2002        2001
                                       ----        ----
                                        (In thousands)


                                   <c>         <c>
Salaries and employee benefits        $13,185     $11,287
Occupancy and equipment                 3,006       2,622
Data processing                         1,987       1,779
Marketing                               1,234         979
Professional services                   1,380         883
Loan servicing                            927         945
Other real estate owned                    26         353
Amortization of goodwill                    -       1,164
Deposit tax and assessments               117         117
Other expenses                          3,162       3,067
                                      -------------------
      Total noninterest expense       $25,024     $23,196
                                      ===================
</TABLE>


Income Tax Expense

The Company recorded income tax expense of $3.8 million for 2002, compared
to $3.4 million for 2001. This represented total effective tax rates of
33.4% and 35.1%, respectively. Tax-favored income from U.S. Agency
securities and bank-owned life insurance, along with the utilization of a
Rhode Island passive investment company, reduced the Company's effective
tax rate from the 39.9% combined statutory federal and state tax rates.


<PAGE>  26


COMPARISON OF YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000

General

Net income for 2001 increased $697,000, or 12.4%, to $6.3 million, or $1.62
per diluted common share, from $5.6 million, or $1.49 per diluted common
share, for 2000.   This performance represented a return on average assets
of 0.77% and a return on average equity of 11.26% for 2001, as compared to
a return on average assets of 0.83% and a return on average equity of
11.58% for 2000.

Net interest income was $29.4 million for 2001, compared to $26.4 million
for 2000. The net interest margin for 2001 was 3.75%, compared to a net
interest margin of 4.10% for 2000. The increase in net interest income of
$3.0 million, or 11.4%, was primarily attributable to the overall growth of
the Company. Average earning assets increased $140.5 million, or 21.9%, and
average interest-bearing liabilities increased $115.5 million, or 21.2%,
over the prior year. The decrease of 35 basis points in the net interest
margin was caused by the 475 basis point drop in short-term market interest
rates, along with tighter spreads on wholesale asset purchases completed in
the first quarter of 2001.

Interest Income - Investments

Total investment income (consisting of interest or dividends on federal
funds sold, investment securities, MBSs and FHLB stock) was $11.6 million
for 2001, compared to $9.8 million for 2000. This increase in total
investment income of $1.7 million, or 17.5%, was primarily attributable to
a $44.2 million, or 51.4%, increase in the average balance of MBSs.
Meanwhile, the overall yield on investments decreased 69 basis points due
to dramatically lower market interest rates. The Company's investments at
December 31, 2001 were primarily comprised of Agency securities or MBSs
with either remaining maturities or repricing periods of less than five
years. As a result of the low interest rate environment present at the end
of 2001, prepayments on MBSs accelerated and negatively impacted the yield
on MBSs purchased at a premium.

Interest Income - Loans

Interest from loans was $44.3 million for 2001, and represented a yield on
total loans of 7.59%. This compares to $40.2 million of interest, and a
yield of 8.18%, for 2000. This increase of $4.2 million, or 10.3%, in
interest on loans was due primarily to an increase in the average balance
of loans outstanding, partially offset by lower interest rates. The average
balance of the various components of the loan portfolio changed as follows:
residential mortgage loans increased $58.0 million, or 23.8%, commercial
loans increased $24.8 million, or 12.6%, and consumer and other loans
increased $10.3 million, or 20.4%. Meanwhile, in response to declining
market interest rates, the yields on the various components of the loan
portfolio changed as follows: residential mortgage loans increased 19 basis
points, to 7.19%; commercial loans decreased 85 basis points, to 8.14%; and
consumer and other loans decreased 134 basis points, to 7.53%.

Interest Expense - Deposits and Borrowings

Interest paid on deposits and borrowings increased $2.9 million, or 12.1%,
to $26.5 million for 2001, compared to $23.7 million for 2000. The increase
in total interest expense was primarily attributable to growth in savings
accounts, along with the use of borrowings, to fund the overall growth of
the Company. The average balance of interest-bearing liabilities increased
$115.5 million, from $544.9 million in 2000, to $660.4 million in 2001. The
Company continued to experience strong average balance growth in core
deposit accounts, specifically noninterest bearing demand deposit accounts
(up $17.6 million, or 21.3%) and savings accounts (up $44.4 million, or
23.1%). In addition, the Company increased its utilization of borrowed
funds (average balances up $61.2 million, or 112.4%). In response to
declining market interest rates, the overall average cost for interest-
bearing liabilities decreased 33 basis points from 4.35% for 2000, to 4.02%
for 2001.


<PAGE>  27


Provision for Loan Losses

The provision for loan losses was $1.7 million for 2001, compared to $1.5
million for 2000. Increases to the provision for loan losses were primarily
in response to a softening economy, some deterioration in commercial credit
quality and growth in loans outstanding. Management evaluates several
factors including new loan originations, delinquency rates, actual and
estimated charge-offs, the risk characteristics of the loan portfolio and
general economic conditions when determining the provision for each
quarter. Also see discussion under "Asset Quality" and "Allowance for Loan
Losses."

Noninterest Income

Total noninterest income increased $1.7 million, or 46.2%, from $3.6
million for 2000, to $5.2 million for 2001. Service charges on deposit
accounts, which continue to represent the largest source of noninterest
income, rose $729,000, or 26.8%, from $2.7 million for 2000, to $3.5
million for 2001, primarily as a result of growth in checking and savings
accounts. Commissions on loans originated for others increased $214,000, or
289.2%, in response to significantly higher fixed-rate mortgage loan
activity resulting from the drop in market interest rates. Additionally,
Other income increased $679,000, or 129.6%, primarily from increased
commissions on sales of nondeposit investment products.

The following table sets forth the components of noninterest income:

<TABLE>
<CAPTION>

                                               Year Ended December 31,
                                               -----------------------
                                                   2001       2000
                                                   ----       ----
                                                   (In thousands)


                                               <c>        <c>
Service charges on deposit accounts               $3,451     $2,722
Commissions on loans originated for others           288         74
Loan related fees                                    285        258
Gain on sale of MBSs                                   4          -
Other income                                       1,203        524
                                                  -----------------
      Total noninterest income                    $5,231     $3,578
                                                  =================
</TABLE>

Noninterest Expense

Noninterest expenses for 2001 increased a total of $3.5 million, or 18.0%,
to $23.2 million, from $19.7 million in 2000. This increase occurred
primarily as a result of the overall growth of the Company and was centered
in the following areas: Salaries and benefits (up $1.7 million, or 18.2%),
Occupancy and Equipment (up $193,000, or 7.9%), Data processing (up
$439,000, or 32.8%), Loan servicing (up $184,000, or 24.2%), Workout and
OREO expense (up $322,000, or 1038.7%) and Other expenses (up $751,000, or
32.4%). The Company has experienced substantial growth in both loans and
core deposits in recent years that resulted in the increased operating
costs evidenced in 2001. In addition, the softening of both the national
and local economies in 2001 lead to increases in workout and fraudulent
activity charges. Partially offsetting these increases was a decrease in
Marketing (down $90,000, or 8.4%). The Company's efficiency ratio increased
137 basis points, to 67.05%, for 2001.


<PAGE>  28


The following table sets forth the components of noninterest expense:

<TABLE>
<CAPTION>

                                    Year Ended December 31,
                                    -----------------------
                                       2001        2000
                                       ----        ----
                                        (In thousands)


                                   <c>         <c>
Salaries and employee benefits        $11,287     $ 9,552
Occupancy and equipment                 2,622       2,429
Data processing                         1,779       1,340
Marketing                                 979       1,069
Professional services                     883         891
Loan servicing                            945         761
Other real estate owned                   353          31
Amortization of goodwill                1,164       1,164
Deposit tax and assessments               117         109
Other expenses                          3,067       2,316
                                      -------------------
      Total noninterest expense       $23,196     $19,662
                                      ===================
</TABLE>

Income Tax Expense

The Company recorded income tax expense of $3.4 million for 2001, compared
to $3.1 million for 2000. This represented total effective tax rates of
35.1% and 35.7%, respectively. Tax-favored income from U.S. Treasury and
Agency securities and its utilization of a Rhode Island passive investment
company, reduced the Company's effective tax rate from the 39.9% combined
statutory federal and state tax rates.

Financial Condition

Loans Receivable

Total loans were $670.7 million, or 66.2% of total assets, at December 31,
2002, compared to $611.0 million, or 70.9% of total assets, at December 31,
2001, an increase of $59.7 million, or 9.8%. Total loans as of December 31,
2002, may be segmented in three broad categories: residential mortgages
that aggregate $297.8 million, or 44.4% of the portfolio; commercial loans
that aggregate $281.0 million, or 41.9% of the portfolio; and consumer and
other loans that aggregate $91.9 million, or 13.7% of the portfolio.

The Company utilizes the term "small business loans" to describe business
lending relationships of $250,000 or less.


<PAGE>  29


The following is a summary of loans receivable:

<TABLE>
<CAPTION>

                                                                        December 31,
                                                 -----------------------------------------------------------
                                                   2002        2001         2000         1999         1998
                                                   ----        ----         ----         ----         ----
                                                                       (In thousands)


                                              <c>         <c>          <c>          <c>          <c>
Residential mortgage loans:
  One- to four-family adjustable rate            $277,265    $285,589     $212,197     $196,863     $211,076
  One- to four-family fixed rate                   19,310      23,306       34,609       39,037       45,671
                                                 -----------------------------------------------------------
    Subtotal                                      296,575     308,895      246,806      235,900      256,747
  Premium on loans acquired                         1,248       1,381        1,166        1,446        2,110
  Net deferred loan origination fees                  (60)        (64)         (49)         (26)           -
                                                 -----------------------------------------------------------
      Total residential mortgage loans           $297,763    $310,212     $247,923     $237,320     $258,857
                                                 ===========================================================

Commercial loans:
  Commercial real estate - nonowner occupied     $ 81,242    $ 73,369     $ 69,315     $ 56,181     $ 39,654
  Commercial real estate - owner occupied          59,249      46,698       38,272       33,968       36,908
  Commercial & industrial                          57,389      53,677       51,470       40,109       30,655
  Small business                                   28,750      24,122       19,170       13,322        6,804
  Multi-family                                     18,952      14,927       15,933       16,270       13,221
  Construction                                     18,101      14,027        7,070        6,379        3,482
  Leases and other                                 17,613      12,715       11,731        8,499        3,370
                                                 -----------------------------------------------------------
    Subtotal                                      281,296     239,535      212,961      174,728      134,094
  Net deferred loan origination fees                 (329)       (171)        (143)        (180)         (61)
                                                 -----------------------------------------------------------
      Total commercial loans                     $280,967    $239,364     $212,818     $174,548     $134,033
                                                 ===========================================================

Consumer and other loans:
  Home equity - term loans                       $ 47,906    $ 22,930     $ 23,292     $ 19,710     $ 16,996
  Home equity - lines of credit                    37,381      28,460       26,215       24,166       18,400
  Automobile                                        3,409       6,335        4,643            -            -
  Installment                                         967       1,240        1,348        1,279        1,010
  Savings secured                                     602         656          987        1,005          935
  Unsecured and other                               1,063       1,153        1,044          590          972
                                                 -----------------------------------------------------------
    Subtotal                                       91,328      60,774       57,529       46,750       38,313
  Premium on loans acquired                           103         192          144            -            -
  Net deferred loan origination costs                 497         422          411          340          199
                                                 -----------------------------------------------------------
      Total consumer and other loans             $ 91,928    $ 61,388     $ 58,084     $ 47,090     $ 38,512
                                                 ===========================================================

      Total loans receivable                     $670,658    $610,964     $518,825     $458,958     $431,402
                                                 ===========================================================
</TABLE>

During 2002, residential mortgage loans decreased $12.4 million, or 4.0%,
as repayments of $188.5 million were slightly greater than the total of
purchases ($166.9 million) and originations ($9.3 million). As a result of
the low interest rate environment present during 2002, residential mortgage
loans prepayments accelerated, ending the second half of 2002 at prepayment
speeds in excess of those anticipated. Since inception, the Bank has
concentrated its portfolio lending efforts on commercial and, to a lesser
extent, consumer lending opportunities. During late 1997, the Bank began to
originate mortgage loans for its own portfolio as well as for sale to
others and anticipates continuing to originate mortgage loans on a limited
basis for its customers. The Bank does not employ any outside mortgage
originators and typically only holds in its portfolio loans whose rate will
adjust in less than 10 years. Until such time as the Bank can originate
sufficient commercial and consumer loans to utilize available cash flow, it
intends to continue purchasing residential mortgage loans as opportunities
develop.

The commercial loan portfolio (consisting of commercial real estate,
commercial & industrial, multi-family real estate, construction and small
business loans) increased $41.6 million, or 17.4%, during 2002. The Company
believes it is well positioned for continued commercial loan growth.
Particular emphasis is placed on generation of small- to medium-sized
commercial relationships (those relationships with $5.0 million or less in
total loan commitments). The Bank is also active in small business lending
in which it utilizes credit scoring, in conjunction with traditional review
standards, and employs streamlined documentation. The small business
portfolio increased $4.6 million, or 19.2%, during 2002. The Bank is a
participant in the U.S. Small Business Administration ("SBA") Preferred
Lender Program ("PLP") in Rhode Island and the 7a Guarantee Loan Program in
Massachusetts.


<PAGE>  30


The consumer loan portfolio is comprised primarily of home equity term
loans and home equity lines of credit. During 2002, consumer loan
outstandings increased $30.5 million, or 49.7%, to $91.9 million at
December 31, 2002, from $61.4 million at December 31, 2001. During 2002, in
an effort to take advantage of the current environment for mortgage
refinancings, the Bank promoted its fifteen-year fixed-rate home equity
loan product, generating $25.0 million of net loan growth. The remainder of
the growth was in the Bank's home equity line of credit product, which had
$8.9 million of net loan growth.

The table below shows loan originations, purchases, sales and repayment
activities.

<TABLE>
<CAPTION>

                                                                  Year Ended December 31,
                                              ----------------------------------------------------------------
                                                2002          2001          2000         1999          1998
                                                ----          ----          ----         ----          ----
                                                                       (In thousands)


                                           <c>           <c>           <c>          <c>           <c>
Originations and Principal Additions:
Loans purchased:
  Residential mortgage loans                  $ 166,935     $ 186,013     $ 48,491     $  53,747     $ 107,559
  Consumer and other loans                            -         4,902        4,891             -             -
                                              ----------------------------------------------------------------
      Total loans purchased                     166,935       190,915       53,382        53,747       107,559
                                              ----------------------------------------------------------------

Loans originated:
  Residential mortgage loans                      9,345        18,037        9,985        17,659        13,093
  Commercial loans                               84,132        59,186       65,465        62,430        41,872
  Consumer and other loans                       51,951        22,332       17,950        18,704        16,837
                                              ----------------------------------------------------------------
      Total loans originated                    145,428        99,555       93,400        98,793        71,802
                                              ----------------------------------------------------------------

Principal Reductions:
Charge-offs/transfers to OREO:
  Residential mortgage loans                        (58)         (304)        (148)         (412)         (950)
  Commercial loans                                 (400)         (981)         (93)         (176)          (15)
  Consumer and other loans                          (93)          (61)         (20)          (80)         (163)
                                              ----------------------------------------------------------------
      Total charge-offs/transfers to OREO          (551)       (1,346)        (261)         (668)       (1,128)
                                              ----------------------------------------------------------------

Principal payments:
  Residential mortgage loans                   (188,542)     (141,657)     (47,422)      (91,841)     (118,679)
  Commercial loans                              (41,971)      (31,631)     (27,139)      (21,620)      (22,547)
  Consumer and other loans                      (21,304)      (23,928)     (12,042)      (10,187)      (11,739)
                                              ----------------------------------------------------------------
      Total principal payments                 (251,817)     (197,216)     (86,603)     (123,648)     (152,965)
                                              ----------------------------------------------------------------

Change in total loans receivable (before
 net items)                                   $  59,995     $  91,908     $ 59,918     $  28,224     $  25,268
                                              ================================================================
</TABLE>

The following table sets forth certain information at December 31, 2002,
regarding the aggregate dollar amount of certain loans maturing in the loan
portfolio based on scheduled payments to maturity. Actual loan principal
payments may vary from this schedule due to refinancings, modifications and
other changes in loan terms. Demand loans and loans having no stated
schedule of repayments and no stated maturity are reported as due in one
year or less.

<TABLE>
<CAPTION>

                                                     Principal Repayments Contractually Due
                                                     --------------------------------------
                                                                  After One,
                                                     One Year     But Within     After Five
                                                     or Less      Five Years       Years
                                                     --------     ----------     ----------
                                                                 (In thousands)


                                                  <c>          <c>            <c>
Construction loans                                   $18,101      $     -        $     -
Commercial & industrial loans (including leases)      44,798       20,050         10,154
Small business loans                                  14,831       12,569          1,350
                                                     -----------------------------------
      Total                                          $77,730      $32,619        $11,504
                                                     ===================================
</TABLE>


<PAGE>  31


The following table sets forth as of December 31, 2002, the dollar amount
of certain loans due after one year that have fixed interest rates or
floating or adjustable interest rates.

<TABLE>
<CAPTION>

                                                     Loans Due After One Year
                                                     ------------------------
                                                                 Floating or
                                                      Fixed      Adjustable
                                                      Rates         Rates
                                                      -----      -----------
                                                          (In thousands)


                                                  <c>           <c>
Construction loans                                   $     -       $     -
Commercial & industrial loans (including leases)      13,578        16,626
Small business loans                                  10,228         3,691
                                                     ---------------------
      Total                                          $23,806       $20,317
                                                     =====================
</TABLE>

Asset Quality

The definition of nonperforming assets includes nonperforming loans and
OREO. OREO consists of real estate acquired through foreclosure proceedings
and real estate acquired through acceptance of a deed in lieu of
foreclosure. Nonperforming loans are defined as nonaccrual loans, loans
past due 90 days or more, but still accruing and impaired loans. Under
certain circumstances the Company may restructure the terms of a loan as a
concession to a borrower. These restructured loans are considered impaired
loans. Included in nonaccrual loans at December 31, 2002, were $224,000 of
impaired loans. At December 31, 2001 and 2000, the Company did not have any
impaired loans.

Nonperforming Assets. At December 31, 2002, the Company had nonperforming
assets of $794,000, or 0.08% of total assets. This compares to
nonperforming assets of $1.0 million, or 0.12% of total assets, at December
31, 2001, and nonperforming assets of $538,000, or 0.07% of total assets,
at December 31, 2000. Nonperforming assets at December 31, 2002, consisted
of residential mortgage loans aggregating $291,000, commercial loans
aggregating $428,000, consumer loans aggregating $17,000 and OREO
aggregating $58,000. Nonperforming assets at December 31, 2001 and 2000,
were primarily comprised of nonaccrual residential mortgage loans. The
Company evaluates the underlying collateral of each nonperforming loan and
continues to pursue the collection of interest and principal. Management
believes that the December 31, 2002 level of nonperforming assets is low.
As the loan portfolio continues to grow and mature, or if economic
conditions worsen, management believes it highly likely that the level of
nonperforming assets will increase, as will its level of charged-off loans.

The following table sets forth information regarding nonperforming assets.

<TABLE>
<CAPTION>

                                                                         December 31,
                                                       ------------------------------------------------
                                                       2002       2001      2000       1999       1998
                                                       ----       ----      ----       ----       ----
                                                                    (Dollars in thousands)


                                                    <c>       <c>        <c>       <c>        <c>
Nonaccrual Loans                                       $ 736     $  753     $ 508     $1,112     $1,563
Loans past due 90 days or more, but still accruing         -          -         -          -          -
Impaired loans (not included in nonaccrual loans)          -          -         -          -          -
                                                       ------------------------------------------------
      Total nonperforming loans                          736        753       508      1,112      1,563
Other real estate owned                                   58        264        30         49        394
                                                       ------------------------------------------------
      Total nonperforming assets                       $ 794     $1,017     $ 538     $1,161     $1,957
                                                       ================================================

Nonperforming loans as a percent of total loans         0.11%      0.12%     0.10%      0.24%      0.36%
Nonperforming loans as a percent of total assets        0.08%      0.12%     0.07%      0.18%      0.33%
</TABLE>


<PAGE>  32


Nonaccrual Loans. Accrual of interest income on all loans is discontinued
when concern exists as to the collectibility of principal or interest, or
when a loan becomes over 90 days delinquent. Additionally, when a loan is
placed on nonaccrual status, all interest previously accrued but not
collected is reversed against current period income. Loans are removed from
nonaccrual when they become less than 90 days past due and in the case of
commercial and consumer loans, when concern no longer exists as to the
collectibility of principal or interest. Interest collected on nonaccruing
loans is either applied against principal or reported as income according
to management's judgment as to the collectibility of principal. At December
31, 2002, nonaccrual loans totaled $736,000. Interest on nonaccrual loans
that would have been recorded as additional income for the year ended
December 31, 2002, had the loans been current in accordance with their
original terms, totaled $25,000. This compares with $31,000 and $35,000 of
foregone interest income on nonaccrual loans for the years ended December
31, 2001 and 2000, respectively.

The following table sets forth certain information regarding nonaccrual
loans.

<TABLE>
<CAPTION>

                                                                 December 31,
                                 ----------------------------------------------------------------------------
                                          2002                       2001                       2000
                                 ----------------------     ----------------------     ----------------------
                                               Percent                    Percent                    Percent
                                 Principal     of Total     Principal     of Total     Principal     of Total
                                  Balance       Loans        Balance       Loans        Balance       Loans
                                 ---------     --------     ---------     --------     ---------     --------
                                                            (Dollars in thousands)


                                <c>          <c>           <c>          <c>           <c>          <c>
Nonaccrual loans:
  Residential mortgage loans       $291         0.04%         $656         0.11%         $398         0.08%
  Commercial loans                  428         0.07%           42         0.00%          109         0.02%
  Consumer and other loans           17         0.00%           55         0.01%            1         0.00%
                                   -----------------------------------------------------------------------
      Total nonaccrual loans       $736         0.11%         $753         0.12%         $508         0.10%
                                   =======================================================================
</TABLE>

Delinquencies. At December 31, 2002, $857,000 of loans were 30 to 89 days
past due. This compares to $3.7 million and $1.1 million of loans 30 to 89
days past due as of December 31, 2001 and 2000, respectively. The majority
of these loans at December 31, 2002 and 2001 were commercial loans, while
at December 31, 2000 they were residential mortgage loans.

Management reviews delinquent loans frequently to assess problem situations
and to quickly address these problems. In the case of consumer and
commercial loans, the Bank contacts the borrower when a loan becomes
delinquent. When a payment is not made, generally within 10-15 days of the
due date, a late charge is assessed. After 30 days of delinquency, a notice
is sent to the borrower advising that failure to cure the default may
result in formal demand for payment in full. In the event of further
delinquency, the matter is generally referred to legal counsel to commence
civil proceedings to collect all amounts owed. In the case of residential
mortgage loans, delinquency and collection proceedings are conducted by
either the Bank or its mortgage servicers in accordance with standard
servicing guidelines. In any circumstance where the Bank is secured by real
property or other collateral, the Bank enforces its rights to the
collateral in accordance with applicable law.


<PAGE>  33


The following table sets forth information as to loans delinquent for 30 to
89 days.

<TABLE>
<CAPTION>

                                                                               December 31,
                                               ----------------------------------------------------------------------------
                                                        2002                       2001                       2000
                                               ----------------------     ----------------------     ----------------------
                                                             Percent                    Percent                    Percent
                                               Principal     of Total     Principal     of Total     Principal     of Total
                                                Balance       Loans        Balance       Loans        Balance       Loans
                                               ---------     --------     ---------     --------     ---------     --------
                                                                          (Dollars in thousands)


                                              <c>          <c>          <c>           <c>          <c>           <c>
Loans delinquent for 30 to 59 days:
  Residential mortgage loans                     $197         0.03%        $  526        0.09%        $  584        0.11%
  Commercial loans                                563         0.08%         2,878        0.47%           168        0.03%
  Consumer and other loans                         70         0.01%           143        0.02%            39        0.01%
                                                 -----------------------------------------------------------------------
      Total loans delinquent 30 to 59 days        830         0.12%         3,547        0.58%           791        0.15%
                                                 -----------------------------------------------------------------------

Loans delinquent for 60 to 89 days:
  Residential mortgage loans                       11         0.00%           131        0.02%           278        0.05%
  Commercial loans                                  -            -              -           -             39        0.01%
  Consumer and other loans                         16         0.01%             -           -             20        0.01%
                                                 -----------------------------------------------------------------------
      Total loans delinquent 60 to 89 days         27         0.01%           131        0.02%           337        0.07%
                                                 -----------------------------------------------------------------------

      Total loans delinquent 30 to 89 days       $857         0.13%         $3,678       0.60%        $1,128        0.22%
                                                 =======================================================================
</TABLE>

Adversely Classified Assets. The Company's management adversely classifies
certain assets as "substandard," "doubtful" or "loss" based on criteria
established under banking regulations. An asset is considered substandard
if inadequately protected by the current net worth and paying capacity of
the obligor or of the collateral pledged, if any. Substandard assets
include those characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if existing deficiencies are not
corrected. Assets classified as doubtful have all of the weaknesses
inherent in those classified substandard with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the
basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as loss are those
considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss reserve is not
warranted.

At December 31, 2002, the Company had $8.4 million of assets that were
classified as substandard. This compares to $8.7 million and $5.8 million
of assets that were classified as substandard at December 31, 2001 and
2000, respectively. The Company had no assets that were classified as loss
or doubtful at any of these dates. Performing loans may or may not be
adversely classified depending upon management's judgment with respect to
each individual loan. At December 31, 2002, included in the $8.4 million of
assets that were classified as substandard, were $7.6 million of performing
loans. This compares to $7.9 million and $5.3 million of adversely
classified performing assets as of December 31, 2001 and 2000,
respectively. These amounts constitute assets that, in the opinion of
management, could potentially migrate to nonperforming or doubtful status.
The increase in adversely classified assets is reflective of a softening
economy and some deterioration in commercial credit quality. This may lead
to an increase in nonaccrual loans and an increase to the provision for
loan losses in future periods.

Allowance for Loan Losses

The allowance for loan losses is established for credit losses inherent in
the loan portfolio through a charge to earnings. Loans deemed uncollectible
are charged against the allowance, while recoveries of amounts previously
charged-off are added to the allowance. Amounts are charged-off once the
probability of loss has been established, with consideration given to such
factors as the customer's financial condition, underlying collateral and
guarantees, and general and industry economic conditions.


<PAGE>  34


When an insured institution classifies problem loans as either substandard
or doubtful, it is required to establish allowances for loan losses in an
amount deemed prudent by management. Additionally, general allowances
represent loss allowances that have been established to recognize the
inherent risk associated with lending activities, and have not been
allocated to particular problem loans.

The following table represents the allocation of the allowance for loan
losses as of the dates indicated:

<TABLE>
<CAPTION>

                                                                       December 31,
                              ----------------------------------------------------------------------------------------------
                                    2002               2001                2000               1999               1998
                              -----------------  ------------------  -----------------  -----------------  -----------------
                                       Percent             Percent            Percent            Percent            Percent
                                       of Loans            of Loans           of Loans           of Loans           of Loans
                                       in Each             in Each            in Each            in Each            in Each
                                       Category            Category           Category           Category           Category
                                       to Total            to Total           to Total           to Total           to Total
                              Amount    Loans    Amount     Loans    Amount    Loans    Amount    Loans    Amount    Loans
                              ------   --------  ------    --------  ------   --------  ------   --------  ------   --------
                                                                  (Dollars in thousands)


                           <c>       <c>      <c>        <c>      <c>       <c>      <c>       <c>      <c>       <c>
Residential mortgage loans    $ 1,757    44.4%   $1,835      50.8%   $1,460     47.8%   $1,395     51.7%   $1,558     60.0%
Commercial loans                5,250    41.9%    4,191      39.2%    3,210     41.0%    2,007     38.0%    1,277     31.1%
Consumer and other loans        1,027    13.7%      787      10.0%      731     11.2%      566     10.3%      456      8.9%
Unallocated                     2,062       -     1,711         -     1,893        -     1,713        -     1,727        -
                              --------------------------------------------------------------------------------------------
      Total                   $10,096   100.0%   $8,524     100.0%   $7,294    100.0%   $5,681    100.0%   $5,018    100.0%
                              ============================================================================================
</TABLE>

Assessing the adequacy of the allowance for loan losses involves
substantial uncertainties and is based upon management's evaluation of the
amounts required to meet estimated charge-offs in the loan portfolio after
weighing various factors. Management's methodology to estimate loss
exposure includes an analysis of individual loans deemed to be impaired,
reserve allocations for various loan types based on payment status or loss
experience and an unallocated allowance that is maintained based on
management's assessment of many factors including the growth, composition
and quality of the loan portfolio, historical loss experiences, general
economic conditions and other pertinent factors. Based on this evaluation,
management believes that its year-end allowance for loan losses is
adequate.

A portion of the allowance for loan losses is not allocated to any specific
segment of the loan portfolio. This non-specific allowance is maintained
for two primary reasons: (i) there exists an inherent subjectivity and
imprecision to the analytical processes employed, and (ii) the prevailing
business environment, as it is affected by changing economic conditions and
various external factors, may impact the portfolio in ways currently
unforeseen. Management, therefore, has established and maintains a non-
specific allowance for loan losses. The amount of this measurement
imprecision allocation was $2.1 million at December 31, 2002, compared to
$1.7 million at December 31, 2001.

While management evaluates currently available information in establishing
the allowance for loan losses, future adjustments to the allowance may be
necessary if conditions differ substantially from the assumptions used in
making the evaluations. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review a financial
institution's allowance for loan losses and carrying amounts of other real
estate owned. Such agencies may require the financial institution to
recognize additions to the allowance based on their judgments about
information available to them at the time of their examination.

During 2002, 2001 and 2000, the Bank made additions to the allowance of
$1.9 million, $1.7 million and $1.5 million and experienced net charge-offs
(recoveries) of $303,000, and $439,000 and ($71,000), respectively. At
December 31, 2002, the allowance for loan losses stood at $10.1 million and
represented 1371.74% of nonperforming loans and 1.51% of total loans
outstanding. This compares to an allowance for loan losses of $8.5 million,
representing 1132.01% of nonperforming loans and 1.40% of total loans
outstanding at December 31, 2001.


<PAGE>  35


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

<TABLE>
<CAPTION>

                                                                            Year Ended December 31,
                                                              ---------------------------------------------------
                                                               2002        2001       2000       1999       1998
                                                               ----        ----       ----       ----       ----
                                                                                (In thousands)


                                                           <c>         <c>        <c>        <c>        <c>
Balance at beginning of year                                  $ 8,524     $7,294     $5,681     $5,018     $4,340

Loans charged-off:
  Residential mortgage loans                                        -          -        (11)      (128)      (174)
  Commercial loans                                               (400)      (406)       (94)      (176)       (15)
  Consumer and other loans                                        (93)       (61)       (20)       (80)      (163)
                                                              ---------------------------------------------------
      Total loans charged-off                                    (493)      (467)      (125)      (384)      (352)
                                                              ---------------------------------------------------

Recoveries of loans previously charged-off:
  Residential mortgage loans                                       40          -          -         29          -
  Commercial loans                                                110          -        191          1          3
  Consumer and other loans                                         40         28          5         17         10
                                                              ---------------------------------------------------
      Total recoveries of loans previously charged-off            190         28        196         47         13
                                                              ---------------------------------------------------

Net (charge-offs) recoveries                                     (303)      (439)        71        (337)     (339)

Provision for loan losses charged against income                1,875      1,669      1,542       1,000     1,017
                                                              ---------------------------------------------------

Balance at end of year                                        $10,096     $8,524     $7,294      $5,681    $5,018
                                                              ===================================================

Net charge-offs (recoveries) to average loans outstanding        0.05%      0.08%     (0.01%)      0.08%     0.08%
                                                              ===================================================
</TABLE>

Investments

Total investments (consisting of fed funds sold and overnight investments,
investment securities, MBSs, and FHLB stock) totaled $282.7 million, or
27.9% of total assets, at December 31, 2002. This compares to total
investments of $210.7 million, or 24.4% of total assets, as of December 31,
2001. The increase of $72.1 million, or 34.2%, was primarily in overnight
investments and investment securities. These were purchased to reinvest the
funds generated from unusually high prepayment levels of residential
mortgage loans and continued deposit growth.

The investment portfolio provides a source of short-term liquidity and acts
as a counterbalance to loan and deposit flows. Investment securities and
MBSs are primarily comprised of U.S. Agency securities, but in an effort to
diversify the portfolio and increase yields, the Company has started to
invest in corporate debt instruments. At December 31, 2002, the Company had
a total of $20.6 million in corporate debt. All investment securities and
MBSs at December 31, 2002 and 2001, were classified as securities available
for sale, and at December 31, 2002, carried a total of $3.4 million in net
unrealized gains, compared to $1.4 million in net unrealized gains at
December 31, 2001.


<PAGE>  36


A summary of investment and mortgage-backed securities available for sale
follows:

<TABLE>
<CAPTION>

                                                            Unrealized
                                           Amortized     -----------------      Market
                                             Cost        Gains      Losses      Value
                                           ---------     -----      ------      ------
                                                          (In thousands)


                                        <c>           <c>        <c>        <c>
At December 31, 2002:
U.S. Agency obligations                    $ 75,137      $1,203     $  (2)     $ 76,338
Corporate debt securities                    20,367         210         -        20,577
Trust preferred securities                    4,299         184       (69)        4,414
U.S. Agency mortgage-backed securities      150,152       1,856       (61)      151,947
Collateralized mortgage obligations           4,073          94         -         4,167
                                           --------------------------------------------
      Total                                $254,028      $3,547     $(132)     $257,443
                                           ============================================

At December 31, 2001:
U.S. Agency obligations                    $ 46,004      $  514     $ (74)     $ 46,444
Trust preferred securities                    3,189           -      (180)        3,009
U.S. Agency mortgage-backed securities      140,316       1,260      (325)      141,251
Collateralized mortgage obligations           9,233         166         -         9,399
                                           --------------------------------------------
      Total                                $198,742      $1,940     $(579)     $200,103
                                           ============================================

At December 31, 2000:
U.S. Treasury obligations                  $  1,016      $    -     $ (11)     $  1,005
U.S. Agency obligations                      44,256         167      (119)       44,304
Trust preferred securities                    2,187           -      (200)        1,987
U.S. Agency mortgage-backed securities      104,863         457      (468)      104,852
Collateralized mortgage obligations          12,680           -      (101)       12,579
                                           --------------------------------------------
      Total                                $165,002      $  624     $(899)     $164,727
                                           ============================================
</TABLE>

The following table sets forth the contractual maturities of investment and
mortgage-backed securities available for sale and the weighted average
yields of such securities:

<TABLE>
<CAPTION>

                                                                    After One,           After Five,
                                                Within              But Within            But Within                After
                                               One Year             Five Years            Ten Years               Ten Years
                                          ------------------    ------------------    ------------------    ---------------------
                                                    Weighted              Weighted              Weighted                 Weighted
                                          Market    Average     Market    Average     Market    Average      Market      Average
                                          Value      Yield      Value      Yield      Value      Yield       Value        Yield
                                          ------    --------    ------    --------    ------    --------     ------      --------
                                                                          (Dollars in thousands)


                                       <c>        <c>        <c>        <c>        <c>        <c>        <c>           <c>
At December 31, 2002:
U.S. Agency obligations                   $2,029     3.26%      $74,309    4.03%      $    -        -       $      -         -
Corporate debt securities                      -        -        20,577    5.92%           -        -              -         -
Trust preferred securities                     -        -             -       -            -        -          4,414      8.40%
U.S. Agency mortgage-backed securities         -        -             -       -        1,534     2.24%       150,413      4.25%
Collateralized mortgage obligations            -        -             -       -            -        -          4,167      6.35%
                                          ------                -------               ------                --------
      Total                               $2,029     3.26%      $94,886    4.44%      $1,534     2.24%      $158,994      4.42%
                                          ====================================================================================

At December 31, 2001:
U.S. Agency obligations                   $3,046     5.91%      $43,398    4.94%      $    -        -       $      -         -
Trust preferred securities                     -        -             -       -            -        -          3,009      8.59%
U.S. Agency mortgage-backed securities         -        -             -       -        1,664     3.47%       139,587      5.37%
Collateralized mortgage obligations            -        -             -       -            -        -          9,399      6.47%
                                          ------                -------               ------                --------
      Total                               $3,046     5.91%      $43,398    4.94%      $1,664     3.47%      $151,995      5.51%
                                          ====================================================================================

At December 31, 2000:
U.S. Treasury obligations                 $1,005     4.16%      $     -       -       $    -        -       $      -         -
U.S. Agency obligations                    5,243     5.70%       39,061    6.40%           -        -              -         -
Trust preferred securities                     -        -             -       -            -        -          1,987      8.16%
U.S. Agency mortgage-backed securities         -        -             -       -            -        -        104,852      6.69%
Collateralized mortgage obligations            -        -             -       -            -        -         12,579      6.47%
                                          ------                -------               ------                --------
      Total                               $6,248     5.46%      $39,061    6.40%      $    -        -       $119,418      6.71%
                                          ====================================================================================
</TABLE>


<PAGE>  37


Bank-Owned Life Insurance

In 2002, the Bank purchased $14.2 million of bank-owned life insurance
("BOLI"). The Bank purchased these policies for the purpose of protecting
itself against the loss due to the death of key employees and to offset the
Bank's future obligations to its employees under its retirement and benefit
plans. The value of this life insurance was $14.8 million at December 31,
2002. The Bank recorded income from the BOLI policies of $568,000 in 2002.

Deposits and Borrowings

The Company has devoted considerable time and resources to its deposit
gathering network. The Company experienced a net increase in total deposits
during 2002, to $761.9 million, or 75.2% of total assets, at December 31,
2002, from $670.4 million, or 77.8% of total assets, at December 31, 2001.
This increase of $91.5 million, or 13.6%, in total deposits was centered in
core accounts and broken down as follows: demand deposit accounts up $25.0
million, or 22.1%; NOW and savings accounts up $92.2 million, or 30.8%;
while certificates of deposit accounts were down $26.4 million, or 10.6%.
By comparison, the increase in total deposits during 2001 was $38.8
million, or 6.1%. Part of the growth in NOW accounts resulted from the
introduction of the Asset Manager. This account is positioned to compete
against brokerage and mutual fund money market accounts, and as such, bears
an interest rate considerably higher than traditional NOW accounts.

The following table sets forth certain information regarding deposits:

<TABLE>
<CAPTION>

                                                                             December 31,
                                         -------------------------------------------------------------------------------------
                                                    2002                         2001                          2000
                                         ---------------------------  ---------------------------  ---------------------------
                                                   Percent  Weighted            Percent  Weighted            Percent  Weighted
                                                     of     Average               of     Average               of     Average
                                          Amount    Total     Rate     Amount    Total     Rate     Amount    Total     Rate
                                          ------   -------  --------   ------   -------  --------   ------   -------  --------
                                                                        (Dollars in thousands)


                                      <c>       <c>       <c>      <c>       <c>       <c>      <c>       <c>       <c>
NOW accounts                             $100,476   13.2%    1.37%    $ 44,445    6.6%    0.40%    $ 36,910    5.8%    0.64%
Money market accounts                      10,660    1.4%    1.00%       9,914    1.5%    1.40%      12,283    1.9%    2.59%
Savings accounts                          290,981   38.2%    1.70%     254,861   38.0%    1.90%     210,728   33.4%    3.52%
Certificate of deposit accounts           221,874   29.1%    3.07%     248,268   37.0%    4.15%     265,623   42.1%    5.76%
                                         ---------------              ---------------              ---------------
      Total interest bearing deposits     623,991   81.9%    2.12%     557,488   83.1%    2.77%     525,544   83.2%    4.43%
Noninterest bearing accounts              137,920   18.1%       -      112,925   16.9%       -      106,088   16.8%       -
                                         ---------------              ---------------              ---------------
      Total deposits                     $761,911   100.0%   1.74%    $670,413  100.0%    2.31%    $631,632  100.0%    3.69%
                                         ==================================================================================
</TABLE>

At December 31, 2002, certificate of deposit accounts with balances greater
than $100,000 aggregated $30.5 million, compared to $35.4 million and $32.1
million at December 31, 2001 and 2000, respectively.

Total borrowings (consisting of overnight and short-term borrowings, along
with FHLB borrowings) increased $44.9 million, or 35.5%, during 2002, to
$171.3 million, from $126.4 million at December 31, 2001. The Company had
$51.9 million of borrowings outstanding at the end of 2000. The increase
during 2002 was the result of growth in overnight borrowings associated
with the Company's cash management services along with the Company
utilizing FHLB borrowings to take advantage of long-term borrowing rates to
partially fund its asset growth. The Bank, through its membership in the
FHLB, has access to a variety of borrowing alternatives, and management
will from time to time take advantage of these opportunities to fund asset
growth. However, on a long-term basis, the Bank intends to concentrate on
increasing its core deposits.


<PAGE>  38


Company-Obligated Mandatorily Redeemable Capital Securities

On June 26, 2002, the Company, through one of its statutory trust
subsidiaries, issued $5.0 million of trust preferred securities, bringing
its total outstanding of trust preferred securities to $8.0 million. The
securities issued in June 2002 have a floating interest rate equal to 3
month LIBOR plus 3.45% and mature in 30 years. The regulatory capital
generated from issuing these securities helped support the Company's
continued asset growth.

Asset and Liability Management

The principal objective of the Company's asset and liability management
process is to maximize profit potential while minimizing the vulnerability
of its operations to changes in interest rates by means of managing the
ratio of interest rate sensitive assets to interest rate sensitive
liabilities within specified maturity or repricing periods. The Company's
actions in this regard are taken under the guidance of the Bank's
Asset/Liability Committee ("ALCO") that is comprised of members of senior
management. The ALCO generally meets monthly and is actively involved in
formulating the economic assumptions that the Company uses in its financial
planning and budgeting process and establishes policies which control and
monitor the sources, uses and pricing of funds. The Company has not engaged
in any hedging activities.

The ALCO manages the Company's interest rate risk position using both
income simulation and interest rate sensitivity "gap" analysis. The ALCO
has established internal parameters for monitoring the income simulation
and gap analysis. These guidelines serve as benchmarks for evaluating
actions to balance the current position against overall strategic goals.
The ALCO monitors current exposures and reports these to the Board of
Directors.

Simulation is used as the primary tool for measuring the interest rate risk
inherent in the Company's balance sheet at a given point in time by showing
the effect on net interest income, over a 24-month period, of interest rate
ramps of up to 200 basis points. These simulations take into account
repricing, maturity and prepayment characteristics of individual products.
The ALCO reviews simulation results to determine whether the downside
exposure resulting from changes in market interest rates remains within
established tolerance levels over both a 12-month and 24-month horizon, and
develops appropriate strategies to manage this exposure. The Company's
guidelines for interest rate risk specify that if interest rates were to
shift up or down 200 basis points over a 12-month period, estimated net
interest income for those 12 months and the subsequent 12 months, should
decline by no more than 5.0% or 10.0%, respectively. As of December 31,
2002, net interest income simulation indicated that the Company's exposure
to changing interest rates was outside of the 10% guidance level
established for the second year of a 200 basis point decline. This exposure
primarily results from the unusually low current rates paid on deposit
accounts and the extremely high prepayment speeds anticipated for mortgage-
related assets if market rates declined 200 basis points. The current rates
on many deposit accounts are so low, that they cannot decline 200 basis
points without becoming negative. This results in a floor of zero percent
for these deposit accounts, and this floor causes compression of the net
interest margin for modeling purposes. The ALCO reviews the methodology
utilized for calculating interest rate risk exposure and may, from time to
time, adopt modifications to this methodology. While the ALCO reviews
simulation assumptions and methodology to ensure that they reflect
historical experience, it should be noted that income simulation may not
always prove to be an accurate indicator of interest rate risk because the
actual repricing, maturity and prepayment characteristics of individual
products may differ from the estimates used in the simulations.


<PAGE>  39


The following table presents the estimated impact of interest rate ramps on
estimated net interest income over a twenty-four month period beginning
January 1, 2003:

<TABLE>
<CAPTION>

                                   Estimated Impact
                                on Net Interest Income
                                ----------------------
                                 Dollar      Percent
                                 Change      Change
                                 ------      -------
                                (Dollars in thousands)


                              <c>         <c>
Initial 12-Month Period:
Up 200 basis point ramp          $ 1,694       5.57%
Up 100 basis point ramp              999       3.28%
Down 100 basis point ramp           (567)     (1.87%)
Down 200 basis point ramp         (1,261)     (4.15%)

Subsequent 12-Month Period:
Up 200 basis point ramp          $ 3,023      10.21%
Up 100 basis point ramp            2,425       8.19%
Down 100 basis point ramp         (1,557)     (5.26%)
Down 200 basis point ramp         (4,495)    (15.18%)
</TABLE>

The Company also uses interest rate sensitivity "gap" analysis to provide a
more general overview of its interest rate risk profile. The effect of
interest rate changes on the assets and liabilities of a financial
institution such as the Bank may be analyzed by examining the extent to
which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity gap. An asset or
liability is said to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest
rate sensitivity gap is defined as the difference between interest-earning
assets and interest-bearing liabilities maturing or repricing within a
given time period. A gap is considered positive when the amount of interest
rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds interest rate sensitive assets. During a
period of falling interest rates, a positive gap would tend to adversely
affect net interest income, while a negative gap would tend to result in an
increase in net income. Conversely, during a period of rising interest
rates, a positive gap would tend to result in an increase in net interest
income while a negative gap would tend to affect net interest income
adversely.

The Company has sought to maintain a relatively narrow gap position and
has, in some instances, foregone investment in higher yielding assets when
such investment, in management's opinion, exposed it to undue interest rate
risk. However, the Company does not attempt to perfectly match interest
rate sensitive assets and liabilities and will selectively mismatch its
assets and liabilities to a controlled degree when it considers it both
appropriate and prudent to do so. There are a number of relevant time
periods in which to measure the gap position, such as at the 30, 60, 90, or
180 day points in the maturity schedule. Management monitors the gap
position at each of these maturity points, while also focusing closely on
the gap at the one-year point in making its principal funding decisions,
such as with respect to its commercial and residential mortgage loan
portfolios. At December 31, 2002, the Company's cumulative one-year gap was
a positive $155.7 million, or 15.4% of total assets, compared to positive
$97.4 million, or 11.3% of total assets, at the end of 2001. While the
Company's cumulative one-year gap at December 31, 2002, was higher than in
past years, it is projected to decrease during 2003.

The following table presents the repricing schedule for interest-earning
assets and interest-bearing liabilities at December 31, 2002. To the extent
applicable, amounts of assets and liabilities that mature or reprice within
a particular period where determined in accordance with their contractual
terms. Investment securities are allocated based upon expected call dates.
Loans and MBSs have been allocated based upon expected amortization and
prepayment rates based on historical performance. Savings, NOW and money
market deposit


<PAGE>  40


accounts, which have no contractual term and are subject to immediate
repricing, are anticipated to behave more like core accounts and therefore
are presented as spread evenly over the first three years. Nonetheless, the
presentation does not reflect lags that may occur in the actual repricing
of these deposits.

<TABLE>
<CAPTION>

                                                   Within      Over Three     Over Six       Over One
                                                   Three         to Six       to Twelve      Year to       Over Five
                                                   Months        Months        Months       Five Years       Years        Total
                                                   ------      ----------     ---------     ----------     ---------      -----
                                                                              (Dollars in thousands)


                                               <c>           <c>           <c>            <c>           <c>           <c>
Interest-earning assets:
  Federal funds sold and overnight investments    $ 17,623      $      -      $      -       $      -      $      -      $ 17,623
  Investment securities                             14,006        18,078         7,999         55,421         5,825       101,329
  Mortgage-backed securities                        48,858        14,478        14,172         64,931        13,675       156,114
  FHLB Stock                                         7,683             -             -              -             -         7,683
  Residential mortgage loans                        65,726        40,640        50,504        123,991        16,902       297,763
  Commercial loans                                  95,881        18,903        27,934        129,593         8,856       280,967
  Consumer and other loans                          42,060         7,858         6,259         19,763        15,988        91,928
                                                  -------------------------------------------------------------------------------

      Total interest-earning assets                291,837        99,957       106,868        393,699        61,046       953,407
                                                  -------------------------------------------------------------------------------

Interest-bearing liabilities:
  NOW accounts                                       8,373         8,373        16,746         66,984             -       100,476
  Money market accounts                                888           888         1,776          7,108             -        10,660
  Savings accounts                                  24,249        24,249        48,496        193,987             -       290,981
  Certificate of deposit accounts                   46,119        27,694        59,782         85,756         2,523       221,874
  Overnight & short-term borrowings                 27,364             -             -              -             -        27,364
  FHLB borrowings                                   14,951        11,060        16,946         95,984         5,000       143,941
  Capital trust securities                           5,000             -             -              -         3,000         8,000
                                                  -------------------------------------------------------------------------------

      Total interest-bearing liabilities           126,944        72,264       143,746        449,819        10,523       803,296
                                                  -------------------------------------------------------------------------------

      Net interest sensitivity gap during
       the period                                 $164,893      $ 27,693      $(36,878)      $(56,120)     $ 50,523      $150,111
                                                  ===============================================================================

      Cumulative gap - 12/31/02                   $164,893      $192,586      $155,708       $ 99,588      $150,111
                                                  =================================================================

      Cumulative gap - 12/31/01                   $107,354      $131,515      $ 97,398       $112,571      $134,762
                                                  =================================================================

Interest-sensitive assets as a percent of
 interest-sensitive liabilities (cumulative)        229.89%       196.68%       145.40%        112.56%       118.69%

Cumulative gap as a percent of total assets          16.28%        19.01%        15.37%          9.83%        14.82%
</TABLE>

The preceding table does not necessarily indicate the impact of general
interest rate movements on the Company's net interest income because the
repricing of various assets and liabilities is discretionary and is subject
to competitive and other factors. As a result, assets and liabilities
indicated as repricing within the same period may, in fact, reprice at
different times and at different rate levels.

Liquidity and Capital Resources

Liquidity

Liquidity is defined as the ability to meet current and future financial
obligations of a short-term nature. The Company further defines liquidity
as the ability to respond to the needs of depositors and borrowers, as well
as to earnings enhancement opportunities, in a changing marketplace.

The primary source of funds for the payment of dividends and expenses by
the Company is dividends paid to it by the Bank. Bank regulatory
authorities generally restrict the amounts available for payment of
dividends if the effect thereof would cause the capital of the Bank to be
reduced below applicable capital requirements.


<PAGE>  41


These restrictions indirectly affect the Company's ability to pay
dividends. The primary sources of liquidity for the Bank consist of deposit
inflows, loan repayments, borrowed funds, maturity of investment securities
and sales of securities from the available for sale portfolio. Management
believes that these sources are sufficient to fund the Bank's lending and
investment activities.

Management is responsible for establishing and monitoring liquidity targets
as well as strategies and tactics to meet these targets. In general, the
Company maintains a high degree of flexibility with a liquidity target of
10% to 25% of total assets. At December 31, 2002, federal funds sold and
overnight investments, investment securities and mortgage-backed securities
available for sale amounted to $275.1 million, or 27.2% of total assets.
This compares to $205.0 million, or 23.8% of total assets, at December 31,
2001. The Bank is a member of the FHLB and, as such, has access to both
short- and long-term borrowings. In addition, the Bank maintains a line of
credit at the FHLB as well as a line of credit with a correspondent bank.
There have been no adverse trends in the Company's liquidity or capital
reserves. Management believes that the Company has adequate liquidity to
meet its commitments.

The following table sets forth the contractual obligations of the Company:

<TABLE>
<CAPTION>

                                                        Payments Due or Commitment Expiring - By Period
                                                   ----------------------------------------------------------
                                                                Less than     One to      Four to      After
                                                                   One         Three       Five        Five
                                                    Total         Year         Years       Years       Years
                                                    -----       ---------     ------      -------      -----
                                                                         (In thousands)


                                                <c>          <c>           <c>         <c>         <c>
Contractual cash obligations:
  FHLB borrowings                                  $143,941     $ 24,100      $42,000     $35,534     $42,307
  Mandatorily redeemable trust preferred              8,000            -            -           -       8,000
  Lease obligations                                   6,729          906        1,826       1,732       2,265
  Other
    TT&L                                              3,000        3,000            -           -           -
    Customer repo's                                  24,364       24,364            -           -           -
                                                   ----------------------------------------------------------
      Total contractual cash obligations           $186,034     $ 52,370      $43,826     $37,266     $52,572
                                                   ----------------------------------------------------------

Other commitments:
Commitments to originate or purchase loans         $ 58,727     $ 58,727      $     -     $     -     $     -
  Unused lines of credit and other commitments      116,470       54,220       16,854         368      45,028
  Letters of credit                                   2,389        2,389            -           -           -
                                                   ----------------------------------------------------------
      Total other commitments                      $177,586     $115,336      $16,854     $   368     $45,028
                                                   ==========================================================
</TABLE>

Capital Resources

Total shareholders' equity of the Company at December 31, 2002 was $66.4
million, as compared to $59.1 million at December 31, 2001. Major activity
in shareholders' equity during 2002 can be summarized as follows: net
income for the year was $7.7 million, dividends paid on Common Stock
totaled $2.0 million and changes in unrealized gains and losses on
securities equaled $1.4 million.

All FDIC-insured institutions must meet specified minimal capital
requirements. These regulations require banks to maintain a minimum
leverage capital ratio. At December 31, 2002, the Bank's Tier I leverage
ratio stood at 6.06%. In addition, the FDIC has adopted capital guidelines
based upon ratios of a bank's capital to total assets adjusted for risk.
The risk-based capital guidelines include both a definition of capital and
a framework for calculating risk-weighted assets by assigning balance sheet
assets and off-balance sheet items to broad risk categories. These
regulations require banks to maintain minimum capital levels for capital
adequacy purposes and higher capital levels to be considered "well
capitalized." According to these standards, the Bank had a Tier I risk-
weighted capital ratio of 9.43% and a Total risk-weighted capital ratio of
10.68% at December 31, 2002.


<PAGE>  42


Capital guidelines have also been issued by the Federal Reserve Board
("FRB") for bank holding companies. These guidelines require the Company to
maintain minimum capital levels for capital adequacy purposes. In general,
the FRB has adopted substantially identical capital adequacy guidelines as
the FDIC. Such standards are applicable to bank holding companies and their
bank subsidiaries on a consolidated basis. At December 31, 2002, the
Company's Tier I leverage ratio was 6.19%, its Tier I Risk-based capital
ratio was 9.63% and its Total Risk-based capital ratio was 10.88%.

As of December 30, 2002, the Company and the Bank met all applicable
minimum capital requirements and were considered "well capitalized" by both
the FRB and the FDIC.

Impact of Inflation and Changing Prices

The consolidated financial statements and related notes thereto, included
elsewhere herein, have been prepared in accordance with GAAP, which require
the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing
power of money over time due to inflation. Unlike many industrial
companies, substantially all of the assets and liabilities of the Bank are
monetary in nature. As a result, interest rates have a more significant
impact on the Bank's performance than the general level of inflation. Over
short periods of time, interest rates may not necessarily move in the same
direction or in the same magnitude as inflation.

Recent Accounting Developments

On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS 142, "Goodwill and Other Intangible Assets." SFAS 142 addresses
financial accounting and reporting for acquired goodwill and other
intangible assets and supersedes Accounting Principles Board ("APB")
Opinion No. 17, "Intangible Assets." Under SFAS 142, goodwill and
intangible assets that have indefinite useful lives will no longer be
amortized, but rather will be tested at least annually for impairment. The
Statement applies to existing goodwill, as well as goodwill arising
subsequent to the effective date of the Statement. Intangible assets that
have finite useful lives will continue to be amortized over their useful
lives, but without the constraint of the 40-year maximum life required by
APB Opinion No. 17. The provisions of SFAS 142 must be applied for fiscal
years beginning after December 15, 2001, and may not be adopted earlier.

On October 17, 2001, FASB issued Action Alert No. 01-37. That Action Alert
reported a conclusion reached by FASB at its October 10, 2001 meeting
regarding the application of SFAS 142 and SFAS 141, "Business Combinations"
with respect to goodwill accounting for bank branch acquisitions. The
conclusion set forth in the October 17th Action Alert states that paragraph
5 of SFAS 72, "Accounting for Certain Acquisitions of Banking or Thrift
Institutions" applies to all acquisitions of financial institutions (or
branches thereof) whether "troubled" or not, in which the fair value of the
liabilities assumed exceeds the fair value of tangible and intangible
assets acquired. SFAS 72 was originally issued in 1983, in the context of
the savings and loan crisis and the acquisition of so-called "troubled"
financial institutions. The acquisition associated with the formation of
the Company's banking subsidiary in March 1996 was such that the fair value
of the liabilities assumed exceeded the fair value of tangible and
intangible assets acquired. Based upon the conclusion set forth in the
October 17th Action Alert, during the first two quarters of 2002, the
Company continued amortizing its intangible attributable to its March 1996
acquisition from Fleet Financial Group, Inc.

On October 1, 2002, FASB issued SFAS 147, "Acquisitions of Certain
Financial Institutions." SFAS 147 states that the specialized accounting
guidance in paragraph 5 of SFAS 72 will not apply after September 30, 2002,
and if certain criteria are met, any unidentifiable intangible asset will
be reclassified to goodwill upon adoption of the Statement. Financial
institutions meeting conditions outlined in SFAS 147 will be required to
restate previously issued financial statements for fiscal periods beginning
after December 15, 2001. The objective of the


<PAGE>  43


restatement requirement is to present the balance sheet and income
statement as if the amount accounted for under SFAS 72 as an unidentifiable
intangible asset had been reclassified to goodwill as of the date SFAS 142
was initially applied. The transition provisions of SFAS 147 are effective
on October 1, 2002; however early application is permitted. The Company
adopted SFAS 147 during the third quarter of 2002, and therefore has
restated the first and second quarters to remove any amortization of
goodwill, net of taxes. At January 1, 2002, the Company had $10.7 million
of intangible assets that have now been reclassified as goodwill and will
no longer be amortized, but will be reviewed periodically for impairment.

The following table sets forth the reconcilement of net income and earnings
per share excluding goodwill amortization for the years ended December 31,
2002, 2001 and 2000.

<TABLE>
<CAPTION>

                                                    Year Ended December 31,
                                                  ----------------------------
                                                   2002       2001       2000
                                                   ----       ----       ----


                                               <c>        <c>        <c>
Reported net income (in thousands)                $7,662     $6,315     $5,618
Add back: Goodwill amortization, net of taxes          -        756        756
                                                  ----------------------------
Adjusted net income                               $7,662     $7,071     $6,374
                                                  ============================

Basic earnings per share                          $ 2.04     $ 1.69     $ 1.51
Add back: Goodwill amortization, net of taxes          -       0.20       0.20
                                                  ----------------------------
Adjusted basic earnings per share                 $ 2.04     $ 1.89     $ 1.71
                                                  ============================

Diluted earnings per share                        $ 1.92     $ 1.62     $ 1.49
Add back: Goodwill amortization, net of taxes          -       0.19       0.20
                                                  ----------------------------
Adjusted diluted earnings per share               $ 1.92     $ 1.81     $ 1.69
                                                  ============================
</TABLE>

In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and does
not apply to goodwill or intangible assets that are not being amortized and
certain other long-lived assets. SFAS 144 supersedes SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" and the accounting and reporting provisions of APB Opinion 30,
"Reporting Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions",
for the disposal of a segment of a business (as previously defined in that
Opinion). SFAS 144 also amends Accounting Research Bulletin ("ARB") 51,
"Consolidated Financial Statements", to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary.
SFAS 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001 with early adoption encouraged. The
Company adopted SFAS 144 on January 1, 2002. The adoption of this Statement
did not have a material impact on the Company's financial position or
results of operations.

In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS 148 amends SFAS 123,
"Accounting for Stock-Based Compensation", to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. Companies are able to
eliminate a "ramp-up" effect that the SFAS 123 transition rule creates in
the year of adoption. Companies can choose to elect a method that will
provide for comparability amongst years reported. In addition, this
Statement amends the disclosure requirement of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about
the fair value based method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
amendments to SFAS 123 are effective for financial statements for fiscal
years ending after December 15, 2002. The Company does not believe the
adoption of this Statement will have a material impact on the Company's
financial position or results of operations.


<PAGE>  44


BANCORP RHODE ISLAND, INC.

Management's Report

The management of Bancorp Rhode Island, Inc. is responsible for the
preparation, integrity and fair presentation of the financial statements
and other financial information in this annual report. Management believes
that the financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America.
In preparing the financial statements and other financial information,
management makes certain judgments and estimates where appropriate.

The accounting systems, which record, summarize and report financial data,
are supported by a system of internal control. The Company's system of
internal control is designed to provide reasonable assurance that assets
are safeguarded, that transactions are executed in accordance with
management's authorizations and that transactions are properly recorded in
the financial statements. This system is augmented by written policies and
procedures, along with internal audits. Management recognizes that
estimates and judgments are required to assess and balance the relative
costs and expected benefits of the controls and that errors or
irregularities may nevertheless occur. However, management believes that
the Company's internal control system provides reasonable assurance that
errors or irregularities that could be material to the financial statements
are prevented or would be detected on a timely basis and corrected in the
normal course of business.

The Board of Directors oversees the financial statements through an Audit
Committee comprised solely of outside directors who are not employees of
the Company. The Audit Committee reviews the activities of the internal
audit function and meets regularly with representatives of KPMG LLP, the
Company's independent auditors. KPMG LLP has been appointed by the Board of
Directors, on the recommendation of the Audit Committee, to conduct an
independent audit and to express an opinion as to the fairness of the
presentation of the consolidated financial statements of Bancorp Rhode
Island, Inc.



/s/ Merrill W. Sherman                 /s/ Albert R. Rietheimer
Merrill W. Sherman                     Albert R. Rietheimer
President and                          Chief Financial Officer and
Chief Executive Officer                Treasurer


<PAGE>  45


BANCORP RHODE ISLAND, INC.

Independent Auditors' Report

The Board of Directors and Shareholders
Bancorp Rhode Island, Inc.:

We have audited the accompanying consolidated balance sheets of Bancorp
Rhode Island, Inc. and subsidiaries as of December 31, 2002 and 2001, and
the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bancorp
Rhode Island, Inc. and subsidiaries as of December 31, 2002 and 2001, and
the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.

As discussed in note 2 to the consolidated financial statements, Bancorp
Rhode Island, Inc. and subsidiaries adopted Statement of Financial
Accounting Standards ("SFAS") 142, "Goodwill and Other Intangible Assets"
and SFAS 147, "Acquisition of Certain Financial Institutions", effective
January 1, 2002.



/s/ KPMG LLP
KPMG LLP
Providence, Rhode Island

January 23, 2003


<PAGE>  46


BANCORP RHODE ISLAND, INC.

Consolidated Balance Sheets

<TABLE>
<CAPTION>

                                                                                    December 31,
                                                                               -----------------------
                                                                                 2002           2001
                                                                                 ----           ----
                                                                                   (In thousands)


                                                                            <c>            <c>
Assets:
  Cash and due from banks (Note 2)                                             $   25,336     $ 24,261
  Federal funds sold and overnight investments                                     17,623        4,913
  Investment securities available for sale (amortized cost of
   $99,803 and $49,193, respectively) (Notes 3, 10, and 11)                       101,329       49,453
  Mortgage-backed securities available for sale (amortized cost of
   $154,225 and $149,549, respectively) (Notes 4 and 11)                          156,114      150,650
  Stock in the Federal Home Loan Bank of Boston (Note 11)                           7,683        5,668

  Loans receivable (Notes 5 and 11):
    Residential mortgage loans                                                    297,763      310,212
    Commercial loans                                                              280,967      239,364
    Consumer and other loans                                                       91,928       61,388
                                                                               -----------------------
      Total loans receivable                                                      670,658      610,964
  Allowance for loan losses (Note 6)                                              (10,096)      (8,524)
                                                                               -----------------------
      Net loans receivable                                                        660,562      602,440
  Premises and equipment, net (Note 7)                                              9,702        7,184
  Other real estate owned (Note 8)                                                     58          264
  Goodwill, net (Note 2)                                                           10,766       10,766
  Accrued interest receivable                                                       6,183        5,803
  Investment in bank-owned life insurance                                          14,768            -
  Prepaid expenses and other assets                                                 2,753          848
                                                                               -----------------------
      Total assets                                                             $1,012,877     $862,250
                                                                               =======================

Liabilities:
  Deposits (Note 9):
    Demand deposit accounts                                                    $  137,920     $112,925
    NOW accounts                                                                  100,476       44,445
    Money market accounts                                                          10,660        9,914
    Savings accounts                                                              290,981      254,861
    Certificate of deposit accounts                                               221,874      248,268
                                                                               -----------------------
      Total deposits                                                              761,911      670,413

  Overnight and short-term borrowings (Note 10)                                    27,364       13,033
  Federal Home Loan Bank of Boston borrowings (Note 11)                           143,941      113,365
  Company-obligated mandatorily redeemable capital securities (Note 12)             8,000        3,000
  Other liabilities                                                                 5,234        3,342
                                                                               -----------------------
      Total liabilities                                                           946,450      803,153
                                                                               -----------------------


  Commitments and contingencies (Notes 7, 16 and 20)


Shareholders' equity (Notes 1 and 18):
  Preferred stock, par value $0.01 per share, authorized 1,000,000 shares:
   Issued and outstanding: none                                                         -            -
  Common stock, par value $0.01 per share, authorized 11,000,000 shares:
    Voting: Issued and outstanding: 3,777,450 shares in 2002
             and 3,753,550 shares in 2001                                              38           37
  Additional paid-in capital                                                       40,134       39,826
  Retained earnings                                                                24,002       18,336
  Accumulated other comprehensive income, net (Notes 3 and 4)                       2,253          898
                                                                               -----------------------
      Total shareholders' equity                                                   66,427       59,097
                                                                               -----------------------
      Total liabilities and shareholders' equity                               $1,012,877     $862,250
                                                                               =======================
</TABLE>

See accompanying notes to consolidated financial statements.


<PAGE>  47


BANCORP RHODE ISLAND, INC.

Consolidated Statements of Operations

<TABLE>
<CAPTION>

                                                                         Year Ended December 31,
                                                                  -------------------------------------
                                                                    2002          2001          2000
                                                                    ----          ----          ----
                                                                  (In thousands, except per share data)


                                                               <c>           <c>           <c>
Interest and dividend income:
  Residential mortgage loans                                      $  18,646     $  21,694     $  17,982
  Commercial loans                                                   18,396        18,078        17,737
  Consumer and other loans                                            4,072         4,569         4,472
  Mortgage-backed securities                                          8,428         7,720         5,576
  Investment securities                                               3,375         3,044         3,056
  Federal funds sold and overnight investments                          313           510           930
  Federal Home Loan Bank of Boston stock dividends                      277           288           282
                                                                  -------------------------------------
      Total interest and dividend income                             53,507        55,903        50,035
                                                                  -------------------------------------

Interest expense:
  NOW accounts                                                          705           209           205
  Money market accounts                                                 130           221           375
  Savings accounts                                                    5,083         6,507         6,137
  Certificate of deposit accounts                                     8,118        13,458        13,685
  Overnight and short-term borrowings                                   322           461           636
  Federal Home Loan Bank of Boston borrowings                         7,377         5,280         2,359
  Other borrowings                                                        -           138           281
  Company-obligated mandatorily redeemable capital securities           445           263             -
                                                                  -------------------------------------
    Total interest expense                                           22,180        26,537        23,678
                                                                  -------------------------------------
    Net interest income                                              31,327        29,366        26,357
  Provision for loan losses (Note 6)                                  1,875         1,669         1,542
                                                                  -------------------------------------
    Net interest income after provision for loan losses              29,452        27,697        24,815
                                                                  -------------------------------------

Noninterest income:
  Service charges on deposit accounts                                 3,763         3,451         2,722
  Commisions on nondeposit investment products                          978           535             -
  Income from bank-owned life insurance                                 568             -             -
  Loan related fees                                                     688           285           258
  Commissions on loans originated for others                            325           288            74
  Gains on sales of mortage-backed securities                            23             4             -
  Other income                                                          738           668           524
                                                                  -------------------------------------
      Total noninterest income                                        7,083         5,231         3,578
                                                                  -------------------------------------

Noninterest expense:
  Salaries and employee benefits (Note 14)                           13,185        11,287         9,552
  Occupancy (Note 7)                                                  1,933         1,744         1,530
  Equipment                                                           1,073           878           899
  Data processing                                                     1,987         1,779         1,340
  Marketing                                                           1,234           979         1,069
  Professional services                                               1,380           883           891
  Loan servicing                                                        927           945           761
  Other real estate owned (Note 8)                                       26           353            31
  Amortization of goodwill                                                -         1,164         1,164
  Deposit tax and assessments                                           117           117           109
  Other expenses (Note 15)                                            3,162         3,067         2,316
                                                                  -------------------------------------
      Total noninterest expense                                      25,024        23,196        19,662
                                                                  -------------------------------------
      Income before income taxes                                     11,511         9,732         8,731
  Income tax expense (Note 13)                                        3,849         3,417         3,113
                                                                  -------------------------------------
      Net income                                                  $   7,662     $   6,315     $   5,618
                                                                  =====================================

Per share data (Notes 2 and 19):

  Basic earnings per common share                                 $    2.04     $    1.69     $    1.51
  Diluted earnings per common share                               $    1.92     $    1.62     $    1.49

  Average common shares outstanding - basic                       3,758,214     3,730,910     3,728,688
  Average common shares outstanding - diluted                     3,996,670     3,900,028     3,768,589
</TABLE>

See accompanying notes to consolidated financial statements.


<PAGE>  48


BANCORP RHODE ISLAND, INC.

Consolidated Statements of Changes in Shareholders' Equity

For Years Ended December 31, 2002, 2001 and 2000

<TABLE>
<CAPTION>

                                                                                                         Accumulated
                                                                                Additional                  Other
                                                         Preferred   Common      Paid-in     Retained   Comprehensive
                                                           Stock     Stock       Capital     Earnings   Income/(Loss)    Total
                                                         ---------   ------     ----------   --------   -------------    -----
                                                                                     (In thousands)


                                                        <c>        <c>        <c>         <c>          <c>           <c>
Balance at December 31, 1999                               $  -       $37        $39,617     $ 9,763      $(1,742)      $47,675

  Net income                                                  -         -              -       5,618            -         5,618
  Other comprehensive income:
    Unrealized holding gains on securities
     available for sale, net of taxes of $(804)                                                             1,561         1,561
                                                                                                                        -------
  Comprehensive income                                                                                                    7,179
  Exercise of stock options                                   -         -              4           -            -             4
  Dividends on common stock                                   -         -              -      (1,566)           -        (1,566)
                                                           --------------------------------------------------------------------

Balance at December 31, 2000                                  -        37         39,621      13,815         (181)       53,292

  Net income                                                  -         -              -       6,315            -         6,315
  Other comprehensive income:
    Unrealized holding gains on securities
     available for sale, net of taxes of $(556)                                                             1,082         1,082
    Realized gains on securities
     available for sale, net of taxes of $1                                                                    (3)           (3)
                                                                                                                        -------
  Comprehensive income                                                                                                    7,394
  Exercise of stock options                                   -         -            175           -            -           175
  Common stock issued for incentive stock award, net          -         -             30           -            -            30
  Dividends on common stock                                   -         -              -      (1,794)           -        (1,794)
                                                           --------------------------------------------------------------------

Balance at December 31, 2001                                  -        37         39,826      18,336          898        59,097

  Net income                                                  -         -              -       7,662            -         7,662
  Other comprehensive income:
    Unrealized holding gains arising on securities
     available for sale, net of taxes of $(706)                                                             1,370         1,370
    Realized gains on securities
     available for sale, net of taxes of $8                                                                   (15)          (15)
                                                                                                                        -------
  Comprehensive income                                                                                                    9,017

  Exercise of stock options                                   -         1            275           -            -           276
  Common stock issued for incentive stock award, net          -         -             33           -            -            33
  Dividends on common stock                                   -         -              -      (1,996)           -        (1,996)
                                                           --------------------------------------------------------------------

Balance at December 31, 2002                               $  -       $38        $40,134     $24,002      $ 2,253       $66,427
                                                           ====================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


<PAGE>  49


BANCORP RHODE ISLAND, INC.

<TABLE>
<CAPTION>

                                                                           Year Ended December 31,
                                                                     ------------------------------------
                                                                       2002          2001          2000
                                                                       ----          ----          ----
                                                                                (In thousands)


                                                                  <c>           <c>           <c>
Cash flows from operating activities:
  Net income                                                         $   7,662     $   6,315     $  5,618
  Adjustment to reconcile net income to net cash provided by
   operating activities:
    Depreciation and amortization                                        2,827         3,168        2,558
    Provision for loan losses                                            1,875         1,669        1,542
    Gain on sales of mortgage-backed securities                            (23)           (4)           -
    Loss (gain) on other real estate owned                                 (29)          (25)          (7)
    Income from bank-owned life insurance                                 (568)            -            -
    Compensation expense from restricted stock grant                        33            30            -
    (Increase) decrease in accrued interest receivable                    (380)         (173)        (960)
    (Increase) decrease in prepaid expenses and other assets            (2,603)         (374)        (290)
    Increase (decrease) in other liabilities                             1,892           735         (368)
    Increase (decrease) in other, net                                      190            17          204
                                                                     ------------------------------------
      Net cash provided by operating activities                         10,876        11,358        8,297
                                                                     ------------------------------------

Cash flows from investing activities:
  Origination of:
    Residential mortgage loans                                          (9,321)      (17,997)      (9,960)
    Commercial loans                                                   (83,883)      (59,067)     (65,421)
    Consumer loans                                                     (52,199)      (22,515)     (18,111)
  Purchase of:
    Investment securities available for sale                           (96,658)      (54,026)      (9,000)
    Mortgage-backed securities available for sale                      (78,065)      (77,620)     (58,999)
    Residential mortgage loans                                        (167,551)     (186,869)     (48,503)
    Consumer and other loans                                                 -        (5,045)      (5,043)
    Federal Home Loan Bank of Boston stock                              (2,015)       (1,964)           -
  Principal payments on:
    Investment securities available for sale                            46,006        52,263       13,000
    Mortgage-backed securities available for sale                       69,050        41,617       17,785
    Residential mortgage loans                                         188,542       141,657       47,422
    Commercial loans                                                    41,971        31,631       27,139
    Consumer loans                                                      21,304        23,928       12,042
  Proceeds from sale of mortgage-backed securities                       3,731         3,832            -
  Proceeds from disposition of other real estate owned                     293           670          163
  Proceeds from sale of premises and equipment                               -            18            -
  Capital expenditures for premises and equipment                       (3,781)       (1,821)      (1,476)
  Purchase of bank-owned life insurance                                (14,200)            -            -
                                                                     ------------------------------------
      Net cash used in investing activities                           (136,776)     (131,308)     (98,962)
                                                                     ------------------------------------

Cash flows from financing activities:
  Net increase in deposits                                              91,498        38,781      118,216
  Net increase (decrease) in overnight and short-term borrowings        14,331          (814)      (1,131)
  Proceeds from FHLB and other borrowings                               40,351        83,082       15,116
  Repayment of FHLB and other borrowings                                (9,775)       (7,759)     (30,007)
  Proceeds from capital trust securities                                 5,000         3,000            -
  Proceeds from issuance of common stock                                   276           175            4
  Dividends on common stock                                             (1,996)       (1,794)      (1,566)
                                                                     ------------------------------------
      Net cash provided by financing activities                        139,685       114,671      100,632
                                                                     ------------------------------------

Net increase (decrease) in cash and cash equivalents                    13,785        (5,279)       9,967
Cash and cash equivalents at beginning of year                          29,174        34,453       24,486
                                                                     ------------------------------------
Cash and cash equivalents at end of year                             $  42,959     $  29,174     $ 34,453
                                                                     ====================================

Supplementary disclosures:
Cash paid for interest                                               $  22,738     $  26,122     $ 23,471
Cash paid for income taxes                                               4,599         4,095        3,975
Non-cash transactions:
  Additions to other real estate owned in settlement of loans               58           879          137
  Change in other comprehensive income, net of taxes                     1,355         1,079        1,561
</TABLE>

See accompanying notes to consolidated financial statements.


<PAGE>  50


BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements

(1) Organization

Bancorp Rhode Island, Inc., a Rhode Island corporation (the "Company"), was
organized by Bank Rhode Island (the "Bank") to be a bank holding company
and to acquire all of the capital stock of the Bank. The reorganization of
the Bank into the holding company form of ownership was completed on
September 1, 2000. The Company has no significant operating entities other
than the Bank. For this reason, substantially all of the discussion in
these Consolidated Financial Statements and accompanying Notes relates to
the operations of the Bank and its subsidiaries.

The Bank is a commercial bank chartered as a financial institution in the
State of Rhode Island. The Bank pursues a community banking mission and is
principally engaged in providing banking products and services to
individuals and businesses in Providence and Kent counties. The Bank is
subject to competition from a variety of traditional and nontraditional
financial service providers both within and outside of Rhode Island. The
Bank offers its customers a broad range of basic deposit services,
including checking, savings and certificate of deposit accounts, along with
access to their accounts through automated teller machines ("ATMs"), debit
cards and the internet. The Bank also offers a broad range of commercial,
commercial real estate and consumer loans. Additionally, the Bank provides
IRA and Keogh accounts, along with non-deposit investment products. The
Company and Bank are subject to the regulations of certain state and
federal agencies and undergo periodic examinations by those regulatory
authorities. The Bank's deposits are insured by the Federal Deposit
Insurance Corporation ("FDIC"), subject to regulatory limits.

(2) Summary of Significant Accounting Policies

Basis of Presentation

The accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America and to
prevailing practices within the banking industry. The Company has one
reportable operating segment. The following is a summary of the significant
accounting and reporting policies used by management in preparing and
presenting the consolidated financial statements.

In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and revenues and
expenses for the period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to change relate to
the determination of the allowance for loan losses and review of goodwill
for impairment.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
Bancorp Rhode Island, Inc., and its wholly-owned subsidiaries, Bank Rhode
Island and BRI Statutory Trust I and BRI Statutory Trust II (issuers of
trust preferred securities), along with the Bank's wholly-owned
subsidiaries, BRI Investment Corp. (a Rhode Island passive investment
company), BRI Realty Corp. (a Rhode Island real estate holding company) and
Acorn Insurance Agency, Inc. (a licensed insurance agency). All significant
intercompany accounts and transactions have been eliminated in
consolidation.

Reclassifications

Certain amounts in the prior year's financial statements may have been
reclassified to conform with the current year's presentation.


<PAGE>  51


BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

Statement of Cash Flows

For purposes of reporting cash flows, the Company considers cash, due from
banks and federal funds sold and overnight investments to be cash
equivalents. Cash flows relating to deposits are presented net in the
statement of cash flows.

Comprehensive Income

Comprehensive income is defined as all changes to equity except investments
by and distributions to shareholders. Net income is a component of
comprehensive income, with all other components referred to in the
aggregate as "other comprehensive income."

Cash and Due From Banks

The Bank is required to maintain average reserve balances in a noninterest
bearing account with the Federal Reserve Bank based upon a percentage of
certain deposits. As of December 31, 2002 and 2001, the average daily
amount required to be held was $705,000 and $531,000, respectively.
Additionally, in connection with a line of credit from a correspondent
bank, the Bank is required to maintain a compensating balance in a
noninterest bearing account. As of both December 31, 2002 and 2001, the
required compensating balance was $100,000.

Investment and Mortgage-Backed Securities

Debt securities are classified as held to maturity, available for sale, or
trading. As of December 31, 2002 and 2001, all of the Company's securities
were classified as available for sale. Securities are classified as held to
maturity and carried at amortized cost only if the Company has a positive
intent and the ability to hold these securities to maturity. Securities are
classified as trading and carried at fair value, with unrealized gains and
losses included in earnings, if they are bought and held principally for
the purpose of selling in the near term. Securities not classified as
either held to maturity or trading are classified as available for sale and
reported at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of shareholders' equity, net
of estimated income taxes.

Premiums and discounts on securities are amortized or accreted into income
by the level-yield method. If a decline in fair value below the amortized
cost basis of a security is judged to be other than temporary, the cost
basis of the security is written down to fair value. The amount of the
writedown is included as a charge against earnings. Gains and losses on the
sale of securities are recognized at the time of sale on a specific
identification basis.

Loans

Loans held in portfolio are stated at the principal amount outstanding, net
of unamortized premiums, discounts, or deferred loan origination fees and
costs. Interest income is accrued on a level-yield basis based on the
principal amount outstanding. Premiums, discounts, and deferred loan
origination fees and costs are amortized as an adjustment to yield over the
life of the related loans. When a loan is paid-off, the unamortized portion
of premiums, discounts or net fees is recognized into income.

Loans on which the accrual of interest has been discontinued are designated
nonaccrual loans. Accrual of interest income is discontinued when concern
exists as to the collectibility of principal or interest, or when a loan
becomes over 90 days delinquent. Additionally, when a loan is placed on
nonaccrual status, all interest previously accrued but not collected is
reversed against current period income. Loans are removed from nonaccrual
when they become less than 90 days past due and when concern no longer
exists as to the collectibility of principal or interest. Interest
collected on nonaccruing loans is either applied against principal or
reported as income according to management's judgment as to the
collectibility of principal.


<PAGE>  52


BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

Impaired loans are loans for which it is probable that the Bank will not be
able to collect all amounts due according to the contractual terms of the
loan agreements. Impairment is measured on a discounted cash flow method,
or at the loan's observable market price, or at the fair value of the
collateral if the loan is collateral dependent. When foreclosure is
probable, impairment is measured based on the fair value of the collateral.
In addition, the Bank classifies a loan as an in-substance foreclosure only
when the Bank is in possession of the collateral.

Allowance for Loan Losses

The allowance for loan losses is established for credit losses inherent in
the loan portfolio through a charge to earnings. When management believes
that the collectibility of a loan's principal balance, or portions thereof,
is unlikely, the principal amount is charged against the allowance.
Recoveries on loans which have been previously charged-off are credited to
the allowance as received.

Management's methodology to estimate loss exposure inherent in the
portfolio includes an analysis of individual loans deemed to be impaired,
reserve allocations for various loan types based on payment status or loss
experience and an unallocated allowance that is maintained based on
management's assessment of many factors including the growth, composition
and quality of the loan portfolio, historical loss experience, industry
loss experience, general economic conditions, and other pertinent factors.
While management evaluates currently available information in establishing
the allowance for loan losses, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the assumptions
used in making the evaluations. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review a
financial institution's allowance for loan losses. Such agencies may
require the financial institution to recognize additions to the allowance
based on their judgments about information available to them at the time of
their examination.

Other Real Estate Owned

Other Real Estate Owned ("OREO") consists of property acquired through
foreclosure, real estate acquired through acceptance of a deed in lieu of
foreclosure and loans determined to be substantively repossessed. Real
estate loans that are substantively repossessed include only those loans
for which the Company has taken possession of the collateral, but has not
completed legal foreclosure proceedings.

OREO, including real estate substantively repossessed, is stated at the
lower of cost or fair value, minus estimated costs to sell, at the date of
acquisition or classification to OREO status. Fair value of such assets is
determined based on independent appraisals and other relevant factors. Any
write-down to fair value at the time of foreclosure is charged to the
allowance for loan losses. A valuation allowance is maintained for known
specific and potential market declines and for estimated selling expenses.
Increases to the valuation allowance, expenses associated with ownership of
these properties, and gains and losses from their sale, are reflected in
operations as incurred. Realized gains upon disposal are recognized as
income.

Management believes that the net carrying value of OREO reflects the lower
of its cost basis or net fair value. Factors similar to those considered in
the evaluation of the allowance for loan losses, including regulatory
agency requirements, are considered in the evaluation of the net fair value
of OREO.

Premises and Equipment

Premises and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization are computed primarily by
the straight-line method over the estimated useful lives of the assets, or
the terms of the leases if shorter.


<PAGE>  53


BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

Impairment of Long-Lived Assets Except Goodwill

The Company reviews long-lived assets, including premises and equipment and
other intangible assets for impairment at least annually or whenever events
or changes in business circumstances indicate that the remaining useful
life may warrant revision or that the carrying amount of the long-lived
asset may not be fully recoverable. The Company performs undiscounted cash
flow analyses to determine if impairment exists. If impairment is
determined to exist, any related impairment loss is calculated based on
fair value. Impairment losses on assets to be disposed of, if any, are
based on the estimated proceeds to be received, less costs of disposal.

Goodwill

On March 22, 1996, the Bank acquired certain assets and assumed certain
liabilities from Fleet National Bank of Connecticut, formerly known as
Shawmut Bank Connecticut, N.A. and other related entities. This acquisition
was accounted for utilizing the purchase method of accounting and generated
$17.5 million of goodwill. Prior to 2002, this intangible was being
amortized to expense using the straight-line method over 15 years and
resulted in an annual pre-tax charge to earnings of $1.2 million.

On October 1, 2002, FASB issued SFAS 147, "Acquisitions of Certain
Financial Institutions." SFAS 147 states that the specialized accounting
guidance in paragraph 5 of SFAS 72 will not apply after September 30, 2002,
and if certain criteria are met, any unidentifiable intangible asset will
be reclassified to goodwill upon adoption of the Statement. Financial
institutions meeting conditions outlined in SFAS 147 will be required to
restate previously issued financial statements for fiscal periods beginning
after December 15, 2001. The objective of the restatement requirement is to
present the balance sheet and income statement as if the amount accounted
for under SFAS 72 as an unidentifiable intangible asset had been
reclassified to goodwill as of the date SFAS 142 was initially applied. The
transition provisions of SFAS 147 are effective on October 1, 2002; however
early application is permitted. The Company adopted SFAS 147 during the
third quarter of 2002, and therefore has restated the first and second
quarters to remove any amortization of goodwill, net of taxes. At January
1, 2002, the Company had $10.7 million of intangible assets that have now
been reclassified as goodwill and will no longer be amortized, but will be
reviewed annually for impairment.

The following table sets forth the reconcilement of net income and earnings
per share excluding goodwill amortization for the years ended December 31,
2002, 2001 and 2000.

<TABLE>
<CAPTION>

                                                    Year Ended December 31,
                                                  ----------------------------
                                                   2002       2001       2000
                                                   ----       ----       ----


                                               <c>        <c>        <c>
Reported net income (in thousands)                $7,662     $6,315     $5,618
Add back: Goodwill amortization, net of taxes          -        756        756
                                                  ----------------------------
Adjusted net income                               $7,662     $7,071     $6,374
                                                  ============================

Basic earnings per share                          $ 2.04     $ 1.69     $ 1.51
Add back: Goodwill amortization, net of taxes          -       0.20       0.20
                                                  ----------------------------
Adjusted basic earnings per share                 $ 2.04     $ 1.89     $ 1.71
                                                  ============================

Diluted earnings per share                        $ 1.92     $ 1.62     $ 1.49
Add back: Goodwill amortization, net of taxes          -       0.19       0.20
                                                  ----------------------------
Adjusted diluted earnings per share               $ 1.92     $ 1.81     $ 1.69
                                                  ============================
</TABLE>


<PAGE>  54


BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

Bank-Owned Life Insurance

Bank-owned life insurance ("BOLI") represents life insurance on the lives
of certain employees who have provided positive consent allowing the Bank
to be the beneficiary of such policies. Since the Bank is the beneficiary
of the insurance policies, increases in the cash value of the policies, as
well as insurance proceeds received, are recorded in other noninterest
income, and are not subject to income taxes. The cash value of the policies
is included in assets. The Bank reviews the financial strength of the
insurance carriers prior to the purchase of BOLI and at least annually
thereafter and BOLI with any individual carrier is limited to 10% of
capital plus reserves.

Securities Sold Under Agreements to Repurchase

The Company enters into sales of securities under agreements to repurchase.
These agreements are treated as financings, and the obligations to
repurchase securities sold are reflected as a liability in the consolidated
balance sheets. Securities pledged as collateral under agreements to
repurchase are reflected as assets in the accompanying consolidated balance
sheets.

Employee Benefits

The Bank maintains a Section 401(k) savings plan for employees of the Bank
and its subsidiaries. Under the plan, the Bank makes a matching
contribution of the amount contributed by each participating employee, up
to 4% of the employee's yearly salary. The Bank's contributions are charged
against current operations in the year made.

The Company has adopted SFAS 123, "Accounting for Stock-Based
Compensation."  This Statement establishes a fair value based method of
accounting for stock-based compensation plans under which compensation cost
is measured at the grant date based on the value of the award and is
recognized over the service period. However, the Statement allows a company
to continue to measure compensation cost for such plans using the intrinsic
value method under Accounting Principles Board Opinion ("APB") 25,
"Accounting for Stock Issued to Employees." Under APB 25, no compensation
cost is recorded if, at the grant date, the exercise price of the options
is equal to the fair market value of the Company's common stock. The
Company has elected to continue to follow the accounting in APB 25. SFAS
123 requires companies that elect to continue to follow the accounting in
APB 25 to disclose in the notes to their financial statements various
information as if the fair value based method of accounting had been
applied.

In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS 148 amends SFAS 123 to
provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. Companies are able to eliminate a "ramp-up" effect that the
SFAS 123 transition rule creates in the year of adoption. Companies can
choose to elect a method that will provide for comparability amongst years
reported. In addition, this Statement amends the disclosure requirement for
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the fair value based method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. The amendments to SFAS 123 are effective for financial
statements for fiscal years ending after December 15, 2002.


<PAGE>  55


BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

The following table summarizes the differences between the fair value and
intrinsic value methods of accounting for stock-based compensation:

<TABLE>
<CAPTION>

                                              Year Ended December 31,
                                            ----------------------------
                                             2002       2001       2000
                                             ----       ----       ----
                                                   (In thousands)


                                         <c>        <c>        <c>
Net income (in thousands):
  As reported                               $7,662     $6,315     $5,618
  Compensation cost, net of taxes (1)         (158)      (134)      (126)
                                            ----------------------------
  Pro forma                                 $7,504     $6,181     $5,492
                                            ============================

Earnings per common share:
  Basic:
    As reported                             $ 2.04     $ 1.69     $ 1.51
    Compensation cost, net of taxes (1)      (0.04)     (0.03)     (0.04)
                                            ----------------------------
    Pro forma                               $ 2.00     $ 1.66     $ 1.47
                                            ============================
  Diluted:
    As reported                             $ 1.92     $ 1.62     $ 1.49
    Compensation cost, net of taxes (1)      (0.04)     (0.04)     (0.03)
                                            ----------------------------
    Pro forma                               $ 1.88     $ 1.58     $ 1.46
                                            ============================

<FN>
<F1>  The stock-based employee compensation cost, net of related tax
      effects, that would have been included in the determination of net
      income if the fair value based method had been applied to all awards
      granted since 1995.
</FN>
</TABLE>

The fair value of each option granted was estimated as of the date of the
grant using the Black-Scholes option-pricing model with the following
weighted average assumptions: expected life of 7 years; expected volatility
of 20% in 2002 and 2001 and 25% in 2000; average risk-free interest rates
of 4.27% in 2002, 4.90% in 2001 and 6.65% in 2000; and a dividend rate of
2.57% in 2002, 2.92% in 2001 and 4.26% in 2000.

Income Taxes

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

Earnings Per Share

Basic earnings per share ("EPS") excludes dilution and is computed by
dividing income available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then share in the earnings of
the entity.

Guarantees

FASB Interpretation 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others",
considers standby letters of credit, excluding commercial letters of credit
and other lines of credit, a guarantee of the Bank. The Bank enters into a
standby letter of credit to guarantee performance of a customer to a third
party. The credit risk involved is represented by the contractual


<PAGE>  56


BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

amounts of those instruments. 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. Most guarantees extend up to one year. At December 31, 2002, the
maximum potential amount of future payments is $2.2 million.

Pledged collateral including cash, accounts receivable, inventory,
property, plant, equipment and real estate supported all standby letters of
credit outstanding at December 31, 2002. The collateral obtained is
determined based on management's credit evaluation of the customer. Should
the Bank be required to make payments to the beneficiary of a letter of
credit, repayment to the Bank is required. When cash collateral is present
the recourse provisions of the agreements allow the Bank to collect the
cash used to collateralize the agreement. If any other business assets are
used as collateral and cash is not available, the Bank creates a loan for
the customer with the same criteria of its other lending activities. At
December 31, 2002, cash collateral supported $385,000 of the outstanding
standby letters of credit. The fair value of the guarantees is $16,000 and
is not reflected on the balance sheet.

(3) Investment Securities Available for Sale

A summary of investment securities available for sale follows:

<TABLE>
<CAPTION>

                                                Unrealized
                               Amortized     -----------------      Market
                                 Cost        Gains      Losses      Value
                                              (In thousands)
                               ---------     -----      ------      ------


                             <c>          <c>        <c>        <c>
At December 31, 2002:
U.S. Agency obligations         $75,137      $1,203     $  (2)     $ 76,338
Corporate debt securities        20,367         210         -        20,577
Trust Preferred securities        4,299         184       (69)        4,414
                                -------------------------------------------
      Total                     $99,803      $1,597     $ (71)     $101,329
                                ===========================================

At December 31, 2001:
U.S. Agency obligations         $46,004      $  514     $ (74)     $ 46,444
Trust preferred securities        3,189           -      (180)        3,009
                                -------------------------------------------
      Total                     $49,193      $  514     $(254)     $ 49,453
                                ===========================================
</TABLE>

The following table sets forth the maturities of investment securities
available for sale and the weighted average yields of such securities:

<TABLE>
<CAPTION>

                                                                               After One, But
                                       Within One Year                       Within Five Years
                               ---------------------------------     ----------------------------------
                                                        Weighted                               Weighted
                               Amortized     Market     Average      Amortized     Market      Average
                                 Cost        Value       Yield         Cost         Value       Yield
                               ---------     ------     --------     ---------     ------      --------
                                                        (Dollars in thousands)


                             <c>          <c>         <c>          <c>          <c>          <c>
At December 31, 2002:
U.S. Agency obligations         $2,000       $2,029      3.26%        $73,137      $74,309      4.03%
Corporate debt securities            -            -         -%         20,367       20,577      5.92%
Trust preferred securities           -            -         -%              -            -         -%
                                -------------------                   --------------------
      Total                     $2,000       $2,029      3.26%        $93,504      $94,886      4.44%
                                ====================================================================

At December 31, 2001:
U.S. Agency obligations         $3,000       $3,046      5.91%        $43,004      $43,398      4.94%
Trust preferred securities           -            -         -%              -            -         -%
                                -------------------                   --------------------
      Total                     $3,000       $3,046      5.91%        $43,004      $43,398      4.94%
                                ====================================================================

<CAPTION>

                                        After Five, But
                                       Within Ten Years                       After Ten Years
                               ---------------------------------     ----------------------------------
                                                        Weighted                               Weighted
                               Amortized     Market     Average      Amortized     Market      Average
                                 Cost        Value       Yield         Cost         Value       Yield
                               ---------     ------     --------     ---------     ------      --------
                                                        (Dollars in thousands)


                             <c>          <c>         <c>          <c>          <c>          <c>
At December 31, 2002:
U.S. Agency obligations         $    -       $    -         -%        $     -      $     -         -%
Corporate debt securities            -            -         -%              -            -         -%
Trust preferred securities           -            -         -%          4,299        4,414      8.40%
                                -------------------                   --------------------
      Total                     $    -       $    -         -%        $ 4,299      $ 4,414      8.40%
                                ====================================================================

At December 31, 2001:
U.S. Agency obligations         $    -       $    -         -%        $     -      $     -         -%
Trust preferred securities           -            -         -%          3,189        3,009      8.59%
                                -------------------                   --------------------
      Total                     $    -       $    -         -%        $ 3,189      $ 3,009      8.59%
                                ====================================================================
</TABLE>


<PAGE>  57


BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

The weighted average remaining life of investment securities available for
sale at December 31, 2002 and 2001 was 4.1 years and 4.6 years,
respectively. Included in the weighted average remaining life calculation
at December 31, 2002 and 2001, were $57.7 million and $37.5 million,
respectively, of securities that are callable at the discretion of the
issuer. These call dates were not utilized in computing the weighted
average remaining life. There were no sales of investment securities during
2002, 2001 or 2000.

(4) Mortgage-Backed Securities Available for Sale

A summary of mortgage-backed securities available for sale by issuer
follows:

<TABLE>
<CAPTION>

                                                            Unrealized
                                           Amortized     -----------------      Market
                                             Cost        Gains      Losses      Value
                                           ---------     -----      ------      ------
                                                          (In thousands)


                                        <c>           <c>        <c>        <c>
At December 31, 2002:
U.S. Small Business Administration         $ 25,930      $   58     $ (27)     $ 25,961
Federal National Mortgage Association        67,215         958       (32)       68,141
Federal Home Loan Mortgage Corporation       57,007         840        (2)       57,845
Collateralized Mortgage Obligations           4,073          94         -         4,167
                                           --------------------------------------------
      Total                                $154,225      $1,950     $ (61)     $156,114
                                           ============================================

At December 31, 2001:
U.S. Small Business Administration         $ 30,147      $   42     $ (34)     $ 30,155
Federal National Mortgage Association        58,766         764      (143)       59,387
Federal Home Loan Mortgage Corporation       51,403         454      (148)       51,709
Collateralized Mortgage Obligations           9,233         166         -         9,399
                                           --------------------------------------------
      Total                                $149,549      $1,426     $(325)     $150,650
                                           ============================================
</TABLE>

The following table sets forth the maturities of mortgage-backed securities
available for sale and the weighted average yields of such securities:

<TABLE>
<CAPTION>

                                            After Five, But Within Ten Years                 After Ten Years
                                           -----------------------------------     -----------------------------------
                                                                      Weighted                                Weighted
                                           Amortized     Market       Average      Amortized      Market      Average
                                             Cost        Value         Yield         Cost         Value        Yield
                                           ---------     ------       --------     ---------      ------      --------
                                                                     (Dollars in thousands)


                                         <c>          <c>           <c>         <c>           <c>           <c>
At December 31, 2002:
U.S. Small Business Administration          $1,544       $1,534        2.24%       $ 24,386      $ 24,427      2.37%
Federal National Mortgage Association            -            -           -%         67,215        68,141      4.78%
Federal Home Loan Mortgage Corporation           -            -           -%         57,007        57,845      4.44%
Collateralized Mortgage Obligations              -            -           -%          4,073         4,167      6.35%
                                            -------------------                    ----------------------
      Total                                 $1,544       $1,534        2.24%       $152,681      $154,580      4.31%
                                            =======================================================================

At December 31, 2001:
U.S. Small Business Administration          $1,672       $1,664        3.47%       $ 28,475      $ 28,491      3.57%
Federal National Mortgage Association            -            -           -%         58,766        59,387      6.00%
Federal Home Loan Mortgage Corporation           -            -           -%         51,403        51,709      5.65%
Collateralized Mortgage Obligations              -            -           -%          9,233         9,399      6.47%
                                            -------------------                    ----------------------
      Total                                 $1,672       $1,664        3.47%       $147,877      $148,986      5.44%
                                            =======================================================================
</TABLE>


<PAGE>  58


BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

Maturities on mortgage-backed securities are based on contractual
maturities and do not take into consideration scheduled amortization or
prepayments. Actual maturities will differ from contractual maturities due
to scheduled amortization and prepayments. The weighted average remaining
contractual term of mortgage-backed securities available for sale at
December 31, 2002 and 2001 was 25.0 years and 25.7 years, respectively.

The following table presents the sale of mortgage-backed securities
available for sale and the resulting gains from such sales:

<TABLE>
<CAPTION>

                                                                 Year Ended December 31,
                                                                --------------------------
                                                                 2002       2001      2000
                                                                 ----       ----      ----
                                                                      (In thousands)


                                                             <c>        <c>        <c>
Amortized cost of mortgage-backed securities sold               $3,708     $3,828     $  -
Gains realized on sales of mortgage-backed securities               23          4        -
                                                                --------------------------
      Net proceeds from sales of mortgage-backed securities     $3,731     $3,832     $  -
                                                                ==========================
</TABLE>

(5) Loans Receivable

The following is a summary of loans receivable:

<TABLE>
<CAPTION>

                                                     December 31,
                                                 ---------------------
                                                   2002         2001
                                                   ----         ----
                                                    (In thousands)


                                              <c>          <c>
Residential mortgage loans:
  One- to four-family adjustable rate            $277,265     $285,589
  One- to four-family fixed rate                   19,310       23,306
                                                 ---------------------
    Subtotal                                      296,575      308,895
  Premium on loans acquired                         1,248        1,381
  Net deferred loan origination fees                  (60)         (64)
                                                 ---------------------
      Total residential mortgage loans           $297,763     $310,212
                                                 =====================

Commercial loans:
  Commercial real estate - nonowner occupied     $ 81,242     $ 73,369
  Commercial real estate - owner occupied          59,249       46,698
  Commercial and industrial                        57,389       53,677
  Small business                                   28,750       24,122
  Multi-family                                     18,952       14,927
  Construction                                     18,101       14,027
  Leases and other                                 17,613       12,715
                                                 ---------------------
    Subtotal                                      281,296      239,535
  Net deferred loan origination fees                 (329)        (171)
                                                 ---------------------
      Total commercial loans                     $280,967     $239,364
                                                 =====================

Consumer and other loans:
  Home equity - term loans                       $ 47,906     $ 22,930
  Home equity - lines of credit                    37,381       28,460
  Automobile                                        3,409        6,335
  Installment                                         967        1,240
  Savings secured                                     602          656
  Unsecured and other                               1,063        1,153
                                                 ---------------------
    Subtotal                                       91,328       60,774
  Premium on loans acquired                           103          192
  Net deferred loan origination costs                 497          422
                                                 ---------------------
      Total consumer and other loans             $ 91,928     $ 61,388
                                                 =====================

Total loans receivable                           $670,658     $610,964
                                                 =====================
</TABLE>


<PAGE>  59


BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

The Bank's commercial and consumer lending activities are conducted
principally in the State of Rhode Island and, to a lesser extent, in nearby
areas of Massachusetts. The Bank originates commercial real estate loans,
commercial and industrial loans, multi-family residential loans and
consumer loans (principally home equity loans and lines of credit) for its
portfolio. The Bank purchases one- to four-family residential
mortgage loans and automobile loans from third party originators. These
loans may have been originated from areas outside of New England. Most
loans made by the Bank are secured by borrowers' personal or business
assets. The Bank considers a concentration of credit to a particular
industry to exist when the aggregate credit exposure to a borrower or a
group of borrowers in that industry exceeds 25% of the Bank's capital plus
reserves. At December 31, 2002, no concentrations of credit to a particular
industry existed as defined by these parameters.The ability of the Bank's
residential and consumer borrowers to honor their repayment commitments is
generally dependent on the level of overall economic activity within the
area in which they reside. Commercial borrowers' ability to repay is
generally dependent upon the general health of the economy and in cases of
real estate loans, the real estate sector in particular. Accordingly, the
ultimate collectibility of a substantial portion of the Bank's loan
portfolio is susceptible to changing conditions in the Rhode Island economy
in particular, and the New England and national economies, in general.

The Bank's lending limit to any single borrowing relationship is limited by
law to approximately $12.5 million. At December 31, 2002, the Bank had no
outstanding commitments to any single borrowing relationship that was in
excess of $6.6 million.

At December 31, 2002, the risk elements contained within the loan portfolio
were centered in $736,000 of nonaccrual loans and $27,000 of loans past due
60 to 89 days. This compares to $753,000 of nonaccrual loans and $131,000
of loans past due 60 to 89 days as of December 31, 2001, and $508,000 of
nonaccrual loans and $337,000 of loans past due 60 to 89 days as of
December 31, 2000. Included in nonaccural loans as of December 31, 2002,
were $224,000 of impared loans. No specific reserves were necessary in
conjunction with these impaired loans. As of December 31, 2001 and 2000,
the Bank did not have any loans that were considered impaired. The average
balance of impaired loans was $91,000 during 2002, $1.0 million during 2001
and $648,000 during 2000.

The reduction in interest income associated with nonaccrual loans was as
follows:

<TABLE>
<CAPTION>

                                             Year Ended December 31,
                                             -----------------------
                                             2002     2001     2000
                                             ----     ----     ----
                                                 (In thousands)


                                          <c>      <c>      <c>
Income in accordance with original terms     $ 62     $ 68     $ 48
Income recognized                             (37)     (37)     (13)
                                             ----------------------
Foregone interest income                     $ 25     $ 31     $ 35
                                             ======================
</TABLE>


<PAGE>  60


BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

Loans outstanding to executive officers and directors of the Company,
including their immediate families and affiliated companies ("related
parties"), are made in the ordinary course of business under normal credit
terms, including interest rates and collateral, prevailing at the time of
origination for comparable transactions with other persons, and do not
represent more than normal credit risk. These loans comply with the
provisions of Regulation O under the Federal Reserve Act and, accordingly,
are permissable under Section 402 of the Sarbanes-Oxley Act of 2002. An
analysis of the activity of these loans is as follows:

<TABLE>
<CAPTION>

                                                        Year Ended December 31,
                                                        -----------------------
                                                           2002        2001
                                                           ----        ----
                                                            (In thousands)


                                                       <c>         <c>
Balance at beginning of year                              $ 5,521     $ 6,385
  Additions                                                 8,080       1,329
  Repayments                                               (5,290)     (2,193)
  Reductions due to no longer being a related party        (1,650)          -
                                                          -------------------
Balance at end of year                                    $ 6,661     $ 5,521
                                                          ===================
</TABLE>

(6) Allowance for Loan Losses

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

<TABLE>
<CAPTION>

                                                          Year Ended December 31,
                                                       ------------------------------
                                                        2002        2001        2000
                                                        ----        ----        ----
                                                               (In thousands)


                                                    <c>         <c>         <c>
Balance at beginning of year                           $ 8,524     $ 7,294     $5,681
  Provision for loan losses charged against income       1,875       1,669      1,542
  Loans charged-off                                       (493)       (467)      (125)
  Recoveries of loans previously charged-off               190          28        196
                                                       ------------------------------
Balance at end of year                                 $10,096     $ 8,524     $7,294
                                                       ==============================
</TABLE>

The following table represents the allocation of the allowance for loan
losses as of the dates indicated:

<TABLE>
<CAPTION>

                                  December 31,
                               ------------------
                                2002        2001
                                ----        ----
                                 (In thousands)


                            <c>         <c>
Loan category:
Residential mortgage loans     $ 1,757     $1,835
Commercial loans                 5,250      4,191
Consumer and other loans         1,027        787
Unallocated                      2,062      1,711
                               ------------------
      Total                    $10,096     $8,524
                               ==================
</TABLE>


<PAGE>  61


BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(7) Premises and Equipment

Premises and equipment consisted of the following:

<TABLE>
<CAPTION>

                                                      December 31,
                                                   -------------------
                                                    2002        2001
                                                    ----        ----
                                                     (In thousands)


                                                <c>         <c>
Land                                               $   984     $   793
Office buildings and improvements                    2,816       2,346
Leasehold improvements                               3,448       2,700
Data processing equipment and software               5,026       3,619
Furniture, fixtures and other equipment              3,793       3,054
                                                   -------------------
      Subtotal                                      16,067      12,512
Less accumulated depreciation and amortization      (6,365)     (5,328)
                                                   -------------------
      Total premises and equipment                 $ 9,702     $ 7,184
                                                   ===================
</TABLE>

The Company utilizes a useful life of 40 years for buildings and 15 years
for building improvements. Leasehold improvements are amortized over their
respective lease terms. Data processing equipment and software's useful
life is three years and furniture, fixtures and other equipment's useful
life varies but is primarily five years. Depreciation expense totaled $1.3
million, $1.0 million and $941,000 for the years ended December 31, 2002,
2001 and 2000, respectively.

Rent expense for the years ended December 31, 2002, 2001 and 2000 was
$866,000, $815,000 and $686,000, respectively. In connection with the
acquisition of branches from Fleet National Bank of Connecticut, the Bank
assumed the liability for lease payments on seven banking offices
previously occupied by Shawmut Bank Connecticut, N.A. The Bank has
renegotiated some of these leases and has also entered into agreements to
lease additional space. Under the terms of these noncancellable operating
leases, the Bank is currently obligated to minimum annual rents as follows:

<TABLE>
<CAPTION>

                  Minimum
               Less Payments
               (In thousands)


                <c>
2003               $  906
2004                  909
2005                  917
2006                  869
2007                  863
Thereafter          2,265
                   ------
                   $6,729
                   ======
</TABLE>

(8) Other Real Estate Owned

The following table provides a summary of OREO:

<TABLE>
<CAPTION>

                                              December 31,
                                             --------------
                                             2002     2001
                                             ----     ----
                                             (In thousands)


                                          <c>      <c>
One- to four-family residential property     $58      $287
                                             -------------
      Subtotal                                58       287
Allowance for losses                           -       (23)
                                             -------------
      Total                                  $58      $264
                                             =============
</TABLE>


<PAGE>  62


BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

A summary of the activity in the allowance for losses on OREO follows:

<TABLE>
<CAPTION>

                                                 Year Ended December 31,
                                                 -----------------------
                                                      2002     2001
                                                      ----     ----
                                                     (In thousands)


                                                   <c>      <c>
Balance at beginning of year                          $ 23     $31
Provisions/(recovery of previous provisions)            (7)      -
Net charge-offs                                        (16)     (8)
                                                      ------------
Balance at end of year                                $  -     $23
                                                      ============
</TABLE>

The following summarizes the operating results from OREO:

<TABLE>
<CAPTION>

                                         Year Ended December 31,
                                         -----------------------
                                         2002     2001     2000
                                         ----     ----     ----
                                             (In thousands)


                                      <c>      <c>      <c>
Collection and repossession expenses     $ 41     $367     $42
Net expenses of holding properties         14       11      (4)
Provision for losses/(recoveries)          (7)       -       -
Net gains from dispositions               (22)     (25)     (7)
                                         ---------------------
      Total                              $ 26     $353     $31
                                         =====================
</TABLE>

(9) Deposits

Certificate of deposit accounts had the following schedule of maturities:

<TABLE>
<CAPTION>

                                           Year Ended December 31,
                                           -----------------------
                                              2002         2001
                                              ----         ----
                                               (In thousands)


                                         <c>          <c>
1 year or less remaining                    $136,094     $204,248
More than 1 year to 2 years remaining         62,379       27,774
More than 2 years to 4 years remaining        13,093       15,737
More than 4 years remaining                   10,308          505
                                            ---------------------
      Total                                 $221,874     $248,264
                                            =====================
</TABLE>

At December 31, 2002, 2001 and 2000, certificate of deposit accounts with
balances $100,000 or more aggregated $30.5 million, $35.4 million and $32.1
million, respectively.

(10) Overnight and Short-Term Borrowings

Overnight and short-term borrowings are comprised of the following:

<TABLE>
<CAPTION>

                                            December 31,
                                         -------------------
                                          2002        2001
                                          ----        ----
                                           (In thousands)


                                      <c>         <c>
Treasury tax and loan notes              $ 3,000     $   691
Retail reverse repurchase agreements      24,364      12,342
                                         -------------------
      Total                              $27,364     $13,033
                                         ===================
</TABLE>


<PAGE>  63


BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

The Bank utilizes the Note Option for remitting Treasury Tax and Loan
payments to the Federal Reserve Bank. Under this option the U.S. Treasury
invests in obligations of the Bank, as evidenced by open-ended interest-
bearing notes. These notes are collateralized by U.S. Agency securities
owned by the Bank. Information concerning these treasury tax and loan notes
is as follows:

<TABLE>
<CAPTION>

                                                   Year Ended December 31,
                                                   -----------------------
                                                       2002       2001
                                                       ----       ----
                                                       (In thousands)


                                                   <c>        <c>
Outstanding at end of year                            $3,000     $  691
Outstanding collateralized by securities with:
  Par Value                                            4,000      4,000
  Market value                                         4,271      4,007
Average outstanding for the year                       1,090      1,038
Maximum outstanding at any month end                   3,000      3,000
Weighted average rate at end of year                    0.99%      1.40%
Weighted average rate paid for the year                 1.43%      1.50%
</TABLE>

The Bank utilizes retail reverse repurchase agreements in connection with a
cash management product that the Bank offers its commercial customers.
Sales of retail reverse repurchase agreements are treated as financings.
The obligations to repurchase the identical securities that were sold are
reflected as liabilities and the securities remain in the asset accounts.
All of these agreements are collateralized by U.S. Agency securities owned
by the Bank. The securities underlying the agreements were held by the Bank
in a special custody account and remained under the Bank's control.
Information concerning these retail repurchase agreements is as follows:

<TABLE>
<CAPTION>

                                                   Year Ended December 31,
                                                   -----------------------
                                                      2002        2001
                                                      ----        ----
                                                       (In thousands)


                                                  <c>         <c>
Outstanding at end of year                           $24,364     $12,342
Maturity date                                         1/2/03      1/2/02
Outstanding collateralized by securities with:
  Par value                                          $24,735     $14,300
  Market value                                        25,111      14,397
Average outstanding for the year                      21,988      14,041
Maximum outstanding at any month end                  33,149      18,216
Weighted average rate at end of year                    0.96%       1.70%
Weighted average rate paid for the year                 1.39%       3.04%
</TABLE>

Additionally, at December 31, 2002, the Bank had a $2.0 million line of
credit with a correspondent bank to facilitate the issuance of letters of
credit by the Bank and the conducting of foreign exchange transactions for
the Bank's customers. Since inception, there have been no outstanding
balances under this line of credit. The Bank is required to maintain a
compensating balance of $100,000 in conjunction with this line of credit.


<PAGE>  64


BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(11) Federal Home Loan Bank of Boston Borrowings

FHLB borrowings are comprised of the following:

<TABLE>
<CAPTION>

                                     December 31, 2002                       December 31, 2001
                            -----------------------------------     -----------------------------------
                            Scheduled      First       Weighted     Scheduled      First       Weighted
                              Final         Call       Average        Final         Call       Average
                            Maturity      Date (1)     Rate (2)     Maturity      Date (1)     Rate (2)
                            ---------     --------     --------     ---------     --------     --------
                                                      (Dollars in thousands)


                         <c>           <c>           <c>         <c>           <c>           <c>
Within 1 year               $ 24,100      $ 49,100      4.51%       $  7,000      $ 20,000      3.59%
Over 1 year to 2 years        32,000        34,000      5.76%         20,100        32,100      4.92%
Over 2 years to 3 years       10,000        10,000      4.93%         28,000        30,000      6.08%
Over 3 years to 5 years       35,534        45,534      4.61%         11,000        21,000      5.53%
Over 5 years                  42,307         5,307      5.07%         47,265        10,265      5.14%
                            ----------------------                  ----------------------
      Total                 $143,941      $143,941      5.01%       $113,365      $113,365      5.27%
                            ========================================================================

<FN>
<F1>  Callable FHLB advances are shown in the respective periods assuming
      that the callable debt is redeemed at the next call date while all
      other advances are shown in the periods corresponding to their
      scheduled maturity date.
<F2>  Weighted average rate based on scheduled maturity dates.
</FN>
</TABLE>

All borrowings from the FHLB are secured by the Bank's stock in the FHLB
and a blanket lien on "qualified collateral" defined principally as 90% of
the market value of U.S. Government and Agency obligations and 75% of the
carrying value of certain residential mortgage loans. Unused term borrowing
capacity with the FHLB at December 31, 2002, 2001 and 2000 was $149.5
million, $191.6 million and $269.7 million, respectively. In addition, the
Bank has a short-term line of credit with the FHLB. Unused borrowing
capacity under this line was $15.0 million at December 31, 2002 and $11.2
million for December 31, 2001 and 2000. As one requirement of its
borrowings, the Bank is required to invest in the common stock of the FHLB
in an amount at least equal to five percent of its outstanding borrowings
from the FHLB. As and when such stock is redeemed, the Bank would receive
from the FHLB an amount equal to the par value of the stock. As of December
31, 2002, the Bank's FHLB stock holdings, recorded at cost, were $7.7
million.

(12) Company-Obligated Mandatorily Redeemable Capital Securities

On January 23, 2001, the Company sponsored the creation of BRI Statutory
Trust I (the "Trust I"), a Connecticut statutory trust. The Company is the
owner of all of the common securities of Trust I. On February 22, 2001,
Trust I issued $3.0 million of its 10.20% Capital Securities through a
pooled trust preferred securities offering. The proceeds from this
issuance, along with the Company's $93,000 capital contribution for Trust
I's common securities, were used to acquire $3.1 million of the Company's
10.20% Junior Subordinated Notes due February 22, 2031, and constitute the
primary asset of Trust I. The Company has, through the Declaration of
Trust, the Guarantee Agreement, the Notes and the related Indenture, taken
together, fully irrevocably and unconditionally guaranteed all of Trust I's
obligations under the Capital Securities, to the extent Trust I has funds
available therefor.

On June 4, 2002, the Company sponsored the creation of BRI Statutory Trust
II (the "Trust II"), a Connecticut statutory trust. The Company is the
owner of all of the common securities of Trust II. On June 26, 2002, Trust
II issued $5.0 million of its floating rate (quarterly reset to 3 month
LIBOR plus 3.45%) Capital Securities through a pooled trust preferred
securities offering. At December 31, 2002, the rate of the Capital
Securities was 4.85%. The proceeds from this issuance, along with the
Company's $155,000 capital contribution for


<PAGE>  65


BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

Trust II's common securities, were used to acquire $5.2 million of the
Company's floating rate (quarterly reset to 3 month LIBOR plus 3.45%)
Junior Subordinated Notes due June 26, 2032, and constitute the primary
asset of Trust II. The Company has, through the Declaration of Trust, the
Guarantee Agreement, the Notes and the related Indenture, taken together,
fully irrevocably and unconditionally guaranteed all of Trust II's
obligations under the Capital Securities, to the extent Trust II has funds
available therefor.

(13) Income Taxes

The components of income tax expense are as follows:

<TABLE>
<CAPTION>

                                      Year Ended December 31,
                                   -----------------------------
                                    2002       2001       2000
                                    ----       ----       ----
                                          (In thousands)


                                <c>        <c>        <c>
Current expense:
  Federal                          $4,037     $3,897     $ 4,133
  State                                85         39          95
                                   -----------------------------
      Total current expense         4,122      3,936       4,228
                                   -----------------------------

Deferred benefit
  Federal                            (273)      (519)     (1,115)
  State                                 -          -           -
                                   -----------------------------
      Total deferred benefit         (273)      (519)     (1,115)
                                   -----------------------------
      Total income tax expense     $3,849     $3,417     $ 3,113
                                   =============================
</TABLE>

The difference between the statutory federal income tax rate and the
effective federal income tax rate is as follows:

<TABLE>
<CAPTION>

                                                          Year Ended December 31,
                                                         -------------------------
                                                         2002      2001      2000
                                                         ----      ----      ----


                                                      <c>       <c>       <c>
Statutory federal income tax rate                        34.0%     34.0%     34.0%
Increase resulting from:
  State income tax, net of federal tax benefit            0.5       0.2       0.7
  Bank-owned life insurance                              (1.7)        -         -
  Other, net                                              0.6       0.9       1.0
                                                         ------------------------
Effective combined federal and state income tax rate     33.4%     35.1%     35.7%
                                                         ========================
</TABLE>


<PAGE>  66


BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

The components of gross deferred tax assets and gross deferred tax
liabilities are as follows:

<TABLE>
<CAPTION>

                                                          December 31,
                                                       -------------------
                                                        2002        2001
                                                        ----        ----
                                                         (In thousands)


                                                    <c>         <c>
Gross deferred tax assets:
  Allowance for loan losses                            $ 3,433     $ 2,898
  Accrued retirement                                       155         102
  Stock issuance costs                                     103         103
  Organizational costs                                      12          18
  Other                                                     77          90
                                                       -------------------
      Total gross deferred tax assets                    3,780       3,211
                                                       -------------------

Gross deferred tax liabilities:
  Purchase accounting adjustments                       (1,240)       (944)
  Unrealized gain on securities available for sale      (1,161)       (463)
                                                       -------------------
      Total gross deferred tax liabilities              (2,401)     (1,407)
                                                       -------------------
      Net deferred tax asset                           $ 1,379     $ 1,804
                                                       ===================
</TABLE>

It is management's belief, that it is more likely than not, that the
reversal of deferred tax liabilities and results of future operations will
generate sufficient taxable income to realize the deferred tax assets. In
addition, the Company's net deferred tax asset is supported by recoverable
income taxes. Therefore, no valuation allowance was necessary at December
31, 2002 or 2001 for the deferred tax assets. It should be noted, however,
that factors beyond management's control, such as the general state of the
economy and real estate values, can affect future levels of taxable income
and that no assurance can be given that sufficient taxable income will be
generated to fully absorb gross deductible temporary differences.

(14) Employee Benefits

Employee 401(k) Plan

The Bank maintains a 401(k) Plan (the "Plan") which qualifies as a tax
exempt plan and trust under Sections 401 and 501 of the Internal Revenue
Code. Generally, Bank employees who are at least twenty-one (21) years of
age and have completed one year of service with the Bank, are eligible to
participate in the Plan. Expenses associated with the Plan were $281,000,
$240,000 and $191,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.

Nonqualified Deferred Compensation Plan

The Bank also maintains a Nonqualified Deferred Compensation Plan (the
"Nonqualified Plan") under which certain participants may contribute the
amounts they are precluded from contributing to the Bank's 401(k) Plan
because of the qualified plan limitations, and additional compensation
deferrals which may be advantageous for personal income tax or other
planning reasons. Expenses associated with the Nonqualified Plan were
$35,000, $34,000 and $24,000 for the years ended December 31, 2002, 2001
and 2000, respectively.


<PAGE>  67


BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

Supplemental Executive Retirement Plans

The Bank maintains Supplemental Executive Retirement Plans (the "SERPs")
for certain of its senior executives under which participants designated by
the Board of Directors are entitled to an annual retirement benefit.
Expenses associated with the SERPs were $153,000, $103,000 and $58,000 for
the years ended December 31, 2002, 2001 and 2000, respectively.

Restricted Stock Agreement

During 2001, the Company entered into a Restricted Stock Agreement with its
CEO, pursuant to which she was awarded 7,700 shares of restricted stock,
subject to achievement of certain performance goals spanning a three year
period, which have been achieved. The restricted shares vest 50% on January
1, 2005 and 50% on January 1, 2006.The restricted shares are subject to
forfeiture in the event of termination of the CEO's employment prior to the
applicable vesting dates for cause by the Company or without good reason by
the executive. In addition, the Company will make a "gross-up" payment
sufficient to pay any taxes of the CEO (including those on the "gross-up"
payment) arising as a result of the vesting of the restricted stock.
Expenses associated with the Restricted Stock Agreement were $63,000 and
$49,000 for the years ended December 31, 2002 and 2001.

Employee Stock Option Plans

The Company maintains Incentive and Nonqualified Stock Option Plans (the
"Employee Stock Option Plans") under which it may grant options on its
common stock to officers and key employees. The total number of shares
available for issuance under the Employee Stock Option Plans is 585,000.
Options are granted at an exercise price equal to the market value of the
stock on the date of the grant and vest over a three to five year period.
Unless exercised, options granted under the Employee Stock Option Plans
expire ten years from the grant date.

The following table summarizes changes in options outstanding under the
Employee Stock Option Plans during 2000, 2001 and 2002 and options
exercisable at December 31, 2002:

<TABLE>
<CAPTION>

                                              Number of        Weighed
                                             Unexercised       Average
                                               Options       Option Price
                                             -----------     ------------


                                            <c>              <c>
Options outstanding at December 31, 1999       239,950          $10.69

  Granted                                       62,300           10.06
  Exercised                                       (400)          10.00
  Forfeited/Canceled                            (1,600)          10.50
                                               -----------------------

Options outstanding at December 31, 2000       300,250           10.56
                                               -----------------------

  Granted                                       58,650           15.17
  Exercised                                    (15,900)          10.36
  Forfeited/Canceled                            (3,850)          14.21
                                               -----------------------

Options outstanding at December 31, 2001       339,150           11.32
                                               -----------------------

  Granted                                       73,950           20.55
  Exercised                                    (15,900)          10.09
  Forfeited/Canceled                            (1,450)          12.88
                                               -----------------------

Options outstanding at December 31, 2002       395,750          $13.09
                                               =======================

Options exercisable at December 31, 2002       271,703          $11.59
                                               =======================
</TABLE>


<PAGE>  68


BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

Director Stock Plan

The Company established a Non-Employee Director Stock Plan (the "Director
Stock Plan") under which it may grant up to 65,000 options on its common
stock to non-employee directors. Each non-employee director elected at the
1998 shareholders meeting received an option for 1,500 shares and each new
non-employee director elected subsequently will receive an option for 1,000
shares. Non-employee directors will also receive an annual option grant for
500 shares as of the date of each annual meeting of shareholders. Options
are granted at an exercise price equal to the market value of the stock on
the date of the grant and vest six months after the grant date. Unless
exercised, options granted under the Director Stock Plan expire ten years
from the date granted.

The following table summarizes changes in options outstanding under the
Director Stock Plan during 2000, 2001 and 2002 and options exercisable at
December 31, 2002:

<TABLE>
<CAPTION>

                                              Number of        Weighed
                                             Unexercised       Average
                                               Options       Option Price
                                             -----------     ------------


                                            <c>              <c>
Options at December 31, 1999                    22,000          $15.61

  Granted                                        5,500           10.13
  Exercised                                          -               -
  Forfeited/Canceled                                 -               -
                                               -----------------------

Options at December 31, 2000                    27,500           14.52
                                               -----------------------

  Granted                                        5,500           16.00
  Exercised                                     (1,000)          10.50
  Forfeited/Canceled                                 -               -
                                               -----------------------

Options at December 31, 2001                    32,000           14.89
                                               -----------------------

  Granted                                       10,000           20.21
  Exercised                                     (8,000)          14.46
  Forfeited/Canceled                              (500)          22.15
                                               -----------------------

Options at December 31, 2002                    33,500          $16.48
                                               =======================

Options exercisable at December 31, 2002        30,500          $16.33
                                               =======================
</TABLE>

Change of Control Agreements

The Bank has entered into Employment Agreements with its President and
Chief Executive Officer, two Executive Vice Presidents and Chief Financial
Officer and Treasurer. These agreements generally provide for the continued
payment of specified compensation and benefits for the remainder of the
term of the agreement upon termination without cause.  The agreements also
provide that if the executive is terminated in conjunction with a Change in
Control, they are entitled to a severance payment equal to 2.99 times base
salary plus bonus for the President and Chief Executive Officer and 2.00
times base salary plus bonus for the Executive Vice Presidents and the
Chief Financial Officer and Treasurer. If payments under the employment
agreements following a Change in Control are subject to the "golden
parachute" excise tax, the Company will make a "gross-up" payment
sufficient to ensure that the net after-tax amount retained by the
executive (taking into account all taxes, including those on the "gross-up"
payment) is the same as if such excise tax had not applied.


<PAGE>  69


BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(15) Other Operating Expenses

Major components of other operating expenses are as follows:

<TABLE>
<CAPTION>

                              Year Ended December 31,
                            ----------------------------
                             2002       2001       2000
                             ----       ----       ----
                                   (In thousands)


                         <c>        <c>        <c>
Telephone                   $  479     $  541     $  470
Forms and supplies             499        512        371
Postage                        288        305        251
Correspondent bank fees        194        209        128
Insurance                      219        178        128
Director fees                  207        158        120
Recruiting                     109        125        117
Other                        1,167      1,039        731
                            ----------------------------
      Total                 $3,162     $3,067     $2,316
                            ============================
</TABLE>

(16) Financial Instruments with Off-Balance Sheet Risk

The Bank is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to originate loans and
letters of credit. The instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
balance sheet. The contract or notional amounts of those instruments
reflect the extent of involvement the Bank has in particular classes of
financial instruments.

The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and letters of
credit is represented by the contractual amount of those instruments. The
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.

Financial instruments with off-balance sheet risk are summarized as
follows:

<TABLE>
<CAPTION>

                                                     December 31,
                                                 ---------------------
                                                   2002         2001
                                                   ----         ----
                                                    (In thousands)


                                              <c>          <c>
Commitments to originate or purchase loans       $ 58,727     $ 13,965
Unused lines of credit and other commitments      116,470      118,820
Letters of credit                                   2,389        2,466
</TABLE>

Commitments to originate loans and unused lines of credit are agreements to
lend to a customer provided there is no violation of any condition
established in the contract. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. Since
certain commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
The Bank evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Bank
upon extension of credit, is based on management's credit evaluation of the
borrower.

Letters of credit are conditional commitments issued by the Bank to
guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.


<PAGE>  70


BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(17) Fair Value of Financial Instruments

The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS 107,
"Disclosures About Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by using available quoted market
information or other appropriate valuation methodologies. The aggregate
fair value amounts presented are in accordance with SFAS 107 guidelines but
do not represent the underlying value of the Bank taken as a whole.

The fair value estimates provided are made at a specific point in time,
based on relevant market information and the characteristics of the
financial instrument. The estimates do not provide for any premiums or
discounts that could result from concentrations of ownership of a financial
instrument. Because no active market exists for some of the Bank's
financial instruments, certain fair value estimates are based on subjective
judgments regarding current economic conditions, risk characteristics of
the financial instruments, future expected loss experience, prepayment
assumptions and other factors. The resulting estimates involve
uncertainties and therefore cannot be determined with precision. Changes
made to any of the underlying assumptions could significantly affect the
estimates.

The book values and estimated fair values for the Company's financial
instruments are as follows:

<TABLE>
<CAPTION>

                                                                   December 31, 2002           December 31, 2001
                                                                -----------------------     -----------------------
                                                                  Book       Estimated        Book       Estimated
                                                                 Value       Fair Value      Value       Fair Value
                                                                                  (In thousands)


                                                             <c>           <c>           <c>           <c>
Assets:
Cash and due from banks                                         $ 25,336      $ 25,336      $ 24,261      $ 24,261
Federal funds sold and overnight investments                      17,623        17,623         4,913         4,913
Investment securities                                            101,329       101,329        49,453        49,453
Mortgage-backed securities                                       156,114       156,114       150,650       150,650
Stock in the FHLB                                                  7,683         7,683         5,668         5,668
Loans receivable, net of allowance for loan losses:
  Residential mortgage loans                                     295,555       303,249       307,916       313,175
  Commercial loans                                               274,370       287,996       234,121       242,612
  Consumer and other loans                                        90,637        91,202        60,403        61,494
Accrued interest receivable                                        6,183         6,183         5,803         5,803

Liabilities:
Deposits:
  Demand deposit accounts                                        137,920       137,920       112,925       112,925
  NOW accounts                                                   100,476       100,476        44,445        44,445
  Money market accounts                                           10,660        10,660         9,914         9,914
  Savings accounts                                               290,981       290,981       254,861       254,861
  Certificate of deposit accounts                                221,874       224,824       248,268       250,758
Overnight and short-term borrowings                               27,364        27,364        13,033        13,033
FHLB borrowings                                                  143,941       151,771       113,365       115,639
Company-obligated manditorily redeemable capital securities        8,000         8,900         3,000         3,000
Accrued interest payable                                           1,281         1,281         1,839         1,839
</TABLE>

Cash and due from banks

The carrying values reported in the balance sheet for cash and due from
banks approximates the fair value because of the short maturity of these
instruments.


<PAGE>  71


BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

Fed funds sold and overnight investments

The carrying values reported in the balance sheet for federal funds sold
and overnight investments approximates the fair value because of the short
maturity of these instruments.

Investment and mortgage-backed securities

The fair values presented for investment and mortgage-backed securities are
based on quoted bid prices received from securities dealers.

Stock in the Federal Home Loan Bank of Boston

The fair value of stock in the FHLB equals the carrying value reported in
the balance sheet. This stock is redeemable at full par value only by the
FHLB.

Loans receivable

Fair value estimates are based on loans with similar financial
characteristics. Loans have been segregated by homogenous groups into
residential mortgage, commercial, and consumer and other loans. Fair values
are estimated by discounting contractual cash flows, adjusted for
prepayment estimates, using discount rates approximately equal to current
market rates on loans with similar characteristics and maturities. The
incremental credit risk for nonperforming loans has been considered in the
determination of the fair value of loans.

Deposits

The fair values reported for demand deposit, NOW, money market, and savings
accounts are equal to their respective book values reported on the balance
sheet. The fair values disclosed are, by definition, equal to the amount
payable on demand at the reporting date. The fair values reported for
certificate of deposit accounts are based on the discounted value of
contractual cash flows. The discount rates used are representative of
approximate rates currently offered on certificate of deposit accounts with
similar remaining maturities.

Overnight and short-term borrowings

The carrying values reported in the balance sheet for overnight and short-
term borrowings approximates the fair value because of the short maturity
of these instruments.

Federal Home Loan Bank of Boston borrowings

The fair values reported for FHLB borrowings are based on the discounted
value of contractual cash flows. The discount rates used are representative
of approximate rates currently offered on borrowings with similar remaining
maturities.

Company-obligated manditorily redeemable capital securities

The fair values reported for Company-obligated mandatorily redeemable
capital securities are based on the discounted value of contractual cash
flows. The discount rates used are representative of approximate rates
currently offered on instruments with similar terms and remaining
maturities.

Accrued interest receivable and payable

The carrying values for accrued interest receivable and payable
approximates fair value because of the short-term nature of these financial
instruments.


<PAGE>  72


BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

Financial instruments with off-balance sheet risk

Since the Bank's commitments to originate or purchase loans, and for unused
lines and outstanding letters of credit, are primarily at market interest
rates, there is no significant fair value adjustment.

(18) Shareholders' Equity

Capital guidelines issued by the Federal Reserve Board ("FRB") require the
Company to maintain minimum capital levels for capital adequacy purposes.
Tier I capital is defined as common equity and retained earnings, less
certain intangibles. The risk-based capital guidelines include both a
definition of capital and a framework for calculating risk-weighted assets
by assigning assets and off-balance sheet items to one of four risk
categories, each with an appropriate weight. The risk-based capital rules
are designed to make regulatory capital more sensitive to differences in
risk profiles among banks and bank holding companies, to account for
off-balance sheet exposure and to minimize disincentives for holding liquid
assets. The Bank is also subject to FDIC regulations regarding capital
requirements. These regulations require banks to maintain minimum capital
levels for capital adequacy purposes and higher capital levels to be
considered "well capitalized".

As of December 31, 2002, the Company and the Bank met all applicable
minimum capital requirements and were considered "well capitalized" by both
the FRB and the FDIC. There have been no events or conditions since the end
of the year that management believes would cause a change in either the
Company's or the Bank's categorization.

The Company's and the Bank's actual and required capital amounts and ratios
are as follows:

<TABLE>
<CAPTION>

                                                                       For Capital          To Be Considered
                                                   Actual           Adequacy Purposes      "Well Capitalized"
                                             ------------------     ------------------     ------------------
                                             Amount      Ratio      Amount      Ratio      Amount      Ratio
                                             ------      -----      ------      -----      ------      -----
                                             (Dollars in thousands)


                                          <c>         <c>        <c>         <c>        <c>         <c>
At December 31, 2002:

Bancorp Rhode Island, Inc.
--------------------------
Tier I capital (to average assets)           $61,408      6.19%     $29,779      3.00%     $49,631      5.00%
Tier I capital (to risk-weighted assets)      61,408      9.63%      25,506      4.00%      38,260      6.00%
Total capital (to risk-weighted assets)       69,401     10.88%      51,013      8.00%      63,766     10.00%

Bank Rhode Island
-----------------
Tier I capital (to average assets)           $60,097      6.06%     $29,760      3.00%     $49,599      5.00%
Tier I capital (to risk-weighted assets)      60,097      9.43%      25,494      4.00%      38,240      6.00%
Total capital (to risk-weighted assets)       68,090     10.68%      50,987      8.00%      63,734     10.00%

At December 31, 2001:

Bancorp Rhode Island, Inc.
--------------------------
Tier I capital (to average assets)           $50,433      5.93%     $25,508      3.00%     $42,513      5.00%
Tier I capital (to risk-weighted assets)      50,433      9.86%      20,462      4.00%      30,694      6.00%
Total capital (to risk-weighted assets)       56,803     11.10%      40,925      8.00%      51,156     10.00%

Bank Rhode Island
-----------------
Tier I capital (to average assets)           $49,702      5.84%     $25,526      3.00%     $42,544      5.00%
Tier I capital (to risk-weighted assets)      49,702      9.72%      20,458      4.00%      30,687      6.00%
Total capital (to risk-weighted assets)       56,121     10.97%      40,916      8.00%      51,145     10.00%
</TABLE>


<PAGE>  73


BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

Warrants. In connection with its acquisition of certain assets and
assumption of certain liabilities from Fleet National Bank of Connecticut
in 1996, the Bank issued to Fleet Financial Group, Inc. a warrant to
acquire 136,315 shares of common stock of the Bank. Upon conversion into a
holding company structure, the warrant became exercisable for 136,315
shares of the Company's common stock. The per share exercise price of the
warrant is $10.00. The warrant expires on March 22, 2006, and may be
exercised, in whole or in part, at any time prior to its expiration. Upon
the occurrence of a change of control event the holders of the warrant may
sell the warrant to the Company for an amount that is equal to the product
of the number of shares represented by the warrant being sold and the
difference between the exercise price of the warrant and the fair market
value of the consideration per share received in the change of control
transaction.

(19) Earnings Per Share

The following table is a reconciliation of basic EPS and diluted EPS:

<TABLE>
<CAPTION>

                                        Year Ended December 31,
                                ----------------------------------------
                                   2002           2001           2000
                                   ----           ----           ----


                             <c>            <c>            <c>
Basic EPS Computation:

Numerator:
  Net income (in thousands)     $    7,662     $    6,315     $    5,618
                                ========================================

Denominator:
  Common shares outstanding      3,758,214      3,730,910      3,728,688
  Stock options                          -              -              -
  Warrants                               -              -              -
                                ----------------------------------------
      Total shares               3,758,214      3,730,910      3,728,688
                                ========================================

Basic EPS                       $     2.04     $     1.69     $     1.51
                                ========================================

Diluted EPS Computation:

Numerator:
  Net income (in thousands)     $    7,662     $    6,315     $    5,618
                                ========================================

Denominator:
  Common shares outstanding      3,758,214      3,730,910      3,728,688
  Stock options                    166,019        115,572         24,534
  Warrants                          72,437         53,546         15,367
                                ----------------------------------------
      Total shares               3,996,670      3,900,028      3,768,589
                                ========================================

Diluted EPS                     $     1.92     $     1.62     $     1.49
                                ========================================
</TABLE>

(20) Regulation and Litigation

The Company and the Bank are subject to extensive regulation and
examination by the FRB, the Rhode Island Division of Banking and the FDIC,
which insures the Bank's deposits to the maximum extent permitted by law.
The federal and state laws and regulations which are applicable to banks
regulate, among other things, the scope of their business, their
investments, their reserves against deposits, the timing of the
availability of deposited funds and the nature and amount of and collateral
for certain loans. The laws and regulations gov-


<PAGE>  74


BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

erning the Bank generally have been promulgated to protect depositors and
not for the purpose of protecting shareholders. Among other things, bank
regulatory authorities have the right to restrict the payment of dividends
by banks and bank holding companies to shareholders.

The Company is involved in routine legal proceedings occurring in the
ordinary course of business. In the opinion of management, final
disposition of these lawsuits will not have a material adverse effect on
the consolidated financial condition or results of operations of the
Company.


(21) Parent Company Statements

The following are condensed financial statements for Bancorp Rhode Island,
Inc. (the "Parent Company"):

Balance Sheets

<TABLE>
<CAPTION>

                                                                                 December 31,
                                                                              -------------------
                                                                               2002        2001
                                                                               ----        ----
                                                                                (In thousands)


                                                                           <c>         <c>
Assets:
  Cash and due from banks                                                     $    17     $    20
  Overnight investments                                                         1,169         736
  Investment in subsidiaries                                                   73,379      61,465
  Prepaid and other assets                                                        270         108
                                                                              -------------------
      Total assets                                                            $74,835     $62,329
                                                                              ===================

Liabilities:
  Income taxes payable                                                        $   (50)    $   (47)
  Notes payable to subsidiaries                                                 8,248       3,093
  Other liabilities                                                               210         186
                                                                              -------------------
      Total liabilities                                                         8,408       3,232
                                                                              -------------------

Shareholders' equity:
  Preferred stock: par value $0.01 per share, authorized 1,000,000 shares
   Issued and outstanding: none                                                     -           -
  Common stock: par value $0.01 per share, authorized 11,000,000 shares:
   Voting: Issued and outstanding: 3,777,450 shares in 2002 and
            3,753,550 shares in 2001                                               38          37
  Additional paid-in capital                                                   40,134      39,826
  Retained earnings                                                            24,002      18,336
  Accumulated other comprehensive income, net                                   2,253         898
                                                                              -------------------
      Total shareholders' equity                                               66,427      59,097
                                                                              -------------------

      Total liabilities and shareholders' equity                              $74,835     $62,329
                                                                              ===================
</TABLE>


<PAGE>  75


BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

Statements of Operations

<TABLE>
<CAPTION>

                                                                                Year Ended December 31,
                                                                         -------------------------------------
                                                                                  2002           2001
                                                                                  ----           ----
                                                                         (In thousands, except per share data)


                                                                            <c>            <c>
Income:
  Dividends received from subsidiaries                                         $    2,750     $    2,250
  Interest on overnight investments                                                    44             16
                                                                               -------------------------
      Total income                                                                  2,794          2,266
                                                                               -------------------------

Expenses:
  Interest on notes payable                                                           458            271
  Compensation expense                                                                 63             49
  Directors' fees                                                                      86             63
  Professional services                                                               174            159
  Other expenses                                                                        1              -
                                                                               -------------------------
      Total expenses                                                                  782            542
                                                                               -------------------------
      Income before income taxes                                                    2,012          1,724
  Income tax expense (benefit)                                                       (246)          (176)
                                                                               -------------------------
      Income before equity in undistributed earnings of subsidiaries                2,258          1,900
  Equity in undistributed earnings of subsidiaries                                  5,404          4,415
                                                                               -------------------------
      Net income                                                               $    7,662     $    6,315
                                                                               =========================

Basic earnings per common share:                                               $     2.04     $     1.69
Diluted earnings per common share:                                             $     1.92     $     1.62

Average common shares outstanding - basic                                       3,758,214      3,730,910
Average common shares outstanding - diluted                                     3,996,670      3,900,028

<CAPTION>

Statements of Cash Flow

                                                                                       Year Ended  December 31,
                                                                                       ------------------------
                                                                                          2002        2001
                                                                                          ----        ----
                                                                                            (In thousands)


                                                                                      <c>         <c>
Cash flows from operating activities:
  Net income                                                                             $ 7,662     $ 6,315
  Adjustment to reconcile net income to net cash provided by operating activities:
    Equity in undistributed earnings of subsidiaries                                      (5,404)     (4,415)
    Compensation expense from restricted stock grant                                          33          30
    (Increase) decrease in other assets                                                     (162)       (108)
    Increase (decrease) in other liabilities                                                  21        (185)
                                                                                         -------------------
      Net cash provided by operating activities                                            2,150       2,007
                                                                                         -------------------

Cash flows from financing activities:
  Proceeds from notes payable                                                              5,155       3,093
  Investment in subsidiaries                                                              (5,155)     (3,093)
  Proceeds from issuance of common stock                                                     276         175
  Dividends on common stock                                                               (1,996)     (1,794)
                                                                                         -------------------
      Net cash used by financing activities                                               (1,720)     (1,619)
                                                                                         -------------------
Net increase (decrease) in cash and due from banks                                           430         388
Cash and cash equivalents at beginning of year                                               756         368
                                                                                         -------------------
Cash and cash equivalents at end of year                                                 $ 1,186     $   756
                                                                                         ===================

Supplementary disclosures:
Cash paid (received) for income taxes                                                    $  (243)    $  (175)
Non-cash transactions:
  Change in other comprehensive income, net of taxes                                       1,355       1,079
</TABLE>

The Parent Company's Statements of Changes in Shareholders' Equity is
identical to the Consolidated Statements of Changes in Shareholders' Equity
and therefore is not presented here.


<PAGE>  76


BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(22) Quarterly Results of Operations (unaudited)

<TABLE>
<CAPTION>

                                                                               2002 Quarter Ended
                                                              -----------------------------------------------------
                                                              March 31     June 30     September 30     December 31
                                                              --------     -------     ------------     -----------
                                                                      (In thousands, except per share data)


                                                           <c>          <c>           <c>              <c>
Interest income                                               $13,097      $13,539       $13,577          $13,294
Interest expense                                                5,480        5,522         5,676            5,502
                                                              ---------------------------------------------------
      Net interest income                                       7,617        8,017         7,901            7,792
Provision for loan losses                                         400          450           575              450
                                                              ---------------------------------------------------
      Net interest income after provision for loan losses       7,217        7,567         7,326            7,342
Noninterest income                                              1,566        1,518         1,796            2,203
Noninterest expense                                             5,857        6,246         6,234            6,687
                                                              ---------------------------------------------------
      Income before taxes                                       2,926        2,839         2,888            2,858
Income taxes                                                    1,032          930           957              930
                                                              ---------------------------------------------------
      Net income                                              $ 1,894      $ 1,909       $ 1,931          $ 1,928
                                                              ===================================================

Basic EPS                                                     $  0.51      $  0.51       $  0.51          $  0.51
Diluted EPS                                                   $  0.48      $  0.48       $  0.48          $  0.48

<CAPTION>

                                                                               2001 Quarter Ended
                                                              -----------------------------------------------------
                                                              March 31     June 30     September 30     December 31
                                                              --------     -------     ------------     -----------
                                                                      (In thousands, except per share data)


                                                           <c>          <c>           <c>              <c>

Interest income                                               $14,157      $14,203       $14,047          $13,496
Interest expense                                                6,951        7,105         6,585            5,896
                                                              ---------------------------------------------------
      Net interest income                                       7,206        7,098         7,462            7,600
Provision for loan losses                                         488          352           566              263
                                                              ---------------------------------------------------
      Net interest income after provision for loan losses       6,718        6,746         6,896            7,337
Noninterest income                                              1,102        1,306         1,356            1,467
Noninterest expense                                             5,389        5,648         5,827            6,332
                                                              ---------------------------------------------------
      Income before taxes                                       2,431        2,404         2,425            2,472
Income taxes                                                      871          832           849              865
                                                              ---------------------------------------------------
      Net income                                              $ 1,560      $ 1,572       $ 1,576          $ 1,607
                                                              ===================================================

Basic EPS                                                     $  0.42      $  0.42       $  0.42          $  0.43
Diluted EPS                                                   $  0.40      $  0.40       $  0.40          $  0.41
</TABLE>


<PAGE>  77


MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Bancorp Rhode Island, Inc.'s common stock is traded on the Nasdaq Stock
Market(r) under the symbol "BARI". The following table sets forth
information regarding the Common Stock for the periods indicated.

<TABLE>
<CAPTION>

                        Stock Price
                     -----------------     Dividend
                      High       Low         Paid
                      ----       ---       --------


                  <c>        <c>         <c>
2001

  First Quarter      $17.00     $12.63      $0.12
  Second Quarter      17.45      15.38       0.12
  Third Quarter       19.58      16.35       0.12
  Fourth Quarter      17.95      17.13       0.12

2002

  First Quarter      $22.95     $17.45      $0.13
  Second Quarter      24.12      21.50       0.13
  Third Quarter       23.25      18.50       0.13
  Fourth Quarter      23.25      16.50       0.14
</TABLE>

As of March 7, 2003 there were approximately 1,400 holders of record of the
common stock.


Locations

1047 Park Avenue
Cranston, RI 02910

383 Atwood Avenue
Cranston, RI 02910

195 Taunton Avenue
East Providence, RI 02914

999 South Broadway
East Providence, RI 02914

1440 Hartford Avenue
Johnston, RI 02919

One Turks Head Place
Providence, RI 02903

137 Pitman Street
Providence, RI 02906

445 Putnam Pike
Smithfield, RI 02917

1300 Warwick Avenue
Warwick, RI 02888

1062 Centerville Road
Warwick, RI 02886

2975 West Shore Road
Warwick, RI 02886

1175 Cumberland Hill Road
Woonsocket, RI 02895

2104 Plainfield Pike
Cranston, RI 02921

(Full Service Drive-up ATM)
233 Lambert Lind Highway
Warwick, RI 02886

(Full Service Drive-up ATM)
17 Coventry Shoppers Park
Coventry, RI 02816

(Full Service ATM - Vestibule)
625 George Washington Highway
Lincoln, RI 02865


<PAGE>  78