<PAGE>


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

                                  FORM 10-KSB
(Mark One)

                  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
   [X]               THE SECURITIES EXCHANGE ACT OF 1934
                For the fiscal year ended December 31, 2001

             TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
   [ ]           THE SECURITIES EXCHANGE ACT OF 1934
                  For the transition period from      to

                       Commission file number: 0-25465

                         CORNERSTONE BANCORP, INC./CT
--------------------------------------------------------------------------------
                (Name of small business issuer in its charter)

               Connecticut                             06-1524044
       ---------------------------------      ----------------------------------
     (State or other jurisdiction of      ( I.R.S. Employer Identification No.)
       incorporation or organization)

      550 Summer St. , Stamford, Connecticut                06901
    ------------------------------------------             -------
            (Address of principal office)                ( Zip Code)

Issuer's telephone number:  (203) 356-0111
                            --------------

Securities registered under Section 12(b) of the Exchange Act:

   Common Stock, par value $0.01 per share       American Stock Exchange
   ---------------------------------------       -----------------------
   (Title of Each Class)                         (Name of each exchange on which
                                                          registered)

Securities registered under Section 12(g) of the Exchange Act:

          None
   -----------------
   (Title of Each Class)

Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes    X            No
                  ---------          --------

Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained herein, and no disclosure will be contained, to the
best of the issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment of
this Form 10-KSB. (  )

The issuer's revenues for the fiscal year ended December 31, 2001 were
$12,648,000.

The aggregate market value of the issuer's common stock held by non-affiliates
of the issuer was $13,501,046 based on the closing price of $16.30 per share
as of March 1, 2002.

The number of shares outstanding of the issuer's common stock as of March 15,
2002 was 1,090,516.

DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of Shareholders to be held on May
15, 2002 -  Part III.

Transitional Small Business Disclosure Format (check one):  Yes       No X
                                                               ----     ---

<PAGE>

                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
PART I                                                                              PAGE
------                                                                              ----
<S>       <C>                                                                       <C>
          Item 1 - Description of Business......................................       1

          Item 1A - Executive Officers of the Issuer............................      13

          Item 2 - Description of Property......................................      14

          Item 3 - Legal Proceedings............................................      15

          Item 4 - Submission of Matters to a Vote of Security Holders..........      15


PART II
-------

          Item 5 - Market for Common Equity and Related Stockholder Matters.....      15

          Item 6 - Management's Discussion and Analysis or Plan of Operation....      16

          Item 7 - Financial Statements.........................................      25

          Item 8 - Changes in and Disagreements With Accountants
                   on Accounting and Financial Disclosure.......................      26

PART III
--------

          Item 9 - Directors, Executive Officers, Promoters and Control Persons;
                   Compliance with Section 16(a) of the Exchange Act............      26

          Item 10 - Executive Compensation......................................      26

          Item 11 - Security Ownership of Certain Beneficial Owners and
                    Management..................................................      26

          Item 12 - Certain Relationships and Related Transactions..............      26

          Item 13 - Exhibits and Reports on Form 8-K............................      26

          SIGNATURES ...........................................................      28
</TABLE>

<PAGE>

ITEM 1.  DESCRIPTION OF BUSINESS
         -----------------------
                                    GENERAL

         Cornerstone Bancorp, Inc. (the "Bancorp") is a Connecticut corporation,
incorporated in 1998 to serve as a bank holding company to provide executive,
financial and administrative functions for its subsidiaries. The Bancorp is the
successor registrant to Cornerstone Bank (the "Bank"), pursuant to a
reorganization whereby the Bancorp acquired all of the issued and outstanding
shares of common stock of the Bank in a one-for-one share exchange on March 1,
1999. The Bank is a wholly-owned subsidiary of the Bancorp. Cornerstone Business
Credit, Inc. ("CBC"), a wholly-owned subsidiary of the Bank, has engaged since
the third quarter of 2001 in the origination of small business loans that
qualify for sale of the guaranteed portion to the Small Business Administration
(the "SBA"). CBC retains the servicing on these loans. References to the
"Company" in this report are to the Bancorp, the Bank and CBC, collectively,
unless the context indicates otherwise.

         The Bank is a Connecticut corporation incorporated in 1985. The Bank's
business consists primarily of attracting deposits from the general public and
local businesses and loaning or investing these deposits. The Bank originates
loans collateralized by liens on commercial and residential properties, as well
as secured and unsecured commercial and consumer installment loans.

         The Bank engages in a full-service commercial and consumer banking
business. Services include demand, savings and time deposits, and mortgage,
commercial and consumer installment loans. Since its inception, the Bank's
primary mission has been to serve the banking needs of its community, the
businesses in Fairfield County, Connecticut (including minority-owned
businesses in low and moderate income areas) and its citizens (including those
living in low and moderate income areas), while focusing on its community towns
and cities of Stamford, Greenwich, Darien, New Canaan, Westport and Norwalk.
The Bank conducts its operations through its main office located on 550 Summer
Street in Stamford, Connecticut and six branch offices in the following
locations: Hope Street, West Broad Street and High Ridge Road in Stamford,
Connecticut; East Putnam Avenue in Cos Cob, Connecticut; New Canaan Avenue in
Norwalk, Connecticut; and Post Road East in Westport, Connecticut. The Bank
also offers limited service mobile branches that operate within a five-mile
radius of the offices located on Summer Street in Stamford, Cos Cob and
Norwalk. In the third quarter of 2001, the Bank opened a business development
office on East Avenue in Norwalk to further serve the small business and
consumer needs in the Norwalk market.

                          FORWARD-LOOKING STATEMENTS

         The statements contained in this report that are not historical are
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Examples of such forward-looking statements include,
without limitation, statements regarding expectations for earnings, credit
quality, and other financial and business matters. When used in this report,
the words "anticipate," "plan," "believe," "estimate," "expect" and similar
expressions as they relate to the Company or its management are intended to
identify forward-looking statements. All forward-looking statements involve
risks and uncertainties. Actual results may differ materially from those
discussed in, or implied by, the forward-looking statements as a result of
certain factors, including but not limited to, competitive pressures on loan
and deposit product pricing; other actions of competitors; changes in economic
conditions; technological changes; the extent and timing of actions of the
Federal Reserve Board, including changes in monetary policies and interest
rates; customer deposit disintermediation; changes in customers' acceptance of
the Bank's products and services; and the extent and timing of legislative and
regulatory actions and reforms.


         The forward-looking statements contained in this report speak only as
of the date on which such statements are made. By making any forward-looking
statements, the Company assumes no duty to update them to reflect new, changing
or unanticipated events or circumstances.

                                     - 1 -

<PAGE>

                           MARKET AREA AND COMPETITION

         The primary market area of the Bank consists of the city of Stamford
and the surrounding communities of Greenwich, Darien, New Canaan, Westport and
Norwalk, Connecticut. The remainder of Fairfield County forms a secondary
market area. Stamford is located in the Southwest corner of Connecticut. It is
located 40 miles north of New York City and is adjacent to Greenwich, Darien,
and New Canaan, Connecticut and Pound Ridge, New York.


         Competition in the financial services industry and in the Bank's market
area is strong. Numerous commercial banks, savings banks and savings
associations maintain offices in the area. Commercial banks, savings banks,
savings associations, money market funds, mortgage brokers, finance companies,
credit unions, insurance companies, investment firms and private lenders
compete with the Bank for various segments of the Bank's business. These
competitors, which are located both inside and outside the Bank's market area,
often have far greater resources than the Bank and are able to conduct more
intensive and broader-based promotional efforts to reach both commercial and
individual customers. The Bank has emphasized personalized banking services and
the advantage of local decision-making in its banking business, and the Bank
believes this emphasis has been well received by the public in the Bank's
market area.

         Changes in the financial services industry resulting from fluctuating
interest rates, technological changes and deregulation have resulted in an
increase in competition, cost of funds, merger activity, and customer awareness
of product and service differences among competitors.

         Connecticut has enacted legislation that liberalized banking powers and
put thrift institutions on equal footing with other banks, thereby improving
their competitive position. In addition, Connecticut's Interstate Banking Act
permits mergers or acquisitions of Connecticut banks and bank holding companies
with or by banks and bank holding companies in other states, as long as such
states have reciprocal legislation. Many states currently have such
legislation. Connecticut banking law also permits non-Connecticut bank holding
companies to open offices in Connecticut that may engage in a banking business,
other than the provision of deposit services, and several New York and other
out-of-state bank holding companies have done so. Such legislative authority
has also increased the size of financial institutions competing with the Bank
for deposits and loans in its market area.

         The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking Act") authorizes a number of interstate banking
transactions and activities, including, among others, the following: (i) a bank
holding company may acquire banks in states outside of the holding company's
home state; (ii) an insured bank may acquire a bank outside of the acquiring
bank's home state, unless the home state of such bank involved in the
transaction passed a law before June 1, 1997 prohibiting such transactions with
out-of-state banks; (iii) an insured bank may acquire a branch of a bank
located outside of the acquiring bank's home state if the law of the state
where the branch is located allows such out-of-state acquisitions; and (iv) an
insured bank is able to establish new branches in states outside of the bank's
home state if the state in which the bank desires to establish a branch has a
law permitting out-of-state banks to establish branches. The effect of the
Interstate Banking Act has been to increase competition in the Bank's market
area.

         The business of the Bank also may be affected by governmental and
regulatory actions and policies. Monetary and fiscal policies of the United
States Government and its instrumentalities, including the Board of Governors
of the Federal Reserve System, significantly influence the growth of loans,
investments and deposits. The present bank regulatory environment may undergo
further changes that could affect the banking industry itself and competition
between banks and non-bank financial companies. See "Regulation and
Supervision" below.

                              LENDING ACTIVITIES

                                     - 2 -

<PAGE>

         Loans are generated through the Bank's marketing efforts, its present
customers, walk-in customers and referrals from professionals including
certified public accountants, attorneys, real estate brokers, builders and
local businesses. The Bank's lending activities are impacted by economic trends
affecting the availability of funds, the demand for loans, and the level of
interest rates. Interest rates charged by the Bank on its loans are determined
by competitive conditions in its market area, the cost of funds, the demand for
loans and the availability of loanable funds. The Bank's continuing attention
to the Norwalk market, as evidenced by the opening of a business development
office in Norwalk, is expected to contribute to ongoing loan growth.

         Loan Portfolio Composition. At December 31, 2001, the principal balance
of the Bank's loan portfolio totaled $107.3 million, before the allowance for
loan losses. The portfolio represented approximately 59% of total assets and
approximately 70% of total deposits at that date. Approximately 87% of the loan
portfolio consisted of loans secured by residential or non-residential real
estate properties, including residential construction; approximately 11% of the
portfolio consisted of commercial loans, including SBA loans; and approximately
2% of the portfolio consisted of consumer installment and other loans. Funding
for the Bank's loans is derived primarily from deposits, stockholders' equity
and, to a lesser extent, borrowings.

         The following is an analysis of the composition of the loan portfolio
at December 31:

                                2001            2000             1999
                            -------------   -------------    -------------
                            Amount       %  Amount       %   Amount      %
                            ------      --  ------      --   ------     --
                                       (dollars in thousands)
Loans secured by real
   estate:
  Residential               $  42,740   40  $  45,630   45   $ 35,501   45
  Non-residential              44,593   42     39,754   40     25,470   32
  Construction                  5,479    5      2,375    2      6,022    7
Commercial loans               12,157   11     10,711   11      9,604   12
Consumer and other loans        2,368    2      2,316    2      3,026    4
                            ---------  ---  ---------  ---   --------  ---
Total principal balances      107,337  100    100,786  100     79,623  100
                                       ===             ===             ===
Deferred loan costs, net           50               8              41
                            ---------       ---------        --------
Total loans                 $ 107,387       $ 100,794        $ 79,664
                            =========       =========        ========

         The Bank's lending limit to one borrower under applicable federal
regulations was approximately $3 million at December 31, 2001, representing 15%
of the sum of its unimpaired capital (approximately $17.9 million) and the
allowance for loan losses (approximately $1.8 million). Subject to certain
limitations, the Bank may lend an additional 10% above the 15% lending
limitation to one borrower. The Bank's largest lending relationship with a
single borrower at December 31, 2001 amounted to $2.6 million.

         Loan Portfolio Maturities. The following table presents loan principal
balances at December 31, 2001 based upon their interest rate repricing
frequency and remaining period to maturity. Adjustable rate loans are included
based on the period to next repricing date, while fixed rate loans are included
based on the period in which payments are contractually due.

                                     - 3 -

<PAGE>

<TABLE>
<CAPTION>
                                          Loans Secured by Real Estate                         Consumer
                                   ---------------------------------------------                 and
                                   Residential    Non-residential   Construction    Commercial  Other     Total   %
                                   -----------    ---------------   ------------    ---------- -------   ------   --
                                                                       (dollars in thousands)
<S>                                <C>            <C>                <C>            <C>         <C>     <C>        <C>
One year or less                   $ 16,765       $ 17,039           $ 5,417        $  8,526    $1,426  $ 49,173   46
After one year through five years    15,027         11,108                62           2,824       874    29,895   28
After five years                     10,948         16,446               -               807        68    28,269   26
                                   --------       --------           -------        --------    ------  --------  ---
   Total                           $ 42,740       $ 44,593           $ 5,479        $ 12,157    $2,368  $107,337  100
                                   ========       ========           =======        ========    ======  ========  ===
</TABLE>

         Loan Portfolio Delinquencies. It is the Bank's policy to manage its
loan portfolio to facilitate recognition of problem loans at an early point.
The Bank commences internal collection efforts once a loan payment is more than
15 days past due. On a weekly basis, the Bank's data processing system generates
delinquency reports on all of the Bank's loans, and management reviews the loan
portfolio to determine if past due loans should be placed on non-accrual
status. Unless the customer is working with the Bank toward repayment, once a
loan payment is 90 days past due, the Bank generally initiates appropriate
collection or legal action.

         Loans are classified as non-accrual for purposes of income recognition
when the collectibility of interest and principal become uncertain, which is
generally when a loan becomes 90 days past due. Accrual of interest may
continue, however, if management believes the loan is well secured and
collection is probable. When a residential or commercial mortgage loan becomes
90 days past due, the Bank reviews the loan, including the appraisal of the
collateral, and may request an updated appraisal. The value of the collateral,
based on such appraisal, is one of the factors considered in determining
whether the loan should be classified as non-accrual. Commercial loans are
generally classified as non-accrual after becoming 90 days past due.
Construction loans 90 days past due are subject to a present value analysis,
utilizing current appraisal data, to determine whether or not they will be
classified as non-accrual. Generally, any uncollected but previously accrued
interest is charged against current income when a loan is placed on non-accrual
status. Application of payments received on non-accrual loans, as principal
and/or interest due, depends on management's expectation regarding ultimate
repayment. Loans are returned to accrual status when they demonstrate a period
of payment performance and are expected to be fully collectible as to principal
and interest.

         The following table summarizes loan portfolio delinquencies at
December 31:

<TABLE>
<CAPTION>
                               2001                     2000                     1999
                       --------------------     --------------------     --------------------
                                 Percent of              Percent of               Percent of
                                    Total                    Total                    Total
                       Balance      Loans       Balance      Loans       Balance      Loans
                       -------      -----       -------      -----       -------      -----
                                              (dollars in thousands)
<S>                    <C>            <C>       <C>           <C>        <C>           <C>
Loans delinquent for:
 30 to 59 days         $  477         0.4%     $  897         0.9%       $  487        0.6%
 60 to 89 days             53         0.1          11          --            21         --
 90 days or more        1,106         1.0         456         0.5           460        0.6
                       ------         ---      ------         ---        ------        ---
 Total                 $1,636         1.5%     $1,364         1.4%       $  968        1.2%
                       ======         ===      ======         ===        ======        ===
</TABLE>

         The following table summarizes, by type of loan, the recorded
investment in non-performing loans at December 31, 2001, 2000 and 1999. Amounts
are shown for: (i) loans that are past due 90 days or more, segregated between
those on non-accrual status and those still accruing interest; and (ii) loans
that are current or past due less than 90 days for which interest payments are
being applied to reduce principal balances.

                                     - 4 -

<PAGE>

<TABLE>
<CAPTION>
                                       2001                2000                 1999
                                       ----                ----                 ----
  Loans on non-accrual status:                      (dollars in thousands)
<S>                                   <C>                 <C>                  <C>

  Loans secured by real estate        $  202              $  455               $  388
                                      ------              ------               ------

Loans on accrual status:
  Loans secured by real estate           737                  --                   50
  Commercial loans                       133                  --                    9
  Consumer and other loans                34                   1                   13
                                      ------              ------               ------
                                         904                   1                   72
                                      ------              ------               ------

Total loans past due 90 days or more   1,106                 456                  460
                                      ------              ------               ------

Loans current or past due less
than 90 days for which interest
payments are being applied to
reduce principal balances:
  Loans secured by real estate           308                 198                  846
  Commercial loans                        --                   9                   --
                                      ------              ------               ------
                                         308                 207                  846
                                      ------              ------               ------

Total non-performing loans            $1,414              $  663               $1,306
                                      ======              ======               ======

Ratio of total non-performing loans
to total loans outstanding             1.32%               0.66%                1.64%
                                      ======              ======               ======
</TABLE>

During the first quarter of 2002, $308,000 of the $737,000 accruing loans
secured by real estate past due greater than 90 days at December 31, 2001 were
paid-off and $131,000 of commercial loans were brought current.

                                     - 5 -

<PAGE>

         Allowance for Loan Losses. The following table summarizes changes in
the allowance for loan losses for the years ended December 31:

                                         2001           2000           1999
                                         ----           ----           ----
                                               (dollars in thousands)

Balance at beginning of year            $1,589         $1,626         $1,733
                                        ------         ------         ------
Charge-offs:
 Commercial                                 19            470             81
 Real estate mortgage                       --             --             14
 Installment loans to individuals            6             10              8
                                        ------         ------         ------
                                            25            480            103
                                        ------         ------         ------
Recoveries:
 Commercial                                 (7)           (53)           (44)
 Real estate mortgage                      (90)            --            (26)
 Installment loans to individuals          (96)            (6)            (6)
                                        -------        -------        -------
                                          (193)           (59)           (76)
                                        -------        -------        -------
Net charge-offs (recoveries)              (168)           421             27
                                        -------        ------         -------
 Provision for loan losses                  91            384            (80)
                                        ------         ------         -------
 Balance at end of year                 $1,848         $1,589         $1,626
                                        ======         ======         ======

Ratio of net charge-offs (recoveries)
to average loans outstanding            (0.16%)         0.46%          0.04%
                                        =======        ======         ======

Ratio of allowance for loan
losses to total loans                    1.72%          1.58%          2.04%
                                        ======         ======         ======

Ratio of allowance for loan losses
to total non-performing loans             131%           240%           125%
                                        ======         ======         ======

         During the quarter ended March 31, 2001, the Bank recovered $90,000
with respect to a consumer loan that had been charged off in November 1990. Also
in the first quarter of 2001, $149,000 was received on a nonresidential real
estate loan that had been charged off in December 1997, of which $81,000 was a
recovery of previously charged off principal and $68,000 was a payment for
interest that had been applied against principal, and was subsequently applied
to income.

         Approximately $460,000 of the commercial loan charge-offs for the year
ended December 31, 2000 represents borrowings by one borrower who filed for
bankruptcy.

         An allocation of the allowance for loan losses at December 31, 2001,
2000 and 1999 is presented below. No portion of the allowance is restricted to
any loan or group of loans, and the entire allowance is available to absorb
credit losses. The amount and timing of actual charge-offs and future allowance
allocations may vary from current estimates. The table indicates the allowance
for loan losses allocable to real estate secured loans and other loan types, as
well as the percent of the total loan portfolio represented by balances within
each loan type.

                                     - 6 -

<PAGE>

<TABLE>
<CAPTION>
                                         2001                            2000                       1999
                               --------------------------      --------------------------      --------------------------
                                              Percent                         Percent                         Percent
                                              of Loans                        of Loans                        of Loans
                               Allowance      in Category      Allowance      in Category      Allowance      in Category
                               for Loan       to Total         for Loan       to Total         for Loan       to Total
                               Losses         Loans            Losses         Loans            Losses         Loans
                               ------         -----            ------         -----            ------         -----
                                                               (dollars in thousands)
<S>                            <C>             <C>             <C>            <C>              <C>            <C>
Loans secured by real estate:
  Residential                   $ 660           39.8%           $ 681          45.3%              $566          44.6%
  Non-residential                 689            41.6             593           39.4               495          32.0
  Construction                     85             5.1              35            2.4                93           7.6
Commercial                        187            11.3             160           10.6               192          12.0
Consumer and other                 36             2.2              35            2.3               105           3.8
Unallocated                       191             --               85            --                175           --
                                -----           -----           -----          -----            ------         -----
Total                          $1,848           100.0%         $1,589          100.0%           $1,626         100.0%
                                =====           =====           =====          =====            ======         =====
</TABLE>

                             Investment Activities

         The Bank has authority to invest in a variety of security types deemed
prudent by the Board of Directors. Subject to various restrictions, the Bank
may own obligations of the United States Government, federal agencies, certain
obligations of municipalities, certificates of deposit, banker's acceptances,
commercial paper and corporate bonds.

         The Bank has established a written securities policy that is approved
annually by the Board of Directors. The policy states specific investment
objectives relating to interest rate sensitivity and contribution to Bank
profitability. The Bank emphasizes the quality and term of the securities
acquired for its portfolio. The Bank does not engage in the practice of trading
securities for the purpose of generating portfolio gains.

         Investment Portfolio Composition. At December 31, 2001, the Bank's
securities held to maturity consisted of debt securities reported at a total
amortized cost of $35.3 million, with a fair value of $36.0 million (or
$608,000 more than amortized cost). At December 31, 2001, the Bank's available
for sale securities portfolio consisted of debt securities reported at a total
fair value of $9.8 million (or $238,000 more than amortized cost of $9.5
million). The after-tax unrealized gain of $145,000 on available for sale
securities has been added to stockholders' equity at December 31, 2001. The
Bank also held an investment of $466,000 in Federal Home Loan Bank ("FHLB")
stock at December 31, 2001, which is a non-marketable equity security reported
at cost.

                                     - 7 -

<PAGE>
         The amortized cost and fair value of debt securities are summarized as
follows at December 31:

<TABLE>
<CAPTION>
                                               2001                    2000                     1999
                                       -------------------     -------------------      -------------------
                                       Amortized     Fair      Amortized     Fair       Amortized     Fair
                                          Cost       Value        Cost       Value         Cost       Value
                                       --------     ------     --------      -----      --------      -----
                                                                (in thousands)
<S>                                     <C>         <C>        <C>           <C>        <C>          <C>
Securities available for sale:
 U. S. Government Agency securities     $ 9,541     $ 9,779    $18,519       $18,482    $26,024      $25,357
                                        -------     -------    -------       -------    -------      -------

Securities held to maturity:
 U. S. Government Agency securities      35,274      35,882     14,570        14,495     14,735       14,313
 U.S. Treasury Securities                  --          --         --            --        3,002        2,997
 Other securities                            75          75         75            75         75           75
                                        -------       -----     ------          ----       ----       ------

                                         35,349      35,957     14,645         4,570     17,812       17,385
                                         ------      ------     ------         =====     ------       ------
Total debt securities                   $44,890     $45,736    $33,164       $33,052    $43,386      $42,742
                                        =======     =======    =======       =======    =======      =======
</TABLE>

         Investment Portfolio Maturities. The following table summarizes the
amortized cost and the weighted average yield of the securities portfolio, by
remaining period to contractual maturity, at December 31, 2001:

<TABLE>
<CAPTION>
                                        One          One          Five         More
                                        Year         Through      Through      Than
                                        or           Five         Ten          Ten
                                        Less         Years        Years        Years        Total
                                        ----         -----        -----        -----        -----
                                                     (dollars in thousands)
<S>                                     <C>          <C>          <C>          <C>          <C>
Securities available for sale:
  U.S. Government Agency securities     $  1,501     $  8,040     $    --     $     --      $  9,541
                                         -------      -------      -------      -------      -------

Securities held to maturity:
  U. S. Government Agency securities       3,048       22,359        1,442        8,425       35,274
  Other securities                            --           25           50          --            75
                                         -------      -------      -------      -------      -------
                                           3,048       22,384        1,492        8,425       35,349
                                         -------      -------      -------      -------      -------

Total amortized cost                    $  4,549     $ 30,424     $  1,492     $  8,425     $ 44,890
                                         =======      =======      =======      =======      =======
Weighted average yield                     6.17%        5.42%        6.00%        5.85%        5.59%
                                         =======      =======      =======      =======      =======
</TABLE>

                                SOURCES OF FUNDS

         Deposits. Deposits are the primary source of funds for the Bank. The
Bank's deposits consist of checking accounts, preferred savings accounts,
regular savings deposits, NOW accounts, money market accounts, and certificates
of deposit. Deposits are obtained from individuals, partnerships, small and
medium size businesses and professionals in the Bank's market area. The Bank
does not accept brokered deposits.

         The following table summarizes the average balance and the average rate
paid on each type of interest-bearing deposit for the years ended December 31:

<TABLE>
<CAPTION>
                                          2001                    2000                   1999
                                   --------------------   ---------------------   -------------------
                                               Average                  Average               Average
                                   Average      Rate       Average       Rate     Average      Rate
Type of Account                    Balance      Paid       Balance       Paid     Balance      Paid
---------------                    -------      ----       -------      -----     -------      ----
                                                          (dollars in thousands)
<S>                                 <C>          <C>       <C>          <C>       <C>          <C>
NOW accounts                        $ 23,994     0.81%     $ 18,442     1.17%     $ 17,719     1.16%
Money market accounts                  7,080     1.65         4,084     2.18         3,478     2.22
Regular, club, cash management         6,400     1.80         5,918     2.25         6,330     2.25
Preferred rate savings                21,868     2.30        20,615     2.76        21,026     2.75
Time certificates of deposit          51,918     5.32        42,801     5.18        48,750     4.97
                                    --------     -----     --------     -----     --------     -----
   Total                            $111,260     3.32%     $ 91,860     3.51%     $ 97,303     3.52%
                                    ========     =====     ========     =====     ========     =====
</TABLE>

                                      -8-

<PAGE>

         The following table shows, by maturity, the balance of time
certificates of deposit of $100,000 or more and the average rate paid at
December 31, 2001. See Note 6 to the Consolidated Financial Statements
for additional information concerning time deposits.

                                                                    Average
                                                                    Rate
      Remaining Period to Maturity                  Balance         Paid
--------------------------------------------      -----------    ----------
                                                    (dollars in thousands)

Less than 3 months                                  $ 2,740          4.78%
Greater than 3 months and less than 6 months          2,056          3.83
Greater than 6 months and less than 1 year            3,689          3.98
Greater than 1 year                                   3,637          5.92
                                                    -------          ------
  Total                                             $12,122          4.72%
                                                    =======          ======

         Borrowings. The Bank uses borrowings as a secondary source of funds, in
the form of securities repurchase agreements and advances from the FHLB of
Boston. Securities repurchase agreements represent transactions with certain
commercial customers in which the Bank borrows funds from the customers and
pledges U.S. Treasury and Government Agency securities as collateral. The
identical securities are repurchased from the customer when the borrowing
matures, generally within three months or less.

         The following table summarizes information concerning borrowings under
securities repurchase agreements as of and for the years ended December 31:

<TABLE>
<CAPTION>
                                                       2001              2000      1999
                                                       ----              ----      ----
                                                             (dollars in thousands)

<S>                                                   <C>               <C>        <C>
Borrowings at December 31                             $8,041            $6,562     $3,768
Weighted average interest rate at December 31          1.34%             2.03%      1.79%
Maximum borrowings outstanding at any
     month end during the year                        $9,086            $7,172     $4,227
Average borrowings during the year                    $7,753            $5,734     $3,669
Weighted average interest rate during the year         1.78%             2.30%      2.05%
</TABLE>

         Securities with a fair value of $8.1 million, $6.6 million and $4.5
million were pledged as collateral for repurchase agreement borrowings at
December 31, 2001, 2000 and 1999, respectively. The agreements at December 31,
2001 mature within three months.

         As a member of the FHLB of Boston, the Bank is required to own capital
stock in the FHLB and is authorized to apply for advances from the FHLB. Each
FHLB credit program has its own interest rate, which may be fixed or variable,
and range of maturities. The FHLB of Boston may prescribe the acceptable uses
for these advances, as well as limitations on the size of the advances and
repayment provisions. At December 31, 2001, the Bank's FHLB borrowing capacity
was $9.3 million. On such date, there were no FHLB advances outstanding.

                           REGULATION AND SUPERVISION

         As a Connecticut-chartered bank whose deposits are insured by the Bank
Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC"), the Bank
is subject to regulation and supervision by both the Connecticut Banking
Commissioner (the "Banking Commissioner") and the FDIC. The Bank also is
subject to the laws and

                                      -9-

<PAGE>

regulations of the Federal Reserve Board that are applicable to FDIC-insured
financial institutions. The Bancorp is also subject to certain regulations of
the Federal Reserve Board and the Banking Commissioner. This governmental
regulation and supervision is primarily intended to protect depositors, not
shareholders.

         This structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets for regulatory purposes and the establishment of an adequate allowance
for loan losses. Any change in such regulation, whether by the Banking
Commissioner, the FDIC, the Federal Reserve Board or through legislation,
could have a material adverse impact on the Company and its operations.

         Connecticut Regulation. The Banking Commissioner regulates the Bank's
internal organization as well as its deposit, lending and investment
activities. The approval of the Banking Commissioner is required for, among
other things, certain amendments to the Bank's Articles of Incorporation and
Bylaws, as well as for the establishment of branch offices and business
combination transactions. The Banking Commissioner conducts periodic
examinations of the Bank. Many of the areas regulated by the Banking
Commissioner are subject to similar regulation by the FDIC.

         Connecticut banking laws grant banks broad lending authority. Subject
to certain limited exceptions, however, total secured and unsecured loans made
to any one obligor pursuant to this statutory authority may not exceed 25% of a
bank's equity capital plus the allowance for loan losses.

         Subject to certain limited exceptions, state-chartered banks are
prohibited from engaging as a principal in any activity that is not permissible
for national banks. State-chartered banks, for example, are prohibited from
acquiring equity investments of a type, or in an amount, not permissible for a
national bank.

         The Connecticut Interstate Banking Act permits Connecticut banks and
bank holding companies to engage in stock acquisitions with depository
institutions in other states with reciprocal legislation. A majority of states
have enacted such legislation. There have been several interstate mergers and
acquisitions involving Connecticut bank holding companies or banks with offices
in the Bank's service area and bank holding companies or banks headquartered in
other states.

         FDIC Regulation. The Bank's deposit accounts are insured by the Bank
Insurance Fund of the FDIC to a maximum of $100,000 for each insured depositor.
FDIC insurance of deposits may be terminated by the FDIC, after notice and
hearing, upon a finding by the FDIC that the insured institution has engaged in
unsafe or unsound practices, or is in an unsafe or unsound condition to
continue operations, or has violated any applicable law, regulation, rule or
order, or conditions imposed by the FDIC.

         As a FDIC-insured, state-chartered bank, the Bank is subject to
supervision and examination by the FDIC and also is subject to FDIC regulations
regarding many aspects of its business, including types of deposit instruments
offered, permissible methods for acquisition of funds, and activities of
subsidiaries and affiliates of the Bank (including the Bancorp). The FDIC
periodically makes its own examination of insured institutions.

         Federal law requires each federal banking agency, such as the FDIC, to
prescribe for depository institutions under its jurisdiction standards relating
to, among other things: internal controls; information systems and audit
systems; loan documentation; credit underwriting; interest rate risk exposure;
asset growth; compensation, fees and benefits; and such other operational and
managerial standards as the agency deems appropriate. The federal banking
agencies adopted final regulations and Interagency Guidelines Establishing
Standards for Safety and Soundness (the "Guidelines") to implement these safety
and soundness standards. The Guidelines set forth the safety and soundness

                                      -10-

<PAGE>

standards that the federal banking agencies use to identify and address
problems at insured depository institutions before capital becomes impaired.
The Guidelines address internal controls and information systems; internal
audit systems; credit underwriting; loan documentation; interest rate risk
exposure; asset quality; earnings; and compensation, fees and benefits. If the
FDIC determines that an institution fails to meet any standard prescribed by
the Guidelines, the FDIC may require the institution to submit to it an
acceptable plan to achieve compliance with those Guidelines. The Guidelines
establish time frames for the submission and review of such safety and
soundness compliance programs.

         Under the Community Reinvestment Act, as amended ("CRA"), the Bank has
a continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not prescribe specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the FDIC, in connection with its examination of an
institution, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such institution. The CRA requires public disclosure of an
institution's CRA rating and requires the FDIC to provide a written evaluation
of an institution's CRA performance utilizing a four-tiered descriptive rating
system. The Bank's latest CRA rating, received from the FDIC on January 19,
1999, was "satisfactory", which is second to the highest rating of
"outstanding".

         The FDIC has adopted risk-based capital guidelines applicable to
FDIC-insured, state-chartered banks that are not members of the Federal Reserve
System, such as the Bank. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations. Banks are required to
maintain minimum levels of capital based upon their total assets and total
"risk-weighted assets." For purposes of these requirements, capital is
comprised both of Tier 1 and Tier 2 capital. Tier 1 capital consists primarily
of common stock and retained earnings. Subject to certain limitations, Tier 2
capital consists primarily of the allowance for loan losses, subordinated debt,
and convertible securities. In determining total capital, the amount of Tier 2
capital may not exceed the amount of Tier 1 capital. A bank's total "risk-based
assets" are determined by assigning the bank's assets and off-balance sheet
items (e.g., letters of credit) to one of four risk categories based upon their
relative credit risks. The greater the credit risk associated with an asset,
the greater the amount of such asset that will be subject to the capital
requirements.

         The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") defines specific capital categories based upon an institution's
capital ratios. The capital categories, in declining order, are: (i) well
capitalized, (ii) adequately capitalized, (iii) undercapitalized, (iv)
significantly undercapitalized, and (v) critically undercapitalized. Under
FDICIA and the FDIC's prompt correction action rules, the FDIC may take any one
or more of the following actions against an undercapitalized bank: restrict
dividends and management fees; restrict asset growth; and prohibit new
acquisitions, new branches or new lines of business without prior FDIC
approval. If a bank is significantly undercapitalized, the FDIC may also
require the bank to raise capital, restrict interest rates a bank may pay on
deposits, require a reduction in assets, restrict any activities that might
cause risk to a bank, require improved management, prohibit the acceptance of
deposits from correspondent banks and restrict compensation to any senior
executive officer. When a bank becomes critically undercapitalized (i.e., the
ratio of tangible equity to total assets is equal to or less than 2%), the FDIC
must, within 90 days thereafter, appoint a receiver for the bank or take such
other action as the FDIC determines would better achieve the purposes of the
law. Even where such other action is taken, the FDIC generally must appoint a
receiver for a bank if the bank remains critically undercapitalized during the
calendar quarter beginning 270 days after the date on which the bank became
critically undercapitalized.

         To be considered "adequately capitalized," an institution must
generally have a leverage ratio of Tier 1 capital to total adjusted assets of at
least 4%, a Tier 1 capital to risk-weighted assets ratio of at least 4%, and a
total (Tier 1 and Tier 2) capital to risk-weighted assets ratio of at least 8%.
Generally, a bank is considered to be "well

                                      -11-

<PAGE>

capitalized" if it has a leverage (Tier 1) capital ratio of at least 5%, a Tier
1 risk-based capital ratio of at least 6%, and a total risk-based capital ratio
of at least 10%. As of December 31, 2001, the Bank was in full compliance with
all three minimum capital standards and was categorized as "well capitalized"
under the provisions of FDICIA. See "Capital Resources" and Note 10 to the
Consolidated Financial Statements for an analysis of the Bank's actual and
required regulatory capital.

         Federal Reserve System Regulation. Under the Federal Reserve Act and
Regulation D issued thereunder by the Federal Reserve Board, banking
institutions are required to maintain reserves with respect to transaction
accounts (primarily NOW and regular checking accounts) which allow payments or
transfers to third parties. These regulations generally require the maintenance
of reserves of 3% against net transaction accounts of $41.3 million or less
and, for net transaction accounts over $41.3 million, $1,239,000 plus 10% of
the amount of such accounts in excess of $41.3 million. These amounts and
percentages are subject to adjustment by the Federal Reserve Board. At December
31, 2001, the Bank's net transaction accounts exceeded $41.3 million. The
Bank's required average reserve balances were approximately $2,368,000 at
December 31, 2001.

         In addition, the Bancorp is subject to regulation by the Federal
Reserve Board as a bank holding company. The Federal Reserve Board has
established capital adequacy guidelines for bank holding companies that are
similar to the FDIC capital guidelines described above. The Federal Bank Holding
Company Act of 1956, as amended (the "Federal BHC Act"), limits the types of
companies that a bank holding company may acquire or organize and the activities
in which it or they may engage. In general, the Bancorp and its subsidiaries are
prohibited from engaging in or acquiring direct control of any company engaged
in non-banking activities unless such activities are so closely related to
banking or managing or controlling banks as to be properly incident thereto.
State-chartered banks forming holding companies generally are allowed those
powers, with certain restrictions, granted to them by applicable state law. The
Bancorp believes that it may continue to engage in those activities in which
the Bank engages.

         Under the Federal BHC Act, the Bancorp is required to file annually
with the Federal Reserve Board a report of its operations, and the Bancorp, the
Bank and any other subsidiaries are subject to examination by the Federal
Reserve Board. In addition, the Bancorp is required to obtain the prior approval
of the Board of Governors of the Federal Reserve System to acquire, with certain
exceptions, more than 5% of the outstanding voting stock of any bank or bank
holding company, to acquire all or substantially all of the assets of a bank or
to merge or consolidate with another bank holding company. Moreover, the
Bancorp, the Bank and any other subsidiaries are prohibited from engaging in
certain tying arrangements in connection with any extension of credit or
provision of any property or services. The Bank also is subject to certain
restrictions imposed by the Federal Reserve Act on issuing any extension of
credit to the Bancorp or any of its subsidiaries, or making any investments in
the stock or other securities thereof, and on the taking of such stock or
securities as collateral for loans to any borrower.

         In 1999, the Gramm-Leach-Bliley ("GLB") Act was enacted, which could
have a far-reaching impact on the financial services industry. The GLB Act
authorizes affiliations between banking, securities and insurance firms, and
authorizes bank holding companies and banks to engage in a variety of new
financial activities. Among the new activities that are permitted to bank
holding companies are securities and insurance brokerage, securities
underwriting, insurance underwriting and merchant banking. The Federal Reserve
Board, in consultation with the Secretary of the Treasury, may approve
additional financial activities. The GLB Act also imposes new requirements on
financial institutions with respect to customer privacy. It generally prohibits
disclosure of customer information to nonaffiliated third parties unless the
customer has been given the opportunity to object and has not objected to such
disclosure. Financial institutions are further required to disclose their
privacy policies to customers annually. Financial institutions, however, will
be required to comply with state law if it is more protective of customer
privacy than the GLB Act. The Board of Directors approved the Bank's privacy
policy in October 2000.

         The Federal Reserve Board has issued a policy statement on the payment
of cash dividends by bank holding companies, which expresses the Federal Reserve
Board's view that a bank holding company should pay cash

                                      -12-

<PAGE>

dividends only to the extent that a bank holding company's net income for the
past year is sufficient to cover both the cash dividends and a rate of earnings
retention that is consistent with a bank holding company's capital needs, asset
quality and overall financial condition. This policy statement has had no
operative effect upon the dividends paid by the Bancorp through December 31,
2001, and is not expected to have an operative effect in 2002. The Federal
Reserve Board also indicated that it would be inappropriate for a company
experiencing serious financial problems to borrow funds to pay dividends.
Furthermore, under the prompt corrective action regulations adopted by the
Federal Reserve Board pursuant to FDICIA, the Federal Reserve Board may
prohibit a bank holding company from paying any dividends if the holding
company's bank subsidiary is classified as "undercapitalized".

         Bank holding companies are required to give the Federal Reserve Board
prior written notice of any purchase or redemption of outstanding equity
securities of the bank holding company if the gross consideration for the
purchase or redemption, when combined with the net consideration paid for all
such purchases or redemptions during the preceding 12 months, is equal to 10%
or more of their market capitalization. This requirement had no operative
effect upon the stock purchases made by the Bancorp in 2000 (totaling 76,415
shares) and is not expected to have an effect on the Bancorp's ability to
complete the remainder of its 100,000 share repurchase program; although no
share repurchases are presently anticipated for 2002, management continually
re-evaluates the desirability of making additional share repurchases given
fluctuating stock market conditions and the availability of funds. The Federal
Reserve Board may disapprove a purchase or redemption of outstanding equity
securities if it determines that the proposal would constitute an unsafe or
unsound practice or would violate any law, regulation, Federal Reserve Board
order, or any condition imposed by, or written agreement with, the Federal
Reserve Board.

         Federal Securities Law. The common stock of the Company is registered
with the Securities and Exchange Commission ("SEC") under the Securities
Exchange Act of 1934 (the "Exchange Act"). The Company is subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act. Common stock of the Company
held by persons who are affiliates (generally officers, directors and
principal stockholders) of the Company may not be resold without registration
or unless sold in accordance with certain resale restrictions. If the Company
meets specified current public information requirements, each affiliate of the
Company is able to sell in the public market, without registration, a limited
number of shares in any three-month period.

                                    PERSONNEL

         As of December 31, 2001, the Bank had 58 employees (55 of whom are
full-time and 3 of whom are part-time). The employees are not represented by a
collective bargaining unit and the Bank considers its relationship with its
employees to be good.


ITEM 1A. EXECUTIVE OFFICERS OF THE ISSUER
         --------------------------------

         The following table shows the name, age, positions held with the
Bancorp, and the principal occupations during the past five years of the
Bancorp's executive officers.

                             Positions Held with the Bancorp and Principal
Name                   Age   Occupations During the Past Five Years
----                   ---   --------------------------------------

Norman H. Reader*       77   Vice Chairman
                             (2000 - present)
                             President and Chief Executive Officer
                             (1985 - 2000)

Merrill J. Forgotson*   59   President and Chief Executive Officer
                             (2000 - present)

                                      -13-

<PAGE>

                             Senior Vice President
                             People's Bank
                             (1990-2000)

James P. Jakubek        52   Executive Vice President and Chief
                             Operating Officer (1991 - present)

Paul H. Reader*         43   Senior Vice President (1993 - Present)

Ernest J. Verrico, Sr.  46   Vice President and Chief Financial Officer
                             (2001 - present)
                             Senior Vice President and Controller (CT/NY Region)
                             First Union National Bank
                             (1982-2001)

Leigh A. Hardisty       43   Vice President and Corporate Secretary
                             (2001 - present)
                             Vice President, Chief Financial Officer
                             and Corporate Secretary (1999 - 2001)
                             Vice President and Comptroller, and
                             Corporate Secretary (1993 - 1999)

*    Norman H. Reader is the father of Paul H. Reader and the father-in-law of
Merrill J. Forgotson. Merrill J. Forgotson and Paul H. Reader are
brothers-in-law.

ITEM 2.  DESCRIPTION OF PROPERTY
         -----------------------

         The following table sets forth the location of the Bank's main office
and branches, as well as certain additional information relating to those
offices.

                                  Year Facility     Owned or
                                      Opened        Leased
                                  -------------     --------
Main office /(1)/
550 Summer Street
Stamford, Connecticut                 1988          Owned

Springdale office /(2)/
1042 Hope Street
Stamford, Connecticut                 1989          Leased

High Ridge office /(3)/
1117 High Ridge Road
Stamford, Connecticut                 1994          Leased

Cos Cob office /(4)/
211 East Putnam Avenue
Cos Cob, Connecticut                  1995          Leased

                                      -14-

<PAGE>

West Broad office /(5)/
56 West Broad Street
Stamford, Connecticut                 1997          Leased

Norwalk office /(6)/
79 New Canaan Avenue
Norwalk, Connecticut                  1999          Leased

East Norwalk office /(7)/
128 East Avenue
Norwalk, Connecticut                  2001          Leased

Westport office /(8)/
1071 Post Road East
Westport, Connecticut                 2001          Leased

/(1)/  The main office provides 11,000 square feet of interior space and has
offstreet parking facilities.

/(2)/  The Springdale facility is a full-service branch. The office lease
provides for 1,500 square feet of interior space with a term expiring in 2002,
and renewal options for four additional 5 year terms.

/(3)/  The High Ridge facility is a full-service branch. The office lease
provides for approximately 1,763 square feet of interior space, with a term
expiring in 2005, and renewal options for two additional 5 year periods.

/(4)/  The Cos Cob facility is a full-service branch. The office lease provides
for approximately 900 square feet of interior space with a term of 5 years
expiring in 2005, and a renewal option for one additional 5 year period.

/(5)/  The West Broad facility is a full-service branch. The office lease
provides for approximately 2,000 square feet of interior space with an initial
term of 5 years which expired in 2001, and renewal options for three additional
5 year periods, the first of which has not been exercised. The lease is
currently renewing on a month to month basis.

/(6)/  The Norwalk facility is a full-service branch. The office lease provides
for approximately 2,200 square feet of interior space with an initial term of 5
years expiring in 2004, and renewal options for three additional 5 year periods.

/(7)/  The East Avenue facility is a business development office. The office
lease provides for approximately 2,800 square feet of interior space with an
initial term of 5 years expiring in 2006, and renewal options for one
additional 5 year period.

/(8)/  The Westport facility is a full-service branch. The office lease provides
for approximately 1,700 square feet of interior space with an initial term of 5
years expiring in 2006, and renewal options for one additional 5 year period.

ITEM 3.  LEGAL PROCEEDINGS
         -----------------

         There are no material legal proceedings, other than ordinary routine
litigation incidental to the business, to which the Bancorp or the Bank is a
party or of which any of their property is the subject.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
         ---------------------------------------------------

         No matters were submitted to a vote of security holders during the
fourth quarter of 2001.

                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
         --------------------------------------------------------

                                      -15-

<PAGE>

         Cornerstone Bancorp's common stock has traded on The American
Stock Exchange(R) under the symbol CBN since March 2, 1999, and prior thereto,
the common stock of the Bank was listed on The American Stock Exchange(R) from
January 1996 under the same symbol. The following table sets forth, for the
periods indicated, the actual high and low sales prices for the common stock as
reported by The American Stock Exchange(R).

                               2001                        2000
                         ----------------             --------------
                         High       Low               High     Low
                         ----       ----              -----    ----
First Quarter            $14.55    $12.80            $11.625  $10.625
Second Quarter            16.00     13.30             12.50    10.875
Third Quarter             17.75     15.00             13.125   11.625
Fourth Quarter            16.50     14.90             14.50    12.50

         As of March 1, 2002, there were approximately 511 holders of record of
the Bancorp's common stock.

         The transfer agent and registrar for the Bancorp's common stock is
American Stock Transfer & Trust Company.

DIVIDEND POLICY

         The Bancorp's shareholders are entitled to dividends, when and if
declared by the Bancorp's Board of Directors out of funds legally available
therefor. The Bancorp is not directly subject to the restrictions imposed by
Connecticut law regarding the payment of dividends by a Connecticut-chartered
capital stock bank. For the foreseeable future, however, the sole source of
amounts available to the Bancorp for the declaration of dividends will be
dividends declared and paid by the Bank on the Bank's common stock held by the
Bancorp. The Bank is prohibited by Connecticut banking law from paying
dividends, except from its net profits. Net profits are defined as the remainder
of all earnings from current operations plus actual recoveries on loans and
investments and other assets after deducting from the total thereof all current
operating expenses, actual losses, accrued dividends on preferred stock, if any,
and all federal and state taxes. The total of all dividends declared by the Bank
in any calendar year may not, unless specifically approved by the Banking
Commissioner, exceed the total of its net profits for that year combined with
its retained net profits of the preceding two years. The Bank's net profits
retained in 2001 and 2000 (after cash dividends paid to the Bancorp) totaled
$1,768,000. Federal statutes prohibit FDIC insured depository institutions from
paying dividends or making capital distributions that would cause the
institution to fail to meet minimum capital requirements. These dividend
limitations can affect the amount of dividends payable by the Bank to the
Bancorp.

         The Bancorp declared cash dividends on its common stock totaling
$470,000 ($0.4375 per share) in 2001 and $417,000 ($0.39 per share) in 2000.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
         ---------------------------------------------------------

         The following management's discussion and analysis presents a review
of financial condition as of December 31, 2001 and 2000, and operating results
for the years then ended.

                               FINANCIAL CONDITION
                             (dollars in thousands)

         Total assets increased to $181,517 at December 31, 2001 from $150,123
at December 31, 2000, an increase of $31,394 (or 21%). Increases in cash and
cash equivalents of $12,629, total securities of $12,001 and net loans of
$6,334 were funded by growth in deposits of $30,521.

                                      -16-

<PAGE>

         The Bank's loan portfolio, net of allowance for loan losses, increased
to $105,539 at December 31, 2001 from $99,205 at December 31, 2000, an increase
of  $6,334 (or 6%). The net increase in the loan portfolio included increases
of $4,839 (or 12%) in loans secured by non-residential (commercial) real estate,
$3,104 (or 131%) in construction loans, $1,446 (or 14%) in commercial loans and
$52 (or 2%) in consumer loans, partially offset by a decrease of $2,890 (or 6%)
in residential real estate loans. The Bank's newly opened business development
office in Norwalk, coupled with loan demand in the lower Fairfield County
market, led to the overall 6% increase in the loan portfolio.

         Securities increased to $45,128 at December 31, 2001 from $33,127 at
December 31, 2000, an increase of $12,001 (or 36%), resulting from the Company's
redeployment of excess liquidity (available funds in excess of loan demand).
Even after investing in securities, the Company's cash and cash equivalents
increased by $12,629 (or 108%) in 2001, to $24,299 at December 31, 2001 from
$11,670 a year earlier. Securities held to maturity increased to $35,349 (or
78% of total securities) at December 31, 2001 from $14,645 (or 44%) a year
earlier. Securities available for sale decreased to $9,779 (or 22% of total
securities) at December 31, 2001 from $18,482 (or 56%) at December 31, 2000.
The overall portfolio continues to be comprised mostly of U.S. Government
Agency securities with maturities and repricing of less than five years. The
shift in portfolio mix in 2001 from securities available for sale to securities
held to maturity reflected the increase in cash and cash equivalents and the
resulting reduced need to possibly sell securities for liquidity
purposes.

         Deposits increased to $154,473 at December 31, 2001 from $123,952 at
December 31, 2000, an increase of $30,521 (or 25%). Demand deposits increased
to $33,673 at December 31, 2001 from $29,919 at December 31, 2000, an increase
of $3,754 (or 13%). Money market demand and NOW accounts increased to $35,493
at December 31, 2001 from $25,894 at December 31, 2000, an increase of $9,599
(or 37%). Time deposits increased to $55,483 at December 31, 2001 from $41,375
at December 31, 2000, an increase of $14,108 (or 34%). Regular, club and money
market savings increased to $29,824 at December 31, 2001 from $26,764 at
December 31, 2000, an increase of $3,060 (or 11%). The largest dollar increase
in time deposits occurred in 12-17 month certificates of deposit ("CD's") which
increased by $6,236 (or 31%), followed by 60 month CD's which increased by
$3,268 (or 65%) and 24-30 month CD's which increased by $2,309 (or 92%). The
34% overall increase in time deposits reflects the competitive rates offered by
the Bank during the first six months of 2001, as well as national economic
uncertainty, particularly in the equity markets, which prompted customers to
seek bank deposits as an alternative to investing in the equity markets.

         Total borrowings decreased to $8,041 at December 31, 2001 from $8,562
at December 31, 2000, a decrease of $521. Increased deposits were used to repay
$2,000 in borrowings from the FHLB during the first half of 2001, with no
additional FHLB borrowings needed during the year. Borrowings under securities
repurchase agreements increased by $1,479 in 2001, to $8,041 at December 31,
2001, from $6,562 a year earlier.

         Stockholders' equity increased to $17,941 at December 31, 2001 from
$16,584 at December 31, 2000, a net increase of $1,357 (or 8%). The net
increase primarily reflects net income of $1,500 for the year, an increase of
$167 from the change in after-tax net unrealized gains and losses on securities
available for sale and $138 for shares issued in connection with the Dividend
Reinvestment Plan, partially offset by $470 in cash dividends declared. The
ratio of stockholders' equity to total assets declined to 9.9% at December 31,
2001, from 11% a year earlier, primarily reflecting the 21% increase in total
assets during 2001. Book value per common share increased to $16.66 at December
31, 2001, compared to $15.56 at December 31, 2000, as growth in shareholders'
equity outpaced the increase in the number of common shares
outstanding.

                                OPERATING RESULTS
                (dollars in thousands, except per share amounts)

GENERAL

                                      -17-

<PAGE>

         The Company's results of operations depend primarily on its net
interest income, which is the difference between the interest income on earning
assets, such as loans and securities, and the interest expense paid on deposits
and borrowings. Results of operations are also affected by non-interest income
and expense, the provision for loan losses and income tax expense. Non-interest
income consists primarily of banking service fees and charges, but may also
include gains and losses on sales of securities available for sale. The
Company's non-interest expense consists primarily of salaries and employee
benefits, occupancy and equipment expenses, data processing expenses, and
professional fees. Results of operations are also significantly affected by
general economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities.

ACCOUNTING POLICIES

         The Company's significant accounting policies are summarized in Note 1
to the Consolidated Financial Statements, including the allowance for loan
losses which management deems to be an accounting policy that is critical to the
Company's financial results. This policy is critical due to the high degree of
judgement involved, the subjectivity of the assumptions utilized, and the
potential for changes in the necessary allowance as a result of changing
conditions and future events. While management uses the best available
information to determine the allowance for loan losses, future adjustments to
the allowance may be necessary based on a variety of factors, including changes
in economic and real estate market conditions, particularly in Southwestern
Fairfield County, Connecticut.

NET INCOME

         Net income was $1,500 for 2001 compared to $1,783 for 2000, a decrease
of $283 or 16%. Basic earnings per common share was $1.40 for 2001 compared to
$1.65 for 2000 based on weighted average shares outstanding of approximately
1,072,000 and 1,081,000, respectively. Diluted earnings per common share was
$1.36 for 2001 compared to $1.62 for 2000 based on weighted average shares of
approximately 1,103,000 and 1,098,000, respectively. Return on average
stockholders' equity was 8.63% and 11.28% for 2001 and 2000, respectively. The
return on average assets was 0.87% for 2001 and 1.21% for 2000.

         The most significant cause of the lower net income in 2001 was the
increase of $1,142 in non-interest expense resulting primarily from the addition
of new personnel to augment our management team and supplement growth in the
Bank's branch network, and the absorption of expenses related to the Bank's
conversion to a new data processor. These higher expenses were partially offset
by decreases of $293 in the provision for loan losses and $195 in income tax
expense, as well as increases of $276 in non-interest income and $95 in net
interest income.

NET INTEREST INCOME

         Net interest income was $7,869 for 2001 compared to $7,774 for 2000, an
increase of $95 (or 1%). An increase of $1,030 in net interest income due to
growth in the volume of average interest earning assets and interest bearing
liabilities was substantially offset by a decrease of $935 in net interest
income due to a narrower net interest margin. Total average interest earning
assets increased by $23,452 (or 17%) to $160,615 in 2001 from $137,163 in 2000.
Included in the total increase in average interest earning assets was an
increase of $19,987 in comparatively low-yielding federal funds. At the same
time, higher-cost time deposits represented $9,117 of the total $17,524 increase
in average interest bearing liabilities in 2001 compared to 2000.

         The average yield on interest earning assets decreased 101 basis points
to 7.29% in 2001 from 8.30% in 2000. The eleven decreases in the prime rate
during 2001, totaling 4.75%, directly impacted yields on the Company's variable
rate loans tied to the prime rate, as well as on the Company's federal funds
sold. To a lesser extent, yields

                                      -18-

<PAGE>

on other maturing interest earning assets declined in 2001 as a result of the
general decline in the level of market interest rates. The average cost of
interest bearing liabilities decreased by a comparatively smaller 34 basis
points to 3.22% in 2001 from 3.56% in 2000 due to the fixed rate nature of a
large portion of the deposit base and the time lag between changes in market
interest rates and time deposit repricings at maturity. This resulted in an
interest rate spread of 4.07% in 2001, down 67 basis points from 4.74% in 2000.
The interest rate spread is the yield rate on interest earning assets minus the
rate paid on interest bearing liabilities, while the net interest margin
represents the net yield on earning assets (net interest income as a percent of
total interest earning assets). The net interest margin decreased by 77 basis
points to 4.90% in 2001 from 5.67% in 2000 for the reasons stated above.

         The following table sets forth average balance sheet amounts for 2001
and 2000, together with the average yield on interest earning assets and the
average cost of interest bearing liabilities for the periods. Yields and costs
were derived by dividing interest income or expense by the average daily balance
of assets or liabilities, respectively. Non-accrual loans were included in the
computation of average balances, but have been reflected in the table as loans
carrying a zero yield. The yield rates include the effect of deferred loan fees
and costs, and securities discounts and premiums, which are included in interest
income. Average balances of securities are based on amortized cost.

<TABLE>
<CAPTION>
                                               2001                             2000
                                  -----------------------------  ---------------------------------
                                   Average              Yield/    Average                   Yield/
                                   Balance   Interest    Cost     Balance     Interest       Cost
                                  --------   --------    ----     -------     --------       ----
                                                      (dollars in thousands)

<S>                               <C>        <C>         <C>      <C>           <C>          <C>
Assets
 Interest earning assets:
 Loans                            $ 103,209  $  9,039     8.76%   $  92,056     $ 8,669      9.42%
 Securities                          31,852     1,727     5.42       39,440       2,371      6.01
 Federal funds sold                  25,554       936     3.66        5,667         352      6.21
                                  ---------  --------     ----    ---------     -------      ----
 Total interest earning assets      160,615    11,702     7.29      137,163      11,392      8.30
                                             --------     ----                  -------      ----

 Non-interest earning assets:
 Cash and due from banks              8,351                           6,069
 Premises and equipment               2,739                           2,830
 Other assets                         2,963                           2,879
 Allowance for loan losses           (1,832)                         (1,793)
                                  ---------                        --------
Total assets                      $ 172,836                        $147,148
                                  =========                        ========

Liabilities and Stockholders'
Equity:
 Interest bearing liabilities:
 NOW accounts                     $  23,994   $   193     0.81%     $18,442       $ 216      1.17%
 Money market accounts                7,080       117     1.65        4,084          89      2.18
 Regular, club, cash management       6,400       115     1.80        5,918         133      2.25
 Preferred rate savings              21,868       503     2.30       20,615         569      2.76
 Time deposits                       51,918     2,761     5.32       42,801       2,219      5.18
 Repurchase agreements                7,721       138     1.78        5,734         132      2.31
 FHLB advances                           73         6     8.30        3,935         259      6.58
 Other                                   25        --     1.16           26           1      2.16
                                    -------    ------     ----      -------       -----      ----
 Total interest bearing
   liabilities                      119,079     3,833     3.22%     101,555       3,618      3.56%
                                    -------    ------     ----      -------      ------      ----

 Non-interest bearing liabilities:
</TABLE>

                                      -19-

<PAGE>

<TABLE>
<S>                                  <C>                 <C>     <C>           <C>           <C>
Demand deposits                      35,339                         28,875
Other                                 1,034                            917
                                    -------                         ------
Total non-interest bearing
  liabilities                        36,373                         29,792
                                   --------                         ------

Stockholders'  equity                17,384                         15,801
                                   --------                         ------

Total Liabilities & Stockholders'
  Equity                           $172,836                       $147,148
                                   ========                       ========

Net interest income                                      $7,869                $ 7,774
                                                         ======                =======

Interest rate spread                                     4.07%                               4.74%
                                                         =====                               =====

Net interest margin                                      4.90%                               5.67%
                                                         =====                               =====

Ratio of average interest earning
  assets to average interest bearing
  liabilities                        134.88%                        135.06%
                                     =======                        =======
</TABLE>

         The following table sets forth the dollar amount of changes in interest
income, interest expense and net interest income for 2001 compared to 2000.
Information is provided for each category of interest earning assets and
interest bearing liabilities, with respect to (i) changes attributable to rate
(i.e., changes in rate multiplied by prior-period balances) and (ii) changes
attributable to changes in volume (i.e., changes in balances multiplied by the
prior-period rate). Changes attributable to both rate and volume, which cannot
be segregated, have been allocated proportionately to the change due to volume
and the change due to rate, based on the relative dollar amounts of the volume
and rate changes.

                                      Increase (Decrease) Due To
                                      --------------------------
                                Rate             Volume             Total
                                ----             ------             -----
                                             (in thousands)
Interest Income:
Loans                           $  (633)         $1,003           $   370
Securities                         (218)           (426)             (644)
Federal funds sold                 (198)            782               584
                                --------         ------           -------
Total interest earning assets   $(1,049)         $1,359           $   310
                                ========         ======           =======

Interest Expense:
NOW accounts                    $   (77)         $   54           $   (23)
Money market accounts               (26)             54                28
Regular, club, cash management      (28)             10               (18)
Preferred rate savings              (99)             33               (66)
Time deposits                        59             483               542
Repurchase agreements               (34)             40                 6
FHLB advances                        92            (345)             (253)
Other                                (1)             --                (1)
                                --------         ------           -------
Total interest bearing
liabilities                     $  (114)         $  329           $   215
                                ========         ======           =======

Change in Net Interest Income   $  (935)         $1,030           $    95
                                ========         ======           =======

INTEREST INCOME

         Average interest earning assets for 2001 were $160,615 compared to
$137,163 for 2000, an increase of

                                      -20-

<PAGE>

$23,452 (or 17%). Total interest income, which is a function of the volume of
interest earning assets and their related rates, was $11,702 in 2001 and $11,392
in 2000, representing an increase of  $310 (or 3%).

         Loans represent the largest component of interest earning assets.
Average loans outstanding in 2001 were $103,209 compared to $92,056 in 2000, a
12% increase. The Bank's newly opened business development office in Norwalk,
coupled with loan demand in the lower Fairfield County market, led to a 6%
increase in the year-end loan portfolio. Interest on loans was $9,039 in 2001
compared to $8,669 in 2000, a 4% increase. The average yield on loans decreased
to 8.76% in 2001 as compared to 9.42% in 2000, primarily reflecting the effect
on the Company's variable rate loans of the 475 basis point decrease in the
prime rate during 2001.

         Average investments in securities and Federal funds sold totaled
$57,406 for 2001 compared to $45,107 for  2000, an increase of $12,299 (or 27%).
Average securities decreased by $7,588 (or 19%) in 2001, and average Federal
funds sold increased by $19,887 (or 351%). Related income decreased to a total
of $2,663 for 2001 from $2,723 for 2000, a net decrease of $60 (or 2%),
consisting of a $644 decrease in income on securities less a $584 increase in
income on federal funds. The decreased income on securities resulted primarily
from the decline in average balances, as proceeds from sales, maturities and
calls were reinvested in cash equivalents (primarily federal funds). In
addition, the average yield on securities decreased to 5.42% in 2001 from 6.01%
in 2000, and the average rate earned on Federal funds sold decreased to 3.66%
for 2001 compared to 6.21% for 2000, primarily reflecting lower market interest
rates.

INTEREST EXPENSE

         Interest expense was $3,833 for 2001 compared to $3,618 for 2000, a 6%
increase. Interest expense is a function of interest bearing liabilities and
their related rates. Average interest bearing liabilities were $119,079 in 2001
compared to $101,555 in 2000, an increase of $17,524 (or 17%).

         The growth in average interest bearing liabilities in 2001 compared to
2000 was primarily due to growth in time deposits, which increased $9,117, and
NOW and money market accounts, which increased by a combined $8,548. The 34%
overall increase in time deposits reflects the competitive rates offered by the
Bank during the first six months of 2001, as well as national economic
uncertainty, which prompted customers to seek bank deposits as an alternative to
investing in the equity markets.

         The average cost of total interest bearing deposits decreased by a
comparatively small 34 basis points, to 3.22% in 2001 from 3.56% in 2000.
Approximately 59% of the increase in time deposits occurred in the first quarter
of 2001 prior to the later reductions in market interest rates, thus resulting
in an overall higher cost for the year.

PROVISION FOR LOAN LOSSES

         The periodic provision for loan losses represents the amount necessary
to adjust the allowance for loan losses to management's estimate of probable
credit losses inherent in the existing loan portfolio at the reporting date.
Management's determination of the allowance for loan losses is based on the
results of continuing reviews of individual loans and borrower relationships,
particularly in the commercial and commercial real estate loan portfolios. A
review of the quality of the loan portfolio is conducted internally by
management on a quarterly basis, using a consistently-applied methodology, and
the results are presented to the Board of Directors for approval. The
evaluation covers individual borrowers whose aggregate loans are greater than
$100, as well as all adversely-classified loans. Management also considers
factors such as the borrower's financial condition, historical and expected
ability to make loan payments, and underlying collateral values. The
determination of the allowance for loan losses also considers the level of past
due loans, the Bank's historical loan loss experience, changes in loan portfolio
mix, geographic and borrower concentrations, and current economic conditions.
The allowance for loan losses is also adjusted for charge-offs and recoveries.

                                      -21-

<PAGE>

         The allowance for loan losses was $1,848 at December 31, 2001 and
$1,589 at December 31, 2000, and the provision for loan losses was $91 and $384
for the years then ended. The allowance for loan losses represented 1.72% and
1.58% of total loans at December 31, 2001 and 2000, respectively. As a
percentage of total non-performing loans, the allowance decreased to 131% at
December 31, 2001 from 241% at December 31, 2000. The lower provision for loan
losses in 2001 primarily reflects a decrease of $293 in net loan charge-offs to
$91 in 2001 from $384 in 2000. Recoveries in 2001 include a recovery of $90 with
respect to a consumer loan that had been charged off in November 1990. A
recovery of $149 was received on a nonresidential real estate loan that had been
charged off in December 1997, of which $81 was a recovery of previously charged
off principal and $68 was a recovery of interest payments that had been applied
against principal and was subsequently applied to income. Charge-offs in 2000
included $460 for a commercial loan due to the borrower's bankruptcy filing.

         While management uses the best available information to determine the
allowance for loan losses, future adjustments to the allowance may be necessary
based on changes in economic and real estate market conditions, particularly in
the Bank's service area of Southwestern Fairfield County, Connecticut. In
addition, regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize adjustments to the allowance based on their
judgments of information available at the time of their examination.

NON-INTEREST INCOME

         Total non-interest income was $945 for 2001, compared to $669 for 2000,
an increase of $276 or 41%. In order to fund increased loan demand, the Bank
sold $5,000 of securities available for sale in the third quarter of 2000. The
loss on sale was $136. Excluding the effect of this loss, the increase in
non-interest income in 2001 was $140, principally from growth in deposit and
other banking service charges and fees.

NON-INTEREST EXPENSE

         Total non-interest expenses were $6,253 for 2001 and $5,111 for 2000,
an increase of $1,142, or 22%. The following table summarizes the dollar amounts
for each category of non-interest expense, and the dollar and percent changes in
2001 compared to 2000.
<TABLE>
<CAPTION>
                                                                    Increase (Decrease)
                                                                      2001 vs. 2001
                                                                      --------------
                                 2001              2000               $            %
                                 ----              ----               -            --
                                              (dollars in thousands)
<S>                             <C>               <C>              <C>             <C>
Salaries and employee benefits  $3,273            $2,639           $  634          24%
Occupancy                          640               582               58          10
Furniture and equipment            409               408                1          --
Data processing                    603               378              225          60
Professional fees                  289               258               31          12
Advertising and promotion          113               146              (33)        (23)
Other                              926               700              226          32
                                ------            ------           ------          --

Total non-interest expense      $6,253            $5,111           $1,142          22%
                                ======            ======           ======          ==
</TABLE>

         The increase in salaries and employee benefits was due to the addition
of new personnel to augment our management team and supplement growth in the
Bank's branch network, as well as salary increases and bonuses. The increase in
occupancy expenses primarily reflects rent expense, real estate taxes,
depreciation as well as other occupancy expenses associated with the Norwalk
business development office and Westport branch which opened in 2001. The
increase in data processing expense is primarily related to increased data
processing fees and expenses due to the conversion of the Bank's core data
processing system in May 2001, as well as increased fees associated with the
outsourcing of items processing in April 2001. The increase in other
non-interest expense is primarily related to travel-related expenses associated
with the data processing conversion, increased donations and other external
fees.

                                      -22-

<PAGE>

         The following is an analysis of the major categories of non-interest
expense as a percentage of total operating income (interest income plus
non-interest income):

                                        2001      2000
                                        ----      ----

Salaries and employee benefits         25.88%     21.88%
Occupancy                               5.06       4.83
Furniture and equipment                 3.23       3.38
Data processing                         4.77       3.13
Professional fees                       2.28       2.14
Advertising and promotion               0.89       1.21
Other                                   7.33       5.80
                                       -----      -----
Total non-interest expense             49.44%     42.37%
                                       =====      =====

                     LIQUIDITY AND INTEREST RATE SENSITIVITY
                               (dollars in thousands)

         The objective of the Company's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses the
Company's ability to meet deposit withdrawals on demand or at contractual
maturity, to repay borrowings as they mature, and to fund new loans and
investments as opportunities arise. The Company's liquidity sources described
below are anticipated to be sufficient to fund deposit withdrawals, loan
commitments and other obligations existing as of December 31, 2001.

         At December 31, 2001, short term investments totaled $27,936 (federal
funds sold plus all available for sale securities plus the fair value of held to
maturity securities maturing in three months or less). Primary liquidity is
measured by the ratio of net cash and short term investments to deposits and
short term liabilities. The Bank's primary liquidity ratio at December 31, 2001
was 15.55%, compared to 14.78% at December 31, 2000. The Bank also calculates a
secondary liquidity ratio which contemplates the maturity of held to maturity
securities beyond three months. The Bank's secondary liquidity ratio at December
31, 2001 was 37.09%, compared to 32.62% at December 31, 2000. The Bank's
internal guideline is to maintain a secondary liquidity ratio of at least 20%.

         The Company's funding at December 31, 2001 consisted of deposit
liabilities and short-term borrowings. The Company had no long-term debt or
other contractual cash obligations at December 31, 2001, other than the
comparatively minor payments due under operating leases as described in Note 9
to the Consolidated Financial Statements. The Company's commercial commitments
at December 31, 2001 are limited to outstanding loan commitments under unused
lines of credit of $15,317 and outstanding letters of credit of $1,595. A
substantial portion of these amounts expire within three years or less.

         If the Bank requires funds beyond its internal funding capabilities,
advances are available from the FHLB of Boston. At December 31, 2001, the
Bank's available FHLB borrowing capacity in the form of advances and a
short-term line of credit was $9,314. At December 31, 2001, certificates of
deposit scheduled to mature within one year totaled $34,490. The Bank's
experience has been that a majority of its maturing certificate of deposit
accounts are renewed.

         As reported in the Consolidated Statements of Cash Flows, the Company's
cash flows are classified as operating, investing, or financing. The $861
decrease in net cash provided by operating activities in 2001, compared to 2000,
was primarily due to higher non-interest expenses, partially offset by higher
operating income (net interest income plus non-interest income), a reduction in
the provision for loan losses, the absence of any loss on sales of securities
available for sale and a smaller increase in other liabilities. Net cash used in
investing activities increased by $7,635 in 2001 compared to 2000, primarily due
to the purchases of held to maturity securities and no

                                      -23-

<PAGE>

sales of securities, partially offset by higher net cash inflows from the
maturity/call of securities and lower disbursements for loan originations. Net
cash provided by financing activities increased by $21,383 in 2001 primarily
due to the stronger deposit growth, partially offset by a reduction in funds
from borrowings. Cash and cash equivalents increased by $12,629 during 2001 to
$24,299.

         The following table sets forth (i) the maturity or repricing
distribution of interest earning assets and interest bearing liabilities as of
December 31, 2001, (ii) the interest rate sensitivity gap (i.e.,
interest-sensitive assets less interest-sensitive liabilities), (iii) the
cumulative interest rate sensitivity gap, (iv) the ratio of cumulative total
interest earning assets to cumulative total interest bearing liabilities, and
(iv) the cumulative interest rate sensitivity gap ratio. For purposes of the
table, an asset or liability is considered rate sensitive within a specified
period when it matures or could be repriced within such period in accordance
with its contractual terms. Debt securities are placed in maturity periods
based upon their projected call date, where applicable. Adjustable rate loans
are included based on the period to next repricing date, while principal
payments on fixed rate loans are factored into monthly maturity data or at
final maturity. Based on management's evaluation of the interest rate
sensitivity of regular savings, preferred rate savings, NOW and money market
demand accounts, substantially all of the balances at December 31, 2001 have
been included in the column for liabilities repricing within 6 months.

<TABLE>
<CAPTION>
                                                               Interest Rate Sensitivity
                                        -----------------------------------------------------------
                                        Within 6       6 Months-       1-5       Over 5
                                         Months         1 Year        Years      Years       Total
                                        --------       --------      ------     ------       -----
                                                              (dollars in thousands)
<S>                                     <C>            <C>         <C>         <C>          <C>
Interest earning assets:
Federal funds sold and securities       $ 19,542       $  2,048    $  38,346   $  1,257     $61,193
Loans /(1)/:
 Adjustable rate                          41,652           --            --         --       41,652
 Fixed rate                                5,461          1,399       29,881     28,270      65,011
                                        --------       --------    ---------   --------    --------

  Total interest earning assets           66,655          3,447       68,227     29,527     167,856
                                        --------       --------    ---------   --------    --------

Interest bearing liabilities:
Money market demand and
  NOW accounts                            35,493             --         --           --      35,493
Regular, club and preferred
  rate savings accounts                   29,750             74         --           --      29,824
Time accounts                             21,413         13,077       20,993         --      55,483
                                        --------       --------    ---------   --------    --------
  Total interest bearing deposits         86,656         13,151       20,993         --     120,800

Repurchase agreements                      8,041            --           --          --       8,041
                                        --------       --------    ---------   --------    --------

  Total interest bearing liabilities      94,697         13,151       20,993         --     128,841
                                        --------       --------    ---------   --------    --------

Total interest earning assets
less interest bearing liabilities
for the period                          $(28,042)      $ (9,704)   $  47,234   $ 29,527    $ 39,015
                                        ========       ========    =========   ========    ========

Cumulative total
interest earning assets less
interest bearing liabilities            $(28,042)      $(37,746)   $   9,488   $ 39,015
                                        =========      =========   =========   ========

Cumulative total interest earning
assets less interest bearing
liabilities, as a percentage of
total interest earning assets            (16.64%)       (22.40%)      5.63%      23.15%
                                         ========       ========      ======     ======
</TABLE>

/(1)/ Excludes loans on non-accrual status and overdrafts.

         The tabular presentation of the Company's interest sensitivity
position indicates that for the period up to one year following December 31,
2001, the cumulative amount of interest bearing liabilities expected to reprice
is greater than the cumulative amount of interest earning assets expected to
reprice. Accordingly, the Company may experience an increase in its net
interest margin if interest rates were to decline during this period, and a
decrease in net interest margin if interest rates were to increase. From one
through five years, more interest earning assets are expected to reprice than
interest bearing liabilities; therefore, the Company would experience an
increase in its net interest margin

                                      -24-

<PAGE>

in a rising rate environment and a decrease in its net interest margin in a
declining rate environment.

         The tabular presentation only illustrates the repricing of interest
earning assets and interest bearing liabilities at a point in time, and is not
indicative of when and how the interest earning assets and interest bearing
liabilities would actually reprice.

                                CAPITAL RESOURCES

         At December 31, 2001 and 2000, the Bank's leverage capital ratio was
9.6% and 11.1%, respectively. At December 31, 2001 and 2000, the Bank's Tier 1
risk-based capital ratio was 14.7% and 15.4%, respectively, and its total-risk
based capital ratio was 16.0% and 16.6%, respectively. These ratios exceeded
the stated minimum regulatory requirements for capital adequacy and for
classification as a "well-capitalized" institution. The Bancorp's consolidated
capital ratios at December 31, 2001 were substantially the same as the Bank's
ratios.

         During 2001, a total of $470,000 in quarterly cash dividends were
declared. The Board of Directors increased the quarterly dividend from $0.10
per share to $0.11125 per share commencing with the dividend payable July 13,
2001.

         In December 1999, the Company's Board of Directors approved a stock
repurchase plan pursuant to which up to 100,000 common shares may be
repurchased from time to time, in open market and/or privately-negotiated
transactions. A total of 76,415 shares were repurchased in 2000, at a total
cost of $880,000 or an average of $11.52 per share. There were no share
repurchases in 2001. Although no share repurchases are presently anticipated
for 2002, management continually re-evaluates the desirability of making
additional share repurchases given fluctuating stock market conditions and the
availability of funds.

                    IMPACT OF INFLATION AND CHANGING PRICES

         The Consolidated Financial Statements and related Notes have been
prepared in conformity with accounting principles generally accepted in the
United State of America, which generally require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Company's operations. Unlike industrial companies, nearly all the assets and
liabilities of the Company are financial. As a result, the Company's net income
is directly impacted by changes in interest rates, which are influenced by
inflationary expectations. Changes in interest rates do not necessarily move to
the same extent as changes in prices of goods and services. The Company's
ability to match the interest sensitivity of its financial assets to the
interest sensitivity of its financial liabilities as part of its interest rate
risk management program may reduce the effect which changes in interest rates
have on net income. Liquidity and maturity structure of the Company's assets
and liabilities are critical to the maintenance of acceptable levels of net
income and there is no assurance the Company will be successful in doing so.

ITEM 7.  FINANCIAL STATEMENTS
         --------------------

         The Consolidated Statements of Condition of Cornerstone Bancorp, Inc.
and subsidiary as of December 31, 2001 and 2000, and the related Consolidated
Statements of Income, Stockholders' Equity, and Cash Flows for the

                                      -25-

<PAGE>

years then ended, together with the related notes and the report of KPMG LLP,
independent auditors, are included herein on pages F-1 through F-25.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         ---------------------------------------------------------------
         FINANCIAL DISCLOSURE
         --------------------

   There have been no changes in or disagreements with accountants required to
be reported herein.


                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         -------------------------------------------------------------
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
         -------------------------------------------------

         Information regarding the Bancorp's directors is incorporated by
reference herein to the Bancorp's Proxy Statement for its Annual Meeting of
Shareholders to be held on May 15, 2002 (the "2002 Proxy Statement").
Information regarding the Bancorp's executive officers is included as Item 1A
in Part I of this Form 10-KSB.


ITEM 10. EXECUTIVE COMPENSATION
         ----------------------

       Information regarding the compensation of the Bancorp's executive
officers is incorporated by reference herein to the 2002 Proxy Statement.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
         --------------------------------------------------------------

       Information regarding the beneficial ownership of the Bancorp's common
stock by certain persons is incorporated by reference herein to the 2002 Proxy
Statement.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
         ----------------------------------------------

       Information regarding certain transactions involving the Bancorp is
incorporated by reference herein to the 2002 Proxy Statement.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
         --------------------------------

(a) Exhibits

Exhibit No.     Description
-----------     -----------

2.1             Agreement and Plan of Reorganization dated as of August 19,
                1998 between Cornerstone Bank and Cornerstone Bancorp, Inc.
                (Exhibit 2.1 to Form 8-K12G3 dated March 1, 1999, File No.
                0-25465 ("Form 8-K12G3")) /(1)/

3.1             Certificate of Incorporation of Cornerstone Bancorp, Inc.
                (Exhibit 4.1 to Form 8-K12G3) /(1)/

3.2             Bylaws of Cornerstone Bancorp, Inc. (Exhibit 4.2 to Form
                8-K12G3) /(1)/

4.1             Form of Specimen Common Stock Certificate of Cornerstone
                Bancorp, Inc. (Exhibit 4.3 to Form 8-

                                      -26-

<PAGE>

                K12G3)/(1)/

10.1            Lease agreement dated as of January 19, 1989 between First
                National Bank of Stamford and Joseph F. Calve Family Trust
                (Exhibit 2 to Cornerstone Bank's Registration Statement on
                Form F-1 filed with the FDIC) /(1)/

10.2            Lease agreement dated as of May 16, 1995 between Cornerstone
                Bank and Mill Pond Company (Exhibit 3(ii) to Cornerstone
                Bank's Form F-2 for the year ended December 31, 1994 filed
                with the FDIC) /(1)/

10.3            Lease agreement dated as of November 29, 1996 between
                Cornerstone Bank and John P. Rossi (Exhibit 3(vii) to
                Cornerstone Bank's Form F-2 for the year ended December 31, 1996
                filed with the FDIC) /(1)/

10.4            Lease agreement dated as of December 22, 1998 between
                Cornerstone Bank and Ralph Sandolo (Exhibit 10.4 to
                Cornerstone Bancorp, Inc.'s Form 10-KSB for the year ended
                December 31, 1998) /(1)/

10.5            Cornerstone Bancorp, Inc. 1986 Incentive and Non-Qualified Stock
                Option Plan (Exhibit 99.1 to Registration Statement on Form
                S-8 Registration No. 333-73129)("Form S-8") /(1)/

10.6            Cornerstone Bancorp, Inc. 1996 Stock Plan (Exhibit 99.1 to
                Registration statement on Form S-8 Registration No. 333-67298)
                /(1)/

10.7            Cornerstone Bancorp, Inc. Director Compensation Plan (Exhibit
                99.3 to Form S-8) /(1)/

10.7.1          Cornerstone Bancorp, Inc. 2001 Restricted Stock Plan (Exhibit
                99.1 to Registration Statement on Form S-8 Registration No.
                333-67302) /(1)/

10.8            Employment agreement dated as of May 17, 2001 between
                Cornerstone Bank and Norman H. Reader (Exhibit 10.8 to
                Cornerstone Bancorp, Inc.'s Form 10-KSB for the year ended
                December 31, 1998) /(2)/

10.9            Employment agreement dated as of May 17, 2001 between
                Cornerstone Bank and James P. Jakubek (Exhibit 10.9 to
                Cornerstone Bancorp, Inc.'s Form 10-KSB for the year ended
                December 31, 1998) /(2)/

10.10           Employment agreement dated as of November 27, 2000 between
                Cornerstone Bancorp, Inc. and Merrill J. Forgotson /(1)/

10.11           Employment agreement dated as of May 17, 2001 between
                Cornerstone Bank and Paul H. Reader /(2)/

10.12           Lease agreement dated as of June 28, 1994 between Cornerstone
                Bank and Samuel Lotstein Realty (Exhibit 2 to Cornerstone
                Bank's Registration Statement on Form F-1 filed with the FDIC
                and amendment to original lease agreement dated November 24,
                1999) /(1)/

10.13           Lease agreement dated as of November 24, 1999 amending original
                lease agreement dated as of June 28, 1994 between Cornerstone
                Bank and the Samuel Lotstein Realty Company (Exhibit 11.0 to
                Cornerstone Bancorp, Inc.'s Form 10-KSB for the year ended
                December 31, 1999) /(1)/

10.14           Lease agreement dated as of February 28, 2001 between
                Cornerstone Bancorp, Inc/Cornerstone Bank

                                      -27-

<PAGE>

                and Fyber Properties 128 LLC /(2)/

10.15           Lease agreement dated as of June 6, 2001 between Cornerstone
                Bancorp, Inc. and Gesa B. Vogt /(2)/

21.1            Subsidiaries of Cornerstone Bancorp, Inc. /(2)/

23.1            Consent of KPMG LLP /(2)/

/(1)/ Incorporated by reference from referenced filing.
/(2)/ Filed herewith.

(b) Reports on Form 8-K
   No reports on Form 8-K were filed during the fourth quarter of 2001.

                                   SIGNATURES

   Pursuant to the Requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Bancorp has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                            CORNERSTONE BANCORP, INC.

Date:          March 20, 2002         By: /s/ Merrill J. Forgotson
               --------------             --------------------------------------
                                          Merrill J. Forgotson
                                          President and Chief Executive Officer

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

<TABLE>
<CAPTION>
    Signature                            Title                               Date
<S>                                <C>                                    <C>
/s/ Melvin L. Maisel               Chairman of the Board                  March 20, 2002
--------------------------                                                --------------
Melvin L. Maisel

/s/ Norman H. Reader                                                      March 20, 2002
--------------------------         Director and                           --------------
Norman H. Reader                   Vice Chairman

/s/ Merrill J. Forgotson                                                  March 20, 2002
--------------------------         Director, President and                --------------
Merrill J. Forgotson               Chief Executive Officer

/s/ James P. Jakubek                                                      March 20, 2002
-------------------------          Director, Executive-                   --------------
James P. Jakubek                   Vice President

/s/ Paul H. Reader                                                        March 20, 2002
--------------------------         Director, Senior                       --------------
Paul H. Reader                     Vice President

/s/ Ernest J. Verrico, Sr.                                                March 20, 2002
--------------------------         Vice President, Chief Financial        --------------
Ernest J. Verrico                  Officer
                                   (Principal Financial Officer and
                                   Principal Accounting Officer)
</TABLE>


                                      -28-

<PAGE>

<TABLE>
<CAPTION>
  Signature                         Title                                    Date
<S>                                <C>                                    <C>
/s/ Joseph Field                   Director                               March 20, 2002
--------------------------                                                --------------
Joseph Field

/s/ J. James Gordon                Director                               March 20, 2002
--------------------------                                                --------------
J. James Gordon

/s/ Stanley A. Levine              Director                               March 20, 2002
--------------------------                                                --------------
Stanley A. Levine

/s/ Joseph A. Maida                Director                               March 20, 2002
--------------------------                                                --------------
Joseph A. Maida

/s/ Ronald C. Miller               Director                               March 20, 2002
--------------------------                                                --------------
Ronald C. Miller

/s/ Courtney A. Nelthropp          Director                               March 20, 2002
--------------------------                                                --------------
Courtney A. Nelthropp

/s/ Martin Prince                  Director                               March 20, 2002
--------------------------                                                --------------
Martin Prince

/s/ Donald Sappern                 Director                               March 20, 2002
--------------------------                                                --------------
Donald Sappern

/s/ Patrick Tisano                 Director                               March 20, 2002
--------------------------                                                --------------
Patrick Tisano

/s/ Joseph D. Waxberg, M.D.        Director                               March 20, 2002
--------------------------                                                --------------
Joseph D. Waxberg, M.D.
</TABLE>

                                      -29-

<PAGE>

                           CORNERSTONE BANCORP, INC.

                           Consolidated Financial Statements as of
                           December 31, 2001 and 2000, and for
                           the Years Then Ended, With
                           Independent Auditors' Report

<PAGE>

                           CORNERSTONE BANCORP, INC.
                                 AND SUBSIDIARY

                        Consolidated Financial Statements

                                TABLE OF CONTENTS

                                                                         PAGE

INDEPENDENT AUDITORS' REPORT                                              F-1

CONSOLIDATED FINANCIAL STATEMENTS:

    Consolidated Statements of Condition as of December 31,
       2001 and 2000                                                      F-2

    Consolidated Statements of Income for the Years Ended December 31,
       2001 and 2000                                                      F-3

    Consolidated Statements of Stockholders' Equity for the Years
       Ended December 31, 2001 and 2000                                   F-4

    Consolidated Statements of Cash Flows for the Years Ended
       December 31, 2001 and 2000                                         F-5

    Notes to Consolidated Financial Statements                       F-6 to F-25

                                     F

<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Cornerstone Bancorp, Inc.:

We have audited the consolidated statements of condition of Cornerstone Bancorp,
Inc. and subsidiary (the "Company") as of December 31, 2001 and 2000, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years then ended. 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 Cornerstone Bancorp,
Inc. and subsidiary as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.

January 25, 2002

                                     F-1

<PAGE>

                             CORNERSTONE BANCORP, INC.
                                  AND SUBSIDIARY

                       Consolidated Statements of Condition

                            December 31, 2001 and 2000
                   (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                       Assets                                              2001           2000
                                                                     ------------      -----------
<S>                                                                 <C>               <C>
Cash and cash equivalents:
   Cash and due from banks (note 2)                                  $      8,700       $   8,854
   Federal funds sold                                                      15,599           2,816
                                                                       ------------     -----------
         Total cash and cash equivalents                                   24,299          11,670
                                                                       -----------      -----------

Securities, including collateral of $8,101 in 2001 and $6,583 in 2000
   for borrowings under securities repurchase agreements (note 3):
   Available for sale, at fair value                                        9,779          18,482
   Held to maturity, at amortized cost (fair value of $35,957 in 2001
      and $14,570 in 2000)                                                 35,349          14,645
                                                                     ------------      -----------
         Total securities                                                  45,128          33,127
                                                                     ------------      -----------
Loans, net of allowance for loan losses of $1,848 in 2001
   and $1,589 in 2000 (note 4)                                            105,539          99,205
Accrued interest receivable                                                 1,075           1,124
Federal Home Loan Bank stock, at cost                                         466             419
Premises and equipment, net (note 5)                                        2,915           2,699
Deferred income taxes (note 8)                                                710             828
Other assets                                                                1,385           1,051
                                                                     ------------      -----------
         Total assets                                                $    181,517       $ 150,123
                                                                     ============      ===========
                       Liabilities and Stockholders' Equity
Liabilities:
   Deposits:
      Demand (non-interest bearing)                                  $     33,673       $  29,919
      Money market demand and NOW                                          35,493          25,894
      Regular, club and money market savings                               29,824          26,764
      Time (note 6)                                                        55,483          41,375
                                                                     ------------      -----------
         Total deposits                                                   154,473         123,952
   Borrowings under securities repurchase agreements and
      Federal Home Loan Bank advances (note 7)                              8,041           8,562
   Accrued interest payable                                                   164             143
   Other liabilities                                                          898             882
                                                                     ------------      -----------
         Total liabilities                                                163,576         133,539
                                                                     ------------      -----------
Commitments and contingencies (note 9)
Stockholders' equity (notes 10 and 12):
   Common stock, par value $0.01 per share; authorized
      5,000,000 shares; issued 1,153,135 shares in 2001
      and 1,142,159 shares in 2000                                             12              11
   Additional paid-in capital                                              11,816          11,657
   Retained earnings                                                        6,848           5,818
   Treasury stock, at cost (76,415 shares)                                   (880)           (880)
   Accumulated other comprehensive income (loss), net of taxes (note 11)      145             (22)
                                                                     ------------      -----------
          Total stockholders' equity                                       17,941          16,584
                                                                     ------------      -----------
          Total liabilities and stockholders' equity                 $    181,517       $ 150,123
                                                                     ============       ==========
</TABLE>

See accompanying notes to consolidated financial statements.

                                     F-2

<PAGE>

                             CORNERSTONE BANCORP, INC.
                                  AND SUBSIDIARY

                         Consolidated Statements of Income

                      Years Ended December 31, 2001 and 2000
                   (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                         2001              2000
                                                                   ------------      -------------
<S>                                                                <C>               <C>
Interest income:
   Loans                                                           $     9,039         $     8,669
   Securities                                                            1,727               2,371
   Federal funds sold                                                      936                 352
                                                                   ------------      -------------
         Total interest income                                          11,702              11,392
                                                                   ------------      -------------
Interest expense:
   Deposits                                                              3,689               3,226
   Borrowings under securities repurchase agreements and
      Federal Home Loan Bank advances (note 7)                             144                 392
                                                                   ------------      -------------
         Total interest expense                                          3,833               3,618
                                                                   ------------      -------------
Net interest income                                                      7,869               7,774
Provision for loan losses (note 4)                                          91                 384
                                                                   ------------      -------------
Net interest income after provision for loan losses                      7,778               7,390
                                                                   ------------      -------------
Non-interest income:
   Deposit service charges                                                 498                 447
   Loss on sales of securities available for sale (note 3)                   -                (136)
   Other                                                                   447                 358
                                                                   ------------      -------------
         Total non-interest income                                         945                 669
                                                                   ------------      -------------
Non-interest expense:
   Salaries and employee benefits                                        3,273               2,639
   Occupancy                                                               640                 582
   Furniture and equipment                                                 409                 408
   Data processing                                                         603                 378
   Professional fees                                                       289                 258
   Advertising and promotion                                               113                 146
   Other                                                                   926                 700
                                                                   ------------      -------------
         Total non-interest expense                                      6,253               5,111
                                                                   ------------      -------------
Income before income tax expense                                         2,470               2,948
Income tax expense (note 8)                                                970               1,165
                                                                   ------------      -------------
Net income                                                         $     1,500         $     1,783
                                                                   ============      ==============
Earnings per common share (note 13):
   Basic                                                           $      1.40         $      1.65
   Diluted                                                                1.36                1.62
                                                                   ============      ==============
</TABLE>

See accompanying notes to consolidated financial statements.

                                     F-3

<PAGE>

                            CORNERSTONE BANCORP, INC.
                                 AND SUBSIDIARY

                Consolidated Statements of Stockholders' Equity

                     Years Ended December 31, 2001 and 2000
                  (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                   Common Stock
                                             -------------------------
                                                  Number                  Additional
                                                 of shares                  paid-in      Retained    Treasury
                                                outstanding    Amount       capital      earnings      stock
                                             ---------------  --------  -------------  -----------  ----------
<S>                                               <C>        <C>       <C>            <C>          <C>
Balances at December 31, 1999                     1,129,599  $     11  $      11,510  $     4,452  $        -

Comprehensive income:
   Net income                                            --        --             --        1,783          --
   Other comprehensive income (note 11)                  --        --             --           --          --
   Total comprehensive income

Cash dividends declared ($0.39 per share)                --        --             --         (417)         --
Purchases of treasury stock                         (76,415)       --             --           --        (880)
Shares issued under:
   Dividend Reinvestment Plan                        11,045        --            128           --          --
   Directors Compensation Plan                        1,515        --             19           --          --
                                             ---------------  --------  -------------  -----------  ----------

Balances at December 31, 2000                     1,065,744        11         11,657        5,818        (880)

Comprehensive income:
   Net income                                            --        --             --        1,500          --
   Other comprehensive income (note 11)                  --        --             --           --          --
   Total comprehensive income

Cash dividends declared ($0.4375 per share)              --        --             --         (470)         --
Shares issued under:
   Dividend Reinvestment Plan                         9,529         1            137           --          --
   Directors Compensation Plan                        1,447        --             22           --          --
                                             ---------------  --------  -------------  -----------  ----------

Balances at December 31, 2001                     1,076,720  $     12  $      11,816  $     6,848  $     (880)
                                             ===============  ========  =============  ===========  ==========

<CAPTION>
                                               Accumulated
                                                  other            Total
                                              comprehensive    stockholders'
                                              income (loss)        equity
                                             ---------------  ---------------
<S>                                         <C>              <C>
Balances at December 31, 1999               $          (397) $        15,576

Comprehensive income:
   Net income                                            --            1,783
   Other comprehensive income (note 11)                 375              375
                                                              ---------------
   Total comprehensive income                                          2,158

Cash dividends declared ($0.39 per share)                --             (417)
Purchases of treasury stock                              --             (880)
Shares issued under:
   Dividend Reinvestment Plan                            --              128
   Directors Compensation Plan                           --               19
                                             ---------------  ---------------

Balances at December 31, 2000                           (22)          16,584

Comprehensive income:
   Net income                                            --            1,500
   Other comprehensive income (note 11)                 167              167
                                                              ---------------
   Total comprehensive income                                          1,667

Cash dividends declared ($0.4375 per share)              --             (470)
Shares issued under:
   Dividend Reinvestment Plan                            --              138
   Directors Compensation Plan                           --               22
                                             ---------------  ---------------

Balances at December 31, 2001               $           145  $        19,608
                                             ===============  ===============
</TABLE>

See accompanying notes to consolidated financial statements.

                                     F-4

<PAGE>

                            CORNERSTONE BANCORP, INC.
                                 AND SUBSIDIARY

                      Consolidated Statements of Cash Flows

                    Years Ended December 31, 2001 and 2000
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                         2001       2000
                                                                      ---------  ---------
<S>                                                                  <C>        <C>
Cash flows from operating activities:
   Net income                                                        $   1,500  $   1,783
   Adjustments to reconcile net income to net cash
      provided by operating activities:
         Depreciation and amortization                                     345        376
         Provision for loan losses                                          91        384
         Loss on sales of securities available for sale                     --        136
         Deferred income tax expense (benefit)                              10       (128)
         (Increase) decrease in accrued interest receivable                 49        (27)
         Increase in other assets                                         (268)      (211)
         Increase in accrued interest payable                               21          8
         Increase in other liabilities                                      16        236
         Other adjustments, net                                            (15)        53
                                                                      ---------  ---------
             Net cash provided by operating activities                   1,749      2,610
                                                                      ---------  ---------

Cash flows from investing activities:
   Proceeds from maturities of securities available for sale            12,013      2,498
   Proceeds from maturities of securities held to maturity              10,171      3,138
   Proceeds from sales of securities available for sale                     --      4,864
   Purchases of securities available for sale                           (3,039)        --
   Purchases of securities held to maturity                            (30,957)        --
   Disbursements for loan originations, net                             (6,383)   (21,583)
   Purchase of Federal Home Loan Bank stock                                (47)        --
   Purchases of premises and equipment, net                               (561)       (85)
                                                                      ---------  ---------
             Net cash used in investing activities                     (18,803)   (11,168)
                                                                      ---------  ---------

Cash flows from financing activities:
   Net increase in deposits                                             30,521      4,670
   Net increase (decrease) in short-term borrowings under securities
      repurchase agreements and Federal Home Loan Bank advances           (521)     4,794
   Purchases of treasury stock                                              --       (880)
   Dividends paid on common stock                                         (455)      (412)
   Proceeds from issuance of common stock under the
      Dividend Reinvestment Plan                                           138        128
                                                                      ---------  ---------
             Net cash provided by financing activities                  29,683      8,300
                                                                      ---------  ---------

Net increase (decrease) in cash and cash equivalents                    12,629       (258)

Cash and cash equivalents at beginning of year                          11,670     11,928
                                                                      ---------  ---------
Cash and cash equivalents at end of year                             $  24,299  $  11,670
                                                                      =========  =========
Supplemental information:
   Interest payments                                                 $   3,812  $   3,610
   Income tax payments                                                     934      1,295
                                                                      =========  =========
</TABLE>

See accompanying notes to consolidated financial statements.

                                     F-5

<PAGE>

                           CORNERSTONE BANCORP, INC.
                                AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                          December 31, 2001 and 2000

(1)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       Cornerstone Bancorp, Inc. (the "Bancorp") is a bank holding company
       formed by Cornerstone Bank (the "Bank") for the purpose of owning all of
       the Bank's outstanding common stock. On March 1, 1999, each share of the
       Bank's common stock was exchanged on a one-for-one basis for the
       Bancorp's common stock. The Bank is a state-chartered commercial bank
       that provides a variety of loan and deposit services to individuals and
       businesses primarily in Southwestern Fairfield County, Connecticut. The
       Bank is subject to regulations of the Federal Deposit Insurance
       Corporation (the "FDIC") and the State of Connecticut Department of
       Banking, and undergoes periodic examinations by those regulatory
       agencies. The Bancorp is subject to regulation and supervision by the
       Federal Reserve Board (the "FRB"). The Bank's deposit accounts are
       insured up to applicable limits by the Bank Insurance Fund of the FDIC.

       BASIS OF FINANCIAL STATEMENT PRESENTATION

       The consolidated financial statements include the accounts of the
       Bancorp, the Bank, and Cornerstone Business Credit, Inc. (a wholly-owned
       subsidiary of the Bank which commenced small business lending operations
       in 2001) (collectively, the "Company"). Management has prepared these
       consolidated financial statements in conformity with accounting
       principles generally accepted in the United States of America. All
       significant intercompany balances and transactions have been eliminated
       in consolidation.

       In preparing the consolidated financial statements, management is
       required to make estimates and assumptions that affect the reported
       amounts of assets, liabilities, revenues and expenses. Actual results
       could differ significantly from those estimates, as a result of changing
       conditions and future events. An estimate that is particularly critical
       and susceptible to significant near-term change is the allowance for
       loan losses, which is discussed below.

       For purposes of the consolidated statements of cash flows, cash
       equivalents represent federal funds which are generally sold on an
       overnight basis. Prior year amounts are reclassified, whenever
       necessary, to conform to the current year presentation.

       SECURITIES

       Securities are classified as either available for sale (representing
       securities that may be sold in the ordinary course of business) or as
       held to maturity (representing debt securities for which the Company has
       the ability and positive intent to hold until maturity). Management
       determines the classification of securities at the time of purchase.
       Securities held to maturity are reported at amortized cost. Securities
       available for sale are reported at fair value, with unrealized gains and
       losses reported on a net-of-tax basis in stockholders' equity as
       accumulated other comprehensive income or loss. Securities are not
       acquired for trading purposes.

       Gains and losses realized on sales of securities are determined using
       the specific identification method. Premiums and discounts on debt
       securities are amortized to interest income over the term of the
       security. Unrealized losses on securities are charged to earnings if
       management determines that the decline in fair value of a security is
       other than temporary.

                                     F-6

<PAGE>

                           CORNERSTONE BANCORP, INC.
                                AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                          December 31, 2001 and 2000

       As a member of the Federal Home Loan Bank ("FHLB") of Boston, the Bank
       is required to hold a certain amount of FHLB stock. This stock is a
       non-marketable equity security and, accordingly, is reported at cost.

       LOANS

       Loans are reported at unpaid principal balances less the allowance for
       loan losses, except for loans held for sale which are reported at the
       lower of cost or estimated market value in the aggregate. Interest
       income is accrued based on contractual rates applied to principal
       amounts outstanding. Loan origination and commitment fees, and certain
       direct origination costs, are deferred and amortized to interest income
       over the life of the related loan.

       Loans past due 90 days or more as to principal or interest are placed on
       non-accrual status except for certain loans which, in management's
       judgment, are adequately secured and probable of collection. When a loan
       is placed on non-accrual status, previously accrued interest that has
       not been collected is reversed from current interest income. Thereafter,
       the application of principal or interest payments received on
       non-accrual loans is dependent on the expectation of ultimate repayment
       of the loan. If ultimate repayment is reasonably assured, payments are
       applied to principal and interest in accordance with the contractual
       terms. If ultimate repayment is not reasonably assured or management
       judges it to be prudent, any payments received are applied to principal
       until ultimate repayment is reasonably assured. Loans are returned to
       accrual status when they demonstrate a period of payment performance and
       are expected to be fully collectible as to principal and interest.

       ALLOWANCE FOR LOAN LOSSES

       The allowance for loan losses represents management's estimate of
       probable credit losses inherent in the existing loan portfolio. The
       allowance is adjusted by periodic provisions for loan losses, and by
       charge-offs and recoveries. When amounts on specific loans are judged by
       management to be uncollectible, those amounts are charged-off to reduce
       the allowance for loan losses. Subsequent recoveries of earlier
       charge-offs are restored to the allowance when received.

       Management's determination of the allowance for loan losses is based on
       the results of continuing reviews of individual loans and borrower
       relationships, particularly the larger relationships included in the
       commercial and commercial real estate loan portfolios. These reviews
       consider factors such as the borrower's financial condition, historical
       and expected ability to make loan payments, and underlying collateral
       values. Management's determination of the allowance for loan losses also
       considers the level of past due and non-performing loans, the Company's
       historical loan loss experience, changes in loan portfolio mix,
       geographic and borrower concentrations, and current economic conditions.
       While management uses the best available information to determine the
       allowance for loan losses, future adjustments to the allowance may be
       necessary based on changes in economic and real estate market
       conditions, particularly in the Company's market area of Southwestern
       Fairfield County, Connecticut. In addition, 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 of information available to them at the time of their
       examination.

                                     F-7

<PAGE>

                           CORNERSTONE BANCORP, INC.
                                AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                          December 31, 2001 and 2000

       Statement of Financial Accounting Standards ("SFAS") No. 114, Accounting
       by Creditors for Impairment of a Loan, requires recognition of an
       impairment loss on a loan within its scope when it is probable that the
       lender will be unable to collect principal and/or interest payments in
       accordance with the terms of the loan agreement. SFAS No. 114 does not
       apply to large groups of smaller-balance homogeneous loans (such as
       residential mortgage and consumer loans) that are collectively evaluated
       for impairment in accordance with SFAS No. 5, Accounting for
       Contingencies. Measurement of impairment under SFAS No. 114 may be based
       on the present value of expected future cash flows discounted at the
       loan's effective interest rate or, as a practical expedient, based on
       the loan's observable market price or the collateral's fair value if the
       loan is collateral dependent. If the measure of an impaired loan is less
       than its recorded amount, an impairment allowance is established as part
       of the allowance for loan losses.

       PREMISES AND EQUIPMENT

       Premises and equipment are reported at cost, less accumulated
       depreciation and amortization. Owned assets are depreciated using the
       straight-line method over the estimated useful lives of the assets
       (three to twenty years for equipment and thirty-five years for
       buildings). Leasehold improvements are amortized over the shorter of
       their estimated service lives or the term of the lease.

       INCOME TAXES

       Deferred tax assets and liabilities are recognized for the estimated
       future tax effects attributable to "temporary differences" between the
       financial statement carrying amounts of existing assets and liabilities
       and their respective tax bases. Deferred tax assets and liabilities are
       measured using enacted tax rates expected to apply to future taxable
       income. The effect on deferred tax assets and liabilities of an enacted
       change in tax rates is recognized in income tax expense in the period
       that includes the enactment date of the change.

       A deferred tax liability is recognized for all temporary differences
       that will result in future taxable income. A deferred tax asset is
       recognized for all temporary differences that will result in future tax
       deductions, subject to reduction of the asset by a valuation allowance
       in certain circumstances. This valuation allowance is recognized if,
       based on an analysis of available evidence, management determines that
       it is more likely than not that a portion or all of the deferred tax
       asset will not be realized. The valuation allowance is subject to
       ongoing adjustments based on changes in circumstances that affect
       management's judgment about the realizability of the deferred tax asset.
       Adjustments to increase or decrease the valuation allowance are charged
       or credited, respectively, to income tax expense.

                                     F-8

<PAGE>

                           CORNERSTONE BANCORP, INC.
                                AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                          December 31, 2001 and 2000

       EARNINGS PER SHARE

       Basic earnings per share ("EPS") excludes dilution and is computed by
       dividing income available to common shareholders (net income less
       dividends on preferred stock, if any) by the weighted average number of
       common shares outstanding during the period. Diluted EPS reflects the
       potential dilution that could occur if securities or other contracts to
       issue common stock (such as stock options) were exercised or converted
       into common stock that then shared in the earnings of the entity.
       Diluted EPS is computed by dividing net income by the weighted average
       number of common shares outstanding for the period, plus an incremental
       number of common-equivalent shares computed using the treasury stock
       method.

       STOCK-BASED COMPENSATION

       The Company accounts for stock-based compensation in accordance with
       Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
       Issued to Employees, and related interpretations. Accordingly,
       compensation expense is not recognized for fixed stock options if the
       exercise price of the option equals the fair value of the underlying
       stock at the grant date. SFAS No. 123, Accounting for Stock-Based
       Compensation, encourages entities to use a fair-value-based method of
       accounting for employee stock compensation plans. However, SFAS No. 123
       permits entities to continue to measure compensation costs for these
       plans using the intrinsic-value-based method of accounting prescribed by
       APB Opinion No. 25. An entity that follows APB Opinion No. 25 must
       provide pro forma disclosures of net income and earnings per share, as
       if it had applied the fair-value-based method of SFAS No. 123.

       SECURITIES REPURCHASE AGREEMENTS

       The Company enters into transactions with certain of its commercial
       customers in which it sells U.S. Government Agency securities under an
       agreement to repurchase the identical securities from the customer at a
       later date. These transactions are accounted for as secured borrowings
       since the Company maintains effective control over the underlying
       securities which are pledged as collateral. The transaction proceeds are
       recorded as borrowings in the consolidated statements of condition, and
       the collateral securities continue to be carried as assets of the
       Company.

       SEGMENT INFORMATION

       Public companies are required to report certain financial information
       about significant revenue-producing segments of the business for which
       such information is available and utilized by the chief operating
       decision maker. As a community-oriented financial institution,
       substantially all of the Company's operations involve the delivery of
       loan and deposit services to customers. Management makes operating
       decisions and assesses performance based on an ongoing review of these
       community banking operations, which constitute the Company's only
       operating segment for financial reporting purposes.

                                     F-9

<PAGE>

                           CORNERSTONE BANCORP, INC.
                                AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                           December 31, 2001 and 2000

(2)    CASH RESERVE REQUIREMENTS

       The Bank is required to maintain average reserve balances under the
       Federal Reserve Act and Regulation D issued thereunder. These reserves
       were $2,368,000 and $558,000 at December 31, 2001 and 2000, respectively,
       and are included in cash and due from banks in the consolidated
       statements of condition.

(3)    SECURITIES

       The amortized cost, gross unrealized gains and losses, and fair values of
       securities are summarized as follows:

<TABLE>
<CAPTION>
                                                                Gross           Gross
                                              Amortized      unrealized       unrealized     Fair
                                                 cost           gains           losses       value
                                             ------------   ------------    -------------- ----------
                                                                  (In thousands)
<S>                                          <C>            <C>             <C>            <C>
December 31, 2001
-----------------

Available for sale:
    U.S. Government Agency securities        $     9,541    $        242    $         (4)  $   9,779
                                             ============   =============   ============== ==========

Held to maturity:
    U.S. Government Agency securities        $    35,274    $        608    $         --   $  35,882
    Other securities                                  75              --              --          75
                                             ------------   -------------   -------------  ----------

    Total                                    $    35,349    $        608    $         --   $  35,957
                                             ============   =============   =============  ==========

December 31, 2000
-----------------

Available for sale:
    U.S. Government Agency securities        $    18,519    $         36   $         (73)  $  18,482
                                             ============   =============  ==============  ==========

Held to maturity:
    U.S. Government Agency securities        $    14,570    $          3   $         (78)  $  14,495
    Other securities                                  75              --              --          75
                                             ------------   -------------  --------------  ----------

    Total                                    $    14,645    $          3   $         (78)  $  14,570
                                             ============   =============  ==============  ==========
</TABLE>

                                     F-10

<PAGE>

                           CORNERSTONE BANCORP, INC.
                                AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                           December 31, 2001 and 2000

       The following is a summary of the amortized cost and fair value of debt
       securities at December 31, 2001, by remaining period to contractual
       maturity. Actual maturities may differ from contractual maturities
       because certain issuers have the right to call or prepay obligations with
       or without penalties.

<TABLE>
<CAPTION>
                                                      Held to maturity                  Available for sale
                                               -------------------------------    --------------------------------
                                                 Amortized           Fair           Amortized            Fair
                                                   cost              value             cost              value
                                               --------------     ------------    ---------------     ------------
                                                                          (In thousands)
<S>                                        <C>                <C>              <C>

One year or less                             $      3,048       $     3,066      $     1,501        $     1,538
Over one year, less than five years                22,384            22,818            8,040              8,241
Five years or more                                  9,917            10,073               --                 --
                                               --------------     ------------    ---------------     ------------

Total                                        $     35,349       $    35,957      $     9,541        $     9,779
                                               ==============     ============    ===============     ============
</TABLE>

       Gross realized losses on sales of securities available for sale were
       $136,000 in 2000 (none in 2001).

       In addition to securities pledged as collateral for the repurchase
       agreement borrowings described in note 7, securities with a fair value of
       $1,018,000 and $1,496,000 were pledged for other purposes at December 31,
       2001 and 2000, respectively.

(4)    LOANS AND CONCENTRATION OF CREDIT RISK

       Most of the Company's loans are granted to customers who reside or do
       business in Southwestern Fairfield County, Connecticut. In addition to
       this geographic concentration, loans collateralized by real estate or
       granted to customers in real estate related industries were approximately
       $93,000,000 and $88,000,000 at December 31, 2001 and 2000, respectively.
       While collateral provides assurance as a secondary source of repayment,
       the Company's underwriting standards require that a borrower's present
       and expected cash flows be adequate to service the debt at loan
       origination.

       The loan portfolio consisted of the following at December 31:

<TABLE>
<CAPTION>
                                                      2001                 2000
                                                ---------------      ---------------
                                                         (In thousands)
<S>                                         <C>                <C>

Loans secured by real estate:
     Residential                              $       42,740     $      45,630
     Non-residential                                  44,593            39,754
     Construction                                      5,479             2,375
Commercial loans                                      12,157            10,711
Consumer and other loans                               2,368             2,316
                                               ---------------    ---------------
Total principal balances                             107,337           100,786

Allowance for loan losses                             (1,848)           (1,589)
Deferred loan costs, net                                  50                 8
                                               ---------------    ---------------

Total loans, net                              $      105,539     $      99,205
                                               ===============    ===============
</TABLE>

                                     F-11

<PAGE>

                           CORNERSTONE BANCORP, INC.
                                AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                           December 31, 2001 and 2000

       Commercial loans at December 31, 2001 include Small Business
       Administration loans of $1,248,000, which are held for sale. The
       estimated market value of these loans exceeded their cost basis and,
       accordingly, a lower-of-cost-or-market adjustment was not required at
       December 31, 2001.

       The following is a summary of changes in the allowance for loan losses
       for the years ended December 31:

                                                2001                 2000
                                           ---------------      ------------
                                                      (In thousands)

Balance at beginning of year             $         1,589   $        1,626
Provision for loan losses                             91              384
Loan charge-offs                                     (25)            (480)
Recoveries of prior charge-offs                      193               59
                                           ---------------   ---------------

Balance at end of year                   $         1,848   $        1,589
                                           ===============      ============

       The following is an analysis of the recorded investment in impaired
       loans under SFAS No. 114 at December 31:

<TABLE>
<CAPTION>
                                                              2001                2000
                                                         ---------------   ----------------
                                                                   (In thousands)
<S>                                                    <C>               <C>

Total loans past due 90 days or more                   $         1,106   $          456
Less loans on  accrual  status  (adequately
    secured and probable of collection)                           (904)              (1)
                                                         ---------------   ----------------
Non-accrual loans past due 90 days or more                         202              455
Loans current or past due less than 90 days
    for which interest payments are being
    applied to reduce principal /(1)/                              308              207
                                                         ---------------   ----------------

Total recorded investment in impaired loans            $           510   $          662
                                                         ===============   ================
</TABLE>

/(1)/  The recorded investments in these impaired loans have been
       reduced by cumulative interest payments of $30,000 and $98,000
       at December 31, 2001 and 2000, respectively.

       The Company's impaired loans at December 31, 2001 and 2000 were real
       estate secured loans with collateral values in excess of the recorded
       investments. Accordingly, allowances for impairment losses were not
       required under SFAS No. 114. The Company's average recorded investment in
       impaired loans was $474,000 in 2001 and $1,026,000 in 2000.

       Interest contractually due during the respective years on loans
       considered impaired at December 31 totaled $65,000 in 2001 and $100,000
       in 2000. The portion of the 2001 and 2000 amounts actually collected was
       $50,000 and $87,000, respectively, most of which was applied to reduce
       principal balances. No interest income was recorded on impaired loans in
       2001 and 2000 while such loans were considered to be impaired.

                                     F-12

<PAGE>

                            CORNERSTONE BANCORP, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                            December 31,2001 and 2000

(5)    PREMISES AND EQUIPMENT

       Premises and equipment are summarized as follows at December 31:

                                               2001                2000
                                           --------------     ----------------
                                                     (In thousands)

Land                                   $             695  $            695
Buildings and improvements                         1,979             1,959
Furniture and equipment                            2,816             2,653
Vehicles                                             196               174
                                           --------------     ----------------
Total                                              5,686             5,481

Less accumulated depreciation and
    amortization                                   2,771             2,782
                                           --------------     ----------------

Premises and equipment, net            $           2,915  $          2,699
                                           ==============     ================

(6)    TIME DEPOSITS

       The following is a summary of time deposits by remaining period to
       contractual maturity at December 31:

                                               2001                2000
                                           --------------     ----------------
                                                     (In thousands)

90 days or less                        $        12,122    $          9,984
91 to 180 days                                   9,291               6,472
181 days to one year                            13,077              11,176
                                           --------------     ----------------
Total one year or less                          34,490              27,632

Over one year, less than two years               7,917               4,882
Over two years, less than three years            4,458               4,149
Over three years, less than four years           4,592               1,665
Over four years, less than five years            4,026               3,047
                                           --------------     ----------------

Total time deposits                    $        55,483    $         41,375
                                           ==============     ================

       Time deposits of $100,000 or more aggregated $12,122,000 and $9,773,000
       at December 31, 2001 and 2000, respectively.

                                     F-13

<PAGE>

                            CORNERSTONE BANCORP, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                            December 31,2001 and 2000

(7)    BORROWINGS UNDER SECURITIES REPURCHASE AGREEMENTS AND FEDERAL HOME LOAN
       BANK ADVANCES

       Information concerning borrowings under securities repurchase agreements
       follows as of and for the years ended December 31:

                                                          2001          2000
                                                       ---------     ---------
                                                        (Dollars in thousands)

Repurchase agreement borrowings:
   At year end                                     $     8,041     $     6,562
   Average for the year                                  7,753           5,734
   Maximum outstanding at any month end                  9,086           7,172
Fair value of collateral securities at year end          8,101           6,583
Weighted average interest rates on borrowings:
   At year end                                            1.34%           2.03%
   Average for the year                                   1.78            2.30

       The repurchase agreement borrowings at December 31, 2001 mature within
       three months. Interest expense on securities repurchase agreements was
       $138,000 in 2001 and $132,000 in 2000.

       As a member of the FHLB of Boston, the Bank may borrow funds subject to
       certain limitations. Borrowings are secured by the Bank's investment in
       FHLB stock and a blanket security agreement that requires maintenance of
       specified levels of qualifying collateral (principally securities and
       residential mortgage loans) not otherwise pledged. The Bank's FHLB
       borrowing capacity in the form of advances and borrowings under a
       short-term line of credit was $9,314,000 at December 31, 2001. FHLB
       advances of $2,000,000 were outstanding at December 31, 2000 (none at
       December 31, 2001). Interest expense on FHLB advances was $6,000 in 2001
       and $259,000 in 2000.

(8)    INCOME TAXES

       The components of income tax expense are as follows for the years ended
       December 31:

                                          2001                2000
                                      --------------     ----------------
                                                (In thousands)

Federal:
   Current                            $       770        $      1,071
   Deferred                                     9                (112)
                                      --------------     ----------------
                                              779                 959
                                      --------------     ----------------
State:
   Current                                    190                 222
   Deferred                                     1                 (16)
                                      --------------     ----------------
                                              191                 206
                                      --------------     ----------------

Total income tax expense              $       970        $      1,165
                                      ==============     ================

                                     F-14

<PAGE>

                            CORNERSTONE BANCORP, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                            December 31,2001 and 2000

       The following is a reconciliation of income taxes computed using the
       federal statutory rate of 34% to the actual income tax expense for the
       years ended December 31:

                                                        2001             2000
                                                    -----------     ------------
                                                           (In thousands)

Income tax at federal statutory rate            $        840    $        1,002
State income tax, net of federal tax benefit             126               136
Other                                                      4                27
                                                    -----------     ------------

Actual income tax expense                       $        970    $        1,165
                                                    ===========     ============

       The tax effects of temporary differences that give rise to deferred tax
       assets and liabilities are as follows at December 31:

                                                     2001             2000
                                                ------------     ------------
                                                        (In thousands)

Deferred tax assets:
   Allowance for loan losses                $       579      $       543
   Interest on non-accrual loans                    227              211
   Net unrealized loss on securities
      available for sale                             --               15
   Other deductible temporary differences            60               79

                                                ------------    ------------
                                                    866              848
                                                ------------    ------------

Deferred tax liabilities:
   Net unrealized gain on securities
      available for sale                             93               --
   Other taxable temporary differences               63               20
                                                ------------    ------------
                                                    156               20
                                                ------------    ------------

Net deferred tax assets                       $     710      $       828
                                                ============    ============

       Based on the Company's historical and anticipated future pre-tax
       earnings, management believes that it is more likely than not that the
       Company's deferred tax assets will be realized.

(9)    COMMITMENTS AND CONTINGENCIES

       FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

       The Company is a party to lending-related financial instruments that
       involve, to varying degrees, elements of credit risk and interest rate
       risk in addition to the risks associated with loan amounts recognized in
       the consolidated statements of condition. At December 31, 2001 and 2000,
       outstanding loan commitments under unused lines of credit were
       $15,317,000 and $16,617,000, respectively, and outstanding letters of
       credit were $1,595,000 and $97,000, respectively. Unused lines of credit
       are legally binding agreements to lend a customer as long as there is no
       violation of any condition

                                     F-15

<PAGE>

                            CORNERSTONE BANCORP, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 2001 and 2000

       established in the contract. Lines of credit generally have fixed
       expiration dates or other termination clauses. The amount of collateral
       obtained, if deemed necessary by the Company, is based on management's
       credit evaluation of the borrower.

       Although the foregoing contractual amounts represent the Company's
       maximum potential exposure to credit loss, they do not necessarily
       represent future cash requirements since certain of these instruments
       may expire without being funded and others may not be fully drawn upon.
       Substantially all of these commitments and letters of credit have been
       provided to customers within the Company's primary lending area
       described in note 4.

       LEASE COMMITMENTS

       The Company was obligated under various operating leases for office space
       at December 31, 2001. The leases include various renewal options and
       require the Company to pay applicable costs for utilities, maintenance,
       insurance and real estate taxes. Rent expense under these operating
       leases was $325,000 in 2001 and $281,000 in 2000. At December 31, 2001,
       the future minimum rental payments under operating leases, excluding
       renewal option periods, were $336,000 for 2002; $320,000 for 2003;
       $290,000 for 2004; $208,000 for 2005; and $66,000 for 2006.

       LEGAL PROCEEDINGS

       In the normal course of business, the Company is involved in various
       outstanding legal proceedings. In the opinion of management, after
       consultation with legal counsel, the outcome of such legal proceedings
       should not have a material effect on the Company's financial condition,
       results of operations or liquidity.

(10)   STOCKHOLDERS' EQUITY

       REGULATORY CAPITAL REQUIREMENTS

       The Bank is subject to FDIC regulations that require a minimum leverage
       ratio of Tier I capital to total adjusted assets of 4.0%, and minimum
       ratios of Tier I and total capital to risk-weighted assets of 4.0% and
       8.0%, respectively. The Bancorp's consolidated regulatory capital must
       satisfy similar requirements established by the FRB for bank holding
       companies.

       Under its prompt corrective action regulations, the FDIC is required to
       take certain supervisory actions (and may take additional discretionary
       actions) with respect to an undercapitalized bank. Such actions could
       have a direct material effect on a bank's financial statements. The
       regulations establish a framework for the classification of banks into
       five categories: well capitalized, adequately capitalized,
       undercapitalized, significantly undercapitalized and critically
       undercapitalized. Generally, a bank is considered well capitalized if
       it has a leverage (Tier I) capital ratio of at least 5.0%, a Tier I
       risk-based capital ratio of at least 6.0%, and a total risk-based
       capital ratio of at least 10.0%.

       The foregoing capital ratios are based in part on specific quantitative
       measures of assets, liabilities and certain off-balance-sheet items as
       calculated under regulatory accounting practices. Capital amounts

                                     F-16

<PAGE>

                            CORNERSTONE BANCORP, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 2001 and 2000

       and classifications are also subject to qualitative judgements by the
       regulators about capital components, risk weightings and other factors.

       Management believes that, as of December 31, 2001 and 2000, the Bank and
       the Bancorp met all capital adequacy requirements to which they are
       subject. Further, the most recent FDIC notification categorized the
       Bank as a well-capitalized institution under the prompt corrective
       action regulations. There have been no conditions or events since that
       notification that management believes have changed the Bank's capital
       classification.

       The following is a summary of the Bank's actual capital amounts and
       ratios as of December 31, 2001 and 2000, compared to the FDIC
       requirements for minimum capital adequacy and for classification as a
       well-capitalized institution. The Bancorp's consolidated capital ratios
       at December 31, 2001 and 2000 were substantially the same as the Bank's
       actual ratios set forth below.

<TABLE>
<CAPTION>
                                                                                   FDIC Requirements
                                                                 ------------------------------------------------------
                                                                     Minimum capital              Classification
                                          Bank actual                   adequacy                as well capitalized
                                    -------------------------    ------------------------    --------------------------
                                     Amount         Ratio         Amount         Ratio         Amount         Ratio
                                    ---------     -----------    ----------    ----------    -----------    -----------
                                                                  (Dollars in thousands)
<S>                             <C>                    <C>      <C>                <C>      <C>                     <C>
December 31, 2001
Leverage (Tier I) capital       $    17,673             9.6%    $   7,397           4.0%    $      9,247             5.0%
Risk-based capital:
    Tier I                           17,673            14.7         4,799           4.0            7,198             6.0
    Total                            19,177            16.0         9,598           8.0           11,997            10.0

December 31, 2000
Leverage (Tier I) capital       $    16,531            11.1%    $   5,952           4.0%    $      7,440             5.0%
Risk-based capital:
    Tier I                           16,531            15.4         4,307           4.0            6,460             6.0
    Total                            17,880            16.6         8,614           8.0           10,767            10.0
</TABLE>

       The Bank's actual Tier I capital represents total stockholders' equity,
       excluding the after-tax net unrealized gain or loss on securities
       available for sale. The Bank's actual risk-based capital represents
       Tier I capital plus the allowance for loan losses up to 1.25% of
       risk-weighted assets.

       DIVIDENDS

       The Bancorp's ability to pay dividends to its shareholders is largely
       dependent on the ability of the Bank to pay dividends to the Bancorp.
       Under Connecticut banking law, the Bank is permitted to pay cash
       dividends to the Bancorp in any calendar year only to the extent of any
       net profits of the Bank for that calendar year combined with its
       retained net profits for the preceding two years. The Bank's net
       profits retained in 2001 and 2000 (after cash dividends paid to the
       Bancorp) totaled $1,768,000.

       The Company's Dividend Reinvestment Plan permits shareholders to
       automatically reinvest cash dividends in voluntary purchases of new
       shares of the Company's common stock at the current market price.
       Shareholders can invest up to $5,000 in additional shares each quarter.
       A total of 9,529 and 11,045 additional common shares were issued under
       this plan during 2001 and 2000, respectively.

                                     F-17

<PAGE>

                            CORNERSTONE BANCORP, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 2001 and 2000

       STOCK REPURCHASE PLAN

       In December 1999, the Company's Board of Directors approved a stock
       repurchase plan pursuant to which up to 100,000 common shares may be
       repurchased from time to time in open market and/or privately-negotiated
       transactions. A total of 76,415 treasury shares were repurchased pursuant
       to this plan during 2000, at a total cost of $880,000 or an average of
       $11.52 per share. There were no share repurchases in 2001.

(11)   COMPREHENSIVE INCOME

       Total comprehensive income is reported in the consolidated statements of
       stockholders' equity and represents the sum of net income and items of
       "other comprehensive income or loss." The Company's other comprehensive
       income or loss represents the change during the year in after-tax
       unrealized gains and losses on securities available for sale.
       Components of other comprehensive income are summarized as follows for
       the years ended December 31:

<TABLE>
<CAPTION>
                                                                       2001                2000
                                                                  ---------------     ----------------
                                                                            (In thousands)
<S>                                                           <C>                 <C>
Net unrealized holding gains arising during
     the year on securities available for sale, net
     of taxes of $108 in 2001 and $200 in 2000                $           167     $            294
Reclassification adjustment for realized losses
     included in net income in 2000, net of taxes
      of $55                                                                -                   81
                                                                  ---------------     ----------------

Other comprehensive income, net of taxes of
     $108 in 2001 and $255 in 2000                            $           167     $            375
                                                                  ===============     ================
</TABLE>

       The Company's accumulated other comprehensive income (loss), which is
       included as a separate component of stockholders' equity, represents
       the net unrealized gain (loss) of $238,000 and ($37,000) on securities
       available for sale at December 31, 2001 and 2000, respectively, less
       related deferred income taxes.

(12)   STOCK COMPENSATION PLANS

       STOCK OPTION PLAN

       The Company's 1996 Incentive and Non-Qualified Stock Plan (the "1996
       Plan") provides for the issuance of up to 213,000 shares of the
       Company's common stock, including outstanding stock options that were
       granted under the 1986 Incentive and Non-Qualified Stock Plan (the
       "1986 Plan"). At December 31, 2001, a total of 42,415 options were
       available for future grants under the 1996 Plan.

                                     F-18

<PAGE>

                            CORNERSTONE BANCORP, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 2001 and 2000

       The terms of the 1996 Plan and the 1986 Plan are substantially the same,
       except that the 1996 Plan also provides for grants of options to
       directors and for the issuance of Stock Appreciation Rights ("SARs"). No
       SARs have been granted as of December 31, 2001. Stock options have a
       ten-year term and an exercise price equal to the fair value of the
       Company's common stock on the grant date. Options vest immediately,
       except for options granted to those directors who, on the date of grant,
       have fewer than five years of service as a director of the Company. Such
       options become exercisable beginning on the fifth anniversary of the date
       on which service as a director began.

       Stock option transactions during 2001 and 2000 are summarized as follows:

<TABLE>
<CAPTION>
                                                                           Weighted
                                                   Number of           average exercise
                                                    options                  price
                                                -----------------    ----------------------
<S>                                                    <C>                <C>
Outstanding at December 31, 1999                       139,230            $   12.51
Granted                                                  2,750                12.00
Expired                                                 (1,650)               11.58
                                                -----------------

Outstanding at December 31, 2000                       140,330                12.50
Granted                                                 22,750                14.89
Expired                                                   (495)               14.97
                                                -----------------

Outstanding at December 31, 2001                       162,585            $   12.83
                                                =================
</TABLE>

       Substantially all stock options outstanding at December 31, 2001 and 2000
       were exercisable at those dates. Outstanding options at December 31, 2001
       consisted of 153,235 non-qualified options and 9,350 incentive options
       with weighted average exercise prices of $13.03 and $9.55, respectively.
       The weighted average remaining term of outstanding options was 5.4 years
       at December 31, 2001, with option exercise prices ranging from $9.55 to
       $18.98.

       The Company accounts for its stock options in accordance with APB Opinion
       No. 25 and related interpretations. Accordingly, compensation expense is
       not recognized with respect to fixed stock options that have an exercise
       price equal to the fair value of the Company's stock on the grant date.
       On a per share basis, the weighted average estimated fair values of
       options granted during 2001 and 2000 were $2.09 and $2.05, respectively.
       These fair values were estimated using the Black Scholes option-pricing
       model and the following weighted average assumptions: dividend yield of
       2.8% in both 2001 and 2000; expected volatility rates of 13.9% in 2001
       and 15.0% in 2000; expected option life of six years; and risk-free
       interest rates of 4.3% in 2001 and 5.1% in 2000. Had the fair value of
       stock options granted after the effective date of SFAS No. 123 been
       recognized as compensation expense using the fair-value-based method of
       accounting, the Company's 2001 net income, basic EPS and diluted EPS
       would have been $1,479,000, $1.38 and $1.34, respectively ($1,780,000,
       $1.65 and $1.62, respectively, for 2000).

                                     F-19

<PAGE>

                            CORNERSTONE BANCORP, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 2001 and 2000

       RESTRICTED STOCK PLAN

       An initial grant of 11,450 shares of restricted stock was made in January
       2002 under the terms of the 2001 Restricted Stock Plan. An equal number
       of treasury shares has been appropriated to satisfy the awards on the
       vesting dates. The restricted shares vest 40% in January 2004 and 20% in
       each of January 2005, 2006 and 2007. The grant-date fair value of the
       shares awarded amounted to $183,000 and will be recognized as
       compensation expense on a straight-line basis over the vesting period.

       DIRECTORS COMPENSATION PLAN

       Under the Directors Compensation Plan, non-officer directors are
       compensated for their services in Company common stock or cash, based on
       an annual election made by each qualifying director at the first Board
       meeting subsequent to each annual meeting. Directors who elect to receive
       stock are issued a whole number of shares of stock equal to the amount of
       their compensation divided by the fair value of the Company's common
       stock as of the date of each Board meeting. A total of 1,447 shares and
       1,515 shares were issued to directors under this plan during 2001 and
       2000, respectively.

(13)   EARNINGS PER SHARE

       The following is a summary of the basic and diluted EPS calculations for
       2001 and 2000:

<TABLE>
<CAPTION>
                                                                                              Earnings
                                                   Income /(1)/            Shares             per share
                                                ------------------    -----------------    ----------------
                                                          (In thousands, except per share data)
<S>                                          <C>                                <C>          <C>
2001
Basic EPS                                    $            1,500                 1,072        $   1.40
Effect of dilutive stock options /(2)/                       --                    31
                                                ------------------    -----------------

Diluted EPS                                  $            1,500                 1,103        $   1.36
                                                ==================    =================

2000
Basic EPS                                    $            1,783                 1,081        $   1.65
Effect of dilutive stock options /(2)/                       --                    17
                                                ------------------    -----------------

Diluted EPS                                  $            1,783                 1,098        $   1.62
                                                ==================    =================
</TABLE>

-----------------------------------------
/(1)/ Net income applicable to common stock equaled net income for both
      2001 and 2000.
/(2)/ The effect of dilutive stock options represents the number of
      common-equivalent shares issuable from the assumed exercise of
      stock options, computed using the treasury stock method. An
      average of 39,050 and 55,905 anti-dilutive stock options were
      excluded from the computation of common-equivalent shares in 2001
      and 2000, respectively.

(14)   EMPLOYEE SAVINGS PLAN

       The Company maintains a 401(k) Savings Plan covering substantially all
       employees. The plan provides for matching contributions by the Company
       based on a percentage of employee contributions. Total matching
       contributions by the Company were $64,000 in 2001 and $44,000 in 2000.

                                     F-20

<PAGE>

                            CORNERSTONE BANCORP, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 2001 and 2000

(15)   RELATED PARTY TRANSACTIONS

       Loans made to the Company's officers, employees, directors and their
       associates and affiliated businesses totaled $4,538,000 at December
       31, 2001. During 2001, new loans made directly or indirectly to these
       related parties totaled $740,000 and payments totaled $880,000. These
       loans were made in the ordinary course of business at prevailing
       credit terms (including interest rates, collateral and repayment
       terms), and do not involve more than a normal risk of collection. In
       addition, two related parties hold participation interests totaling
       $45,000 at December 31, 2001 in a commercial loan made by the Company
       in the ordinary course of business. The participation interests carry
       the same credit terms as the portion of the loan held by the Company.

       In the ordinary course of business, the Company also engages in
       transactions with companies in which certain Company directors have a
       business interest. Payments to such companies for commissions,
       services and materials totaled $10,000 in 2001 and $13,000 in 2000.
       Management believes that the amounts paid by the Company are
       reasonable and approximate the amounts that would have been paid to
       independent third parties.

(16)   FAIR VALUE OF FINANCIAL INSTRUMENTS

       SFAS No. 107 requires entities to disclose the fair value of financial
       instruments for which it is practicable to estimate fair value. The
       definition of a financial instrument includes many of the assets and
       liabilities recognized in the Company's consolidated statements of
       condition, as well as certain off-balance sheet items. Fair value is
       defined in SFAS No. 107 as the amount at which a financial instrument
       could be exchanged in a current transaction between willing parties,
       other than in a forced sale or liquidation.

       Quoted market prices are used to estimate fair values when those prices
       are available. However, active markets do not exist for many types of
       financial instruments. Consequently, fair values for these instruments
       must be estimated by management using techniques such as discounted cash
       flow analysis and comparison to similar instruments. Estimates developed
       using these methods are highly subjective and require judgments regarding
       significant matters such as the amount and timing of future cash flows
       and the selection of discount rates that appropriately reflect market and
       credit risks. Changes in these judgments often have a material effect on
       the fair value estimates. Since these estimates are made as of a specific
       point in time, they are susceptible to material near-term changes. Fair
       values disclosed in accordance with SFAS No. 107 do not reflect any
       premium or discount that could result from the sale of a large volume of
       a particular financial instrument, nor do they reflect possible tax
       ramifications or estimated transaction costs.

                                     F-21

<PAGE>

                            CORNERSTONE BANCORP, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 2001 and 2000

       The following is a summary of the carrying amounts and estimated fair
       values of the Company's financial assets and liabilities (none of which
       were held for trading purposes) at December 31:

<TABLE>
<CAPTION>
                                                    2001                                 2000
                                       --------------------------------     --------------------------------
                                          Carrying         Estimated          Carrying          Estimated
                                           amount          fair value          amount          fair value
                                       ---------------    -------------     --------------    --------------
                                                                  (In thousands)
<S>                                    <C>                <C>               <C>               <C>
Financial assets:
  Cash and cash equivalents            $   24,299         $  24,299         $   11,670        $  11,670
  Securities                               45,128            45,736             33,127           33,052
  Loans, net                              105,539           107,530             99,205           99,228
  FHLB stock                                  466               466                419              419
  Accrued interest receivable               1,075             1,075              1,124            1,124
Financial liabilities:
  Deposits without stated
     maturities                            98,990            98,990             82,577           82,577
  Time deposits                            55,483            56,118             41,375           41,642
  Borrowings                                8,041             8,041              8,562            8,562
  Accrued interest payable                    164               164                143              143
                                       ===============    =============     ==============    ==============
</TABLE>

       The following is a description of the valuation methods used by
       management to estimate the fair values of the Company's financial
       instruments:

       SECURITIES

       The fair values of securities were estimated based on quoted market
       prices or dealer quotes, if available. If a quote was not available, fair
       value was estimated using quoted market prices for similar securities.

       LOANS

       The fair values of fixed rate loans were estimated by discounting
       projected cash flows using current rates for similar loans. For loans
       that reprice periodically to market rates, the carrying amount represents
       the estimated fair value.

       DEPOSITS

       The estimated fair values of deposits without stated maturities (such as
       non-interest bearing demand deposits, savings accounts, NOW accounts and
       money market accounts) are equal to the amounts payable on demand. The
       fair values of time certificates of deposit were estimated based on the
       discounted value of contractual cash flows. The discount rates were based
       on rates currently offered for time deposits with similar remaining
       maturities.

                                     F-22

<PAGE>

                            CORNERSTONE BANCORP, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 2001 and 2000

       In accordance with SFAS No. 107, these fair values do not include the
       value of core deposit relationships that comprise a significant portion
       of the Company's deposit base. Management believes that the Company's
       core deposit relationships provide a relatively stable, low-cost funding
       source that has a substantial unrecognized value separate from the
       deposit balances.

       OTHER FINANCIAL INSTRUMENTS

       The remaining financial assets and liabilities listed in the preceding
       table have fair values that approximate the respective carrying amounts
       because they are payable on demand or have short-term maturities and
       present relatively low credit risk and interest rate risk.

       Fair values of the lines of credit and letters of credit described in
       note 9 were estimated based on an analysis of the interest rates and fees
       currently charged by the Company for similar transactions, considering
       the remaining terms of the instruments and the creditworthiness of the
       potential borrowers. At December 31, 2001 and 2000, the fair values of
       these financial instruments approximated the related carrying amounts,
       which were not significant.

(17)   RECENT ACCOUNTING STANDARDS

       In July 2001, the Financial Accounting Standards Board issued SFAS No.
       141, Business Combinations, and SFAS No. 142, Goodwill and Other
       Intangible Assets. Among other things, SFAS No. 141 requires use of the
       purchase method to account for all business combinations initiated after
       June 30, 2001 and specifies criteria that acquired intangible assets must
       meet in order to be recognized and reported separately from goodwill.
       SFAS No. 142 requires that goodwill no longer be amortized to expense,
       but instead be reviewed for impairment, with impairment losses charged to
       expense when they occur. Impairment testing is required at least
       annually, using a two-step approach that involves the estimation of fair
       values. SFAS No. 142 requires that acquisition-related intangible assets
       other than goodwill continue to be amortized to expense over their
       estimated useful lives. The Company has no goodwill or other
       acquisition-related intangible assets at December 31, 2001 and,
       accordingly, the adoption of SFAS No. 142 in the first quarter of 2002 is
       not expected to affect the Company's consolidated financial statements.

                                     F-23

<PAGE>

                            CORNERSTONE BANCORP, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 2001 and 2000

(18)   PARENT COMPANY FINANCIAL INFORMATION

       Set forth below are the Bancorp's condensed statements of condition as of
       December 31, 2001 and 2000, together with the related condensed
       statements of income and cash flows for the years then ended.

<TABLE>
<CAPTION>
                                                                                     2001                  2000
                                                                              -------------------   --------------------
                                                                                           (In thousands)

<S>                                                                       <C>                    <C>
      Condensed Statements of Condition

      Assets:
          Cash                                                            $               152    $              120
          Investment in the Bank                                                       17,819                16,509
          Other                                                                            95                    65
                                                                              -------------------   --------------------

                     Total                                                $            18,066    $           16,694
                                                                              ===================   ====================

      Liabilities and stockholders' equity:
          Liabilities                                                     $               125    $              110
          Stockholders' equity                                                         17,941                16,584
                                                                              -------------------   --------------------

                     Total                                                $            18,066    $           16,694
                                                                              ===================   ====================

      Condensed Statements of Income

      Dividends received from the Bank                                    $               515    $            1,185
      Non-interest expense                                                                190                   115
                                                                              -------------------   --------------------
      Income before income tax benefit and equity in the Bank's
          undistributed earnings                                                          325                 1,070
      Income tax benefit                                                                   75                    45
                                                                              -------------------   --------------------
      Income before equity in the Bank's undistributed earnings                           400                 1,115
      Equity in the Bank's undistributed earnings                                       1,100                   668
                                                                              -------------------   --------------------

      Net income                                                          $             1,500    $            1,783
                                                                              ===================   ====================
</TABLE>

                                     F-24

<PAGE>

                            CORNERSTONE BANCORP, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 2001 and 2000

<TABLE>
<CAPTION>
                                                                                     2001                  2000
                                                                              -------------------   --------------------
                                                                                           (In thousands)
      <S>                                                                 <C>                    <C>

      Condensed Statements of Cash Flows

      Cash flows from operating activities:
          Net income                                                      $             1,500    $            1,783
          Equity in the Bank's undistributed earnings                                  (1,100)                 (668)
          Other adjustments, net                                                          (51)                  123
                                                                              -------------------   --------------------
                     Net cash provided by operating activities                            349                 1,238
                                                                              -------------------   --------------------

      Cash flows from financing activities:
          Dividends paid on common stock                                                 (455)                 (412)
          Purchases of treasury stock                                                       -                  (880)
          Proceeds from issuance of common stock under the
             Dividend Reinvestment Plan                                                   138                   128
                                                                              -------------------   --------------------
                     Net cash used in financing activities                               (317)               (1,164)
                                                                              -------------------   --------------------

      Net increase in cash                                                                 32                    74
      Cash at beginning of year                                                           120                    46
                                                                              -------------------   --------------------

      Cash at end of year                                                 $               152    $              120
                                                                              ===================   ====================
</TABLE>

                                     F-25