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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-KSB/A

AMENDMENT NUMBER ONE



(Mark One)



|x |  | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ------------------------------------------------------------------------------



For the fiscal year ended December 31, 2002



| ̈ |  | 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



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CORNERSTONE BANCORP, INC./CT

(Name of small
business issuer in its charter)



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



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



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



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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)



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



None

(Title of Each Class)



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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, 2002 were $13,628,000.



The aggregate market
value of the issuers common stock held by non-affiliates of the issuer was $15,522,432 based on the closing price of $16.85 per share as of March 1, 2003.



The number of shares outstanding of the issuers common stock as of March 14, 2003 was 1,219,515.



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DOCUMENTS INCORPORATED BY REFERENCE



Proxy Statement for Annual Meeting of Shareholders to be held on May 21, 2003  Part III.



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



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##### Table Of Contents



Cornerstone
Bancorp, Inc. (the Company) hereby amends its Annual Report on Form 10-KSB, for the year ended December 31, 2002 and dated March 28, 2003.



Part II

Item 7. Financial Statements



In the original filing of the Companys Annual Report on Form 10-KSB (dated March 28, 2003), the independent auditors name and address were inadvertently omitted from the Independent Auditors Report as set
forth in the electronically filed document. Consequently, the Company hereby amends Part II, Item 7 of the Annual Report by re-submitting the independent auditors report and related financial statements.



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##### Table Of Contents

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, 2002 and 2001                         
|                                   |                                                                                               
|                                   | Consolidated Statements of Income for the Years Ended December 31, 2002 and 2001              
|                                   |                                                                                               
|                                   | Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2002 and 2001
|                                   |                                                                                               
|                                   | Consolidated Statements of Cash Flows for the Years Ended December 31, 2002 and 2001          
|                                   |                                                                                               
|                                   | Notes to Consolidated Financial Statements                                                    



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Independent Auditors Report

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

We have audited the accompanying consolidated statements of condition of Cornerstone Bancorp, Inc. and subsidiary (the Company) as of December 31, 2002 and 2001, 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, 2002 and 2001, 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.

/s/ KPMG LLPStamford, Connecticut

January 27, 2003

F-1



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##### Table Of Contents

CORNERSTONE BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Condition

December 31, 2002 and 2001

(Dollars in thousands, except per share data)

|                                                                                                                                      |                                                                                                                                    | 2002 |         | 2001    |  
|------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | ---- | ------- | ------- | -
|                                                                                                                                      |                                                                                                                                    |      |         |         |  
|Assets                                                                                                                                |                                                                                                                                    |      |         |         |  
|Cash and cash equivalents:                                                                                                            |                                                                                                                                    |      |         |         |  
|                                                                                                                                      | Cash and due from banks (note 2)                                                                                                   |      | $       | 11,304  |  
|                                                                                                                                      | Federal funds sold                                                                                                                 |      |         | 22,900  |  
|                                                                                                                                      |                                                                                                                                    |      |         |         |  
|                                                                                                                                      | Total cash and cash equivalents                                                                                                    |      |         | 34,204  |  
|                                                                                                                                      |                                                                                                                                    |      |         |         |  
|Securities, including collateral of $5,815 in 2002 and $8,101 in 2001 for borrowings under
securities repurchase agreements (note 3): |                                                                                                                                    |      |         |         |  
|                                                                                                                                      | Available for sale, at fair value                                                                                                  |      |         | 11,392  |  
|                                                                                                                                      | Held to maturity, at amortized cost (fair value of $27,811 in 2002 and $35,957 in
2001)                                            |      |         | 26,758  |  
|                                                                                                                                      |                                                                                                                                    |      |         |         |  
|                                                                                                                                      | Total securities                                                                                                                   |      |         | 38,150  |  
|                                                                                                                                      |                                                                                                                                    |      |         |         |  
|Loans held for sale (note 4)                                                                                                          |                                                                                                                                    |      | 7,244   |         |  
|Loans, net of allowance for loan losses of $2,234 in 2002 and $1,848 in 2001 (note 4)                                                 |                                                                                                                                    |      | 121,475 |         |  
|Accrued interest receivable                                                                                                           |                                                                                                                                    |      | 1,081   |         |  
|Federal Home Loan Bank stock, at cost                                                                                                 |                                                                                                                                    |      | 521     |         |  
|Premises and equipment, net (note 5)                                                                                                  |                                                                                                                                    |      | 2,962   |         |  
|Deferred income taxes (note 8)                                                                                                        |                                                                                                                                    |      | 781     |         |  
|Bank-owned life insurance                                                                                                             |                                                                                                                                    |      | 5,113   |         |  
|Other assets                                                                                                                          |                                                                                                                                    |      | 523     |         |  
|                                                                                                                                      |                                                                                                                                    |      |         |         |  
|                                                                                                                                      | Total assets                                                                                                                       |      | $       | 212,054 |  
|                                                                                                                                      |                                                                                                                                    |      |         |         |  
|Liabilities and Stockholders Equity                                                                                                  |                                                                                                                                    |      |         |         |  
|Liabilities:                                                                                                                          |                                                                                                                                    |      |         |         |  
|                                                                                                                                      | Deposits:                                                                                                                          |      |         |         |  
|                                                                                                                                      | Demand (non-interest bearing)                                                                                                      |      | $       | 46,610  |  
|                                                                                                                                      | Money market demand and NOW                                                                                                        |      |         | 32,805  |  
|                                                                                                                                      | Regular, club, and money market savings                                                                                            |      |         | 34,106  |  
|                                                                                                                                      | Time (note 6)                                                                                                                      |      |         | 69,500  |  
|                                                                                                                                      |                                                                                                                                    |      |         |         |  
|                                                                                                                                      | Total deposits                                                                                                                     |      |         | 183,021 |  
|                                                                                                                                      | Borrowings under securities repurchase agreements (note 7)                                                                         |      |         | 5,723   |  
|                                                                                                                                      | Accrued interest payable                                                                                                           |      |         | 126     |  
|                                                                                                                                      | Securities purchased, not yet settled                                                                                              |      |         | 2,529   |  
|                                                                                                                                      | Other liabilities                                                                                                                  |      |         | 1,317   |  
|                                                                                                                                      |                                                                                                                                    |      |         |         |  
|                                                                                                                                      | Total liabilities                                                                                                                  |      |         | 192,716 |  
|                                                                                                                                      |                                                                                                                                    |      |         |         |  
|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 1,279,365 shares in
2002 and 1,153,135 shares in 2001 |      |         | 13      |  
|                                                                                                                                      | Additional paid-in capital                                                                                                         |      |         | 13,954  |  
|                                                                                                                                      | Retained earnings                                                                                                                  |      |         | 6,205   |  
|                                                                                                                                      | Treasury stock, at cost (71,461 shares in 2002 and 76,415 shares in 2001)                                                          |      |         | (749    | )
|                                                                                                                                      | Unearned restricted stock awards                                                                                                   |      |         | (183    | )
|                                                                                                                                      | Accumulated other comprehensive income, net of taxes (note 11)                                                                     |      |         | 98      |  
|                                                                                                                                      |                                                                                                                                    |      |         |         |  
|                                                                                                                                      | Total stockholders equity                                                                                                         |      |         | 19,338  |  
|                                                                                                                                      |                                                                                                                                    |      |         |         |  
|                                                                                                                                      | Total liabilities and stockholders equity                                                                                         |      | $       | 212,054 |  
|                                                                                                                                      |                                                                                                                                    |      |         |         |  
|                                                                                                                                      |                                                                                                                                    |      |         |         |  

See accompanying notes to consolidated financial statements.

F-2



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##### Table Of Contents

CORNERSTONE BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Income

Years ended December 31, 2002 and 2001

(Dollars in thousands, except per share data)

|                                     |                                                                                                |  | 2002  |        |  | 2001 |       
|------------------------------------ | ---------------------------------------------------------------------------------------------- |  | ----- | ------ |  | ---- | ------
|                                     |                                                                                                |  |       |        |  |      |       
|Interest income:                     |                                                                                                |  |       |        |  |      |       
|                                     | Loans                                                                                          |  | $     | 9,423  |  | $    | 9,039 
|                                     | Securities                                                                                     |  |       | 1,921  |  |      | 1,727 
|                                     | Federal funds sold                                                                             |  |       | 224    |  |      | 936   
|                                     |                                                                                                |  |       |        |  |      |       
|                                     | Total interest income                                                                          |  |       | 11,568 |  |      | 11,702
|                                     |                                                                                                |  |       |        |  |      |       
|Interest expense:                    |                                                                                                |  |       |        |  |      |       
|                                     | Deposits                                                                                       |  |       | 3,010  |  |      | 3,689 
|                                     | Borrowings under securities repurchase agreements and Federal Home Loan Bank advances (note
7) |  |       | 80     |  |      | 144   
|                                     |                                                                                                |  |       |        |  |      |       
|                                     | Total interest expense                                                                         |  |       | 3,090  |  |      | 3,833 
|                                     |                                                                                                |  |       |        |  |      |       
|                                     | Net interest income                                                                            |  |       | 8,478  |  |      | 7,869 
|Provision for loan losses (note 4)   |                                                                                                |  | 363   |        |  | 91   |       
|                                     |                                                                                                |  |       |        |  |      |       
|                                     | Net interest income after provision for loan losses                                            |  |       | 8,115  |  |      | 7,778 
|                                     |                                                                                                |  |       |        |  |      |       
|Non-interest income:                 |                                                                                                |  |       |        |  |      |       
|                                     | Deposit service charges                                                                        |  |       | 507    |  |      | 498   
|                                     | Gain on sale of loans (note 4)                                                                 |  |       | 595    |  |      |      
|                                     | Bank-owned life insurance                                                                      |  |       | 153    |  |      | 8     
|                                     | Other                                                                                          |  |       | 805    |  |      | 439   
|                                     |                                                                                                |  |       |        |  |      |       
|Total non-interest income            |                                                                                                |  | 2,060 |        |  | 945  |       
|                                     |                                                                                                |  |       |        |  |      |       
|Non-interest expense:                |                                                                                                |  |       |        |  |      |       
|                                     | Salaries and employee benefits (notes 12 and 14)                                               |  |       | 4,009  |  |      | 3,273 
|                                     | Occupancy (note 9)                                                                             |  |       | 768    |  |      | 640   
|                                     | Furniture and equipment                                                                        |  |       | 390    |  |      | 409   
|                                     | Data processing                                                                                |  |       | 564    |  |      | 603   
|                                     | Professional fees                                                                              |  |       | 304    |  |      | 289   
|                                     | Advertising and promotion                                                                      |  |       | 204    |  |      | 113   
|                                     | Other                                                                                          |  |       | 1,001  |  |      | 926   
|                                     |                                                                                                |  |       |        |  |      |       
|                                     | Total non-interest expense                                                                     |  |       | 7,240  |  |      | 6,253 
|                                     |                                                                                                |  |       |        |  |      |       
|                                     | Income before income tax expense                                                               |  |       | 2,935  |  |      | 2,470 
|Income tax expense (note 8)          |                                                                                                |  | 1,115 |        |  | 970  |       
|                                     |                                                                                                |  |       |        |  |      |       
|                                     | Net income                                                                                     |  | $     | 1,820  |  | $    | 1,500 
|                                     |                                                                                                |  |       |        |  |      |       
|Earnings per common share (note 13): |                                                                                                |  |       |        |  |      |       
|                                     | Basic                                                                                          |  | $     | 1.53   |  | $    | 1.27  
|                                     | Diluted                                                                                        |  |       | 1.48   |  |      | 1.24  
|                                     |                                                                                                |  |       |        |  |      |       
|                                     |                                                                                                |  |       |        |  |      |       

See accompanying notes to consolidated financial statements.

F-3



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##### Table Of Contents

CORNERSTONE BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Stockholders Equity

Years ended December 31, 2002 and 2001

(Dollars in thousands, except per share data)

|                                            |                                      | Common Stock |           | Additional Paid-in Capital |   | Retained Earnings |  
|------------------------------------------- | ------------------------------------ | ------------ | --------- | -------------------------- | - | ----------------- | -
|                                            |                                     
|                                            | Number of Shares Outstanding         |              | Amount   
|                                            |                                      |              |           |                            |   |                   |  
|Balances at December 31, 2000               |                                      |              | 1,065,744 |                            | $ | 11                |  
|Comprehensive income:                       |                                      |              |           |                            |   |                   |  
|                                            | Net income                           |              |           |                           |   |                   | 
|                                            | Other comprehensive income (note 11) |              |           |                           |   |                   | 
|                                            | Total comprehensive income           |              |           |                            |   |                   |  
|Cash dividends declared ($0.3977 per share) |                                      |              |          |                            |   |                  |  
|Shares issued in connection with:           |                                      |              |           |                            |   |                   |  
|                                            | Dividend Reinvestment Plan           |              |           | 9,529                      |   |                   | 1
|                                            | Directors Compensation Plan          |              |           | 1,447                      |   |                   | 
|                                            |                                      |              |           |                            |   |                   |  
|Balances at December 31, 2001               |                                      |              | 1,076,720 |                            |   | 12                |  
|Comprehensive income:                       |                                      |              |           |                            |   |                   |  
|                                            | Net income                           |              |           |                           |   |                   | 
|                                            | Other comprehensive loss (note 11)   |              |           |                           |   |                   | 
|                                            | Total comprehensive income           |              |           |                            |   |                   |  
|Cash dividends declared ($0.4398 per share) |                                      |              |          |                            |   |                  |  
|Shares issued in connection with:           |                                      |              |           |                            |   |                   |  
|                                            | Stock dividend                       |              |           | 109,123                    |   |                   | 1
|                                            | Restricted stock awards              |              |           | 11,450                     |   |                   | 
|                                            | Stock option exercises               |              |           | 3,025                      |   |                   | 
|                                            | Dividend Reinvestment Plan           |              |           | 6,687                      |   |                   | 
|                                            | Directors Compensation Plan          |              |           | 899                        |   |                   | 
|                                            |                                      |              |           |                            |   |                   |  
|Balances at December 31, 2002               |                                      |              | 1,207,904 |                            | $ | 13                |  
|                                            |                                      |              |           |                            |   |                   |  
|                                            |                                      |              |           |                            |   |                   |  

|                                            |                                      | Treasury Stock |      | Restricted Stock |   | Accumulated Other Comprehensive Income (Loss) |      | Total Stockholders Equity |    
|------------------------------------------- | ------------------------------------ | -------------- | ---- | ---------------- | - | --------------------------------------------- | ---- | -------------------------- | ---
|                                            |                                      |                |      |                  |   |                                               |      |                            |    
|Balances at December 31, 2000               |                                      | $              | (880 | )                | $ |                                              |      | $                          | (22
|Comprehensive income:                       |                                      |                |      |                  |   |                                               |      |                            |    
|                                            | Net income                           |                |      |                 |   |                                               |     |                            |    
|                                            | Other comprehensive income (note 11) |                |      |                 |   |                                               |     |                            |    
|                                            |                                      |                |      |                  |   |                                               |      |                            |    
|                                            | Total comprehensive income           |                |      |                  |   |                                               |      |                            |    
|Cash dividends declared ($0.3977 per share) |                                      |                |     |                  |   |                                              |      |                            |   
|Shares issued in connection with:           |                                      |                |      |                  |   |                                               |      |                            |    
|                                            | Dividend Reinvestment Plan           |                |      |                 |   |                                               |     |                            |    
|                                            | Directors Compensation Plan          |                |      |                 |   |                                               |     |                            |    
|                                            |                                      |                |      |                  |   |                                               |      |                            |    
|Balances at December 31, 2001               |                                      |                | (880 | )                |   |                                              |      |                            | 145
|Comprehensive income:                       |                                      |                |      |                  |   |                                               |      |                            |    
|                                            | Net income                           |                |      |                 |   |                                               |     |                            |    
|                                            | Other comprehensive loss (note 11)   |                |      |                 |   |                                               |     |                            |    
|                                            |                                      |                |      |                  |   |                                               |      |                            |    
|                                            | Total comprehensive income           |                |      |                  |   |                                               |      |                            |    
|Cash dividends declared ($0.4398 per share) |                                      |                |     |                  |   |                                              |      |                            |   
|Shares issued in connection with:           |                                      |                |      |                  |   |                                               |      |                            |    
|                                            | Stock dividend                       |                |      |                 |   |                                               |     |                            |    
|                                            | Restricted stock awards              |                |      | 131              |   |                                               | (183 | )                          |    
|                                            | Stock option exercises               |                |      |                 |   |                                               |     |                            |    
|                                            | Dividend Reinvestment Plan           |                |      |                 |   |                                               |     |                            |    
|                                            | Directors Compensation Plan          |                |      |                 |   |                                               |     |                            |    
|                                            |                                      |                |      |                  |   |                                               |      |                            |    
|Balances at December 31, 2002               |                                      | $              | (749 | )                | $ | (183                                          | )    | $                          | 98 
|                                            |                                      |                |      |                  |   |                                               |      |                            |    
|                                            |                                      |                |      |                  |   |                                               |      |                            |    

See accompanying notes to consolidated financial statements.

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##### Table Of Contents

CORNERSTONE BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Years ended December 31, 2002 and 2001

(In thousands)

|                                               |                                                                                                   | 2002 |        | 2001    |  
|---------------------------------------------- | ------------------------------------------------------------------------------------------------- | ---- | ------ | ------- | -
|                                               |                                                                                                   |      |        |         |  
|Operating activities:                          |                                                                                                   |      |        |         |  
|                                               | Net income                                                                                        |      | $      | 1,820   |  
|                                               | Adjustments to reconcile net income to net cash (used in) provided by operating
activities:       |      |        |         |  
|                                               | Depreciation and amortization                                                                     |      |        | 576     |  
|                                               | Provision for loan losses                                                                         |      |        | 363     |  
|                                               | Originations of loans held for sale                                                               |      |        | (22,578 | )
|                                               | Proceeds from sales of loans held for sale                                                        |      |        | 16,684  |  
|                                               | Deferred income tax (benefit) expense                                                             |      |        | (38     | )
|                                               | (Increase) decrease in accrued interest receivable                                                |      |        | (6      | )
|                                               | Increase in other assets                                                                          |      |        | (175    | )
|                                               | (Decrease) increase in accrued interest payable                                                   |      |        | (38     | )
|                                               | Increase in other liabilities                                                                     |      |        | 419     |  
|                                               | Income on bank-owned life insurance                                                               |      |        | (153    | )
|                                               | Other adjustments, net                                                                            |      |        | 270     |  
|                                               |                                                                                                   |      |        |         |  
|                                               | Net cash (used in) provided by operating activities                                               |      |        | (2,856  | )
|                                               |                                                                                                   |      |        |         |  
|Investing activities:                          |                                                                                                   |      |        |         |  
|                                               | Proceeds from maturities and calls of securities available for sale                               |      |        | 3,497   |  
|                                               | Proceeds from maturities and calls of securities held to maturity                                 |      |        | 8,422   |  
|                                               | Purchases of securities available for sale                                                        |      |        | (2,683  | )
|                                               | Purchases of securities held to maturity                                                          |      |        |        |  
|                                               | Disbursements for loan originations (other than loans held for sale), net of principal repayments |      |        | (17,917 | )
|                                               | Purchases of bank-owned life insurance                                                            |      |        | (3,923  | )
|                                               | Purchases of Federal Home Loan Bank stock                                                         |      |        | (55     | )
|                                               | Purchases of premises and equipment                                                               |      |        | (434    | )
|                                               |                                                                                                   |      |        |         |  
|                                               | Net cash used in investing activities                                                             |      |        | (13,093 | )
|                                               |                                                                                                   |      |        |         |  
|Financing activities:                          |                                                                                                   |      |        |         |  
|                                               | Net increase in deposits                                                                          |      |        | 28,548  |  
|                                               | Net decrease in borrowings under securities repurchase agreements                                 |      |        | (2,318  | )
|                                               | Dividends paid on common stock                                                                    |      |        | (515    | )
|                                               | Proceeds from issuance of common stock                                                            |      |        | 139     |  
|                                               |                                                                                                   |      |        |         |  
|Net cash provided by financing activities      |                                                                                                   |      | 25,854 |         |  
|                                               |                                                                                                   |      |        |         |  
|Net increase in cash and cash equivalents      |                                                                                                   |      | 9,905  |         |  
|Cash and cash equivalents at beginning of year |                                                                                                   |      | 24,299 |         |  
|                                               |                                                                                                   |      |        |         |  
|Cash and cash equivalents at end of year       |                                                                                                   | $    | 34,204 |         | $
|                                               |                                                                                                   |      |        |         |  
|Supplemental information:                      |                                                                                                   |      |        |         |  
|                                               | Interest payments                                                                                 |      | $      | 3,128   |  
|                                               | Income tax payments                                                                               |      |        | 1,203   |  
|                                               | Increase in liability for securities purchased, not yet settled                                   |      |        | 2,529   |  
|                                               | Loans transferred to repossessed assets                                                           |      |        | 81      |  
|                                               |                                                                                                   |      |        |         |  
|                                               |                                                                                                   |      |        |         |  

See accompanying notes to consolidated financial statements.

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##### Table Of Contents

CORNERSTONE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2002 and 2001

|(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 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. Earnings per share, dividends per share, and other share and per share data
for all periods has been adjusted for the effect of the 10% stock dividend distributed in June 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | 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.                                                                                                                                                                                                                                                    

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##### Table Of Contents

CORNERSTONE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial
Statements

December 31, 2002 and 2001

| | Purchases (sales) of securities are recorded on the trade date, and the resulting payables (receivables) are reported in the consolidated statements of condition. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 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.  Gains and losses on sales of loans are recorded at settlement using the specific identification method.  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
sufficient 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, if any, are restored to the allowance when realized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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##### Table Of Contents

CORNERSTONE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial
Statements

December 31, 2002 and 2001

| | 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Bank-Owned Life Insurance                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Bank-owned life insurance is reported at the cash surrender value of the underlying policies.  Increases in the cash surrender value are recorded in non-interest income.
Certain of these policies were purchased in consideration of the Companys obligations under the salary continuation agreements described in note 14.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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##### Table Of Contents

CORNERSTONE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial
Statements

December 31, 2002 and 2001

| | 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Earnings Per Common 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 is computed in a similar manner, except that the weighted average number of common shares is increased (using the treasury stock method) by
additional common shares that would have been outstanding if all potentially dilutive securities (such as stock options and unvested restricted stock awards) were exercised or vested during the period.                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 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.  The fair value
of restricted stock awards, measured at the grant date, is recognized as unearned compensation (a component of stockholders equity) and amortized to compensation expense over the vesting period.                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | SFAS No. 123, Accounting for Stock-Based Compensation, encourages the use of a fair-value-based method of accounting for employee stock compensation plans, but
permits the continued use of the intrinsic-value-based method of accounting prescribed by APB Opinion No. 25.  Under SFAS No. 123, the grant-date fair value of options is recognized as compensation expense over the vesting period (if any).
The Company has elected to continue to apply APB Opinion No. 25 and disclose the                                                                                                                                                                                                                                                                                                                                                  

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##### Table Of Contents

CORNERSTONE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial
Statements

December 31, 2002 and 2001

| | pro forma information required by SFAS No. 123.  Had stock-based compensation expense been recognized in accordance with SFAS No. 123, the Companys net income and
earnings per common share would have been adjusted to the following pro forma amounts for the years ended December 31:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                          |             | 2002                                  |       | 2001 |  
|------------------------------------------------------------------------------------------------------------------------- | ----------- | ------------------------------------- | ----- | ---- | -
|                                                                                                                          |             |                                       |       |      |  
|                                                                                                                          |             | (In thousands, except per share data) |      
|Net income, as reported                                                                                                   |             | $                                     | 1,820 |      | $
|Add restricted stock expense included in reported net income, net of related tax effects                                  |             |                                       | 23    |      |  
|Deduct restricted stock and stock option expense determined under the fair-value-based method, net
of related tax effects |             |                                       | (43   | )    |  
|                                                                                                                          |             |                                       |       |      |  
|Pro forma net income                                                                                                      |             | $                                     | 1,800 |      | $
|                                                                                                                          |             |                                       |       |      |  
|Basic earnings per common share:                                                                                          |             |                                       |       |      |  
|                                                                                                                          | As reported |                                       | $     | 1.53 |  
|                                                                                                                          | Pro forma   |                                       |       | 1.51 |  
|                                                                                                                          |             |                                       |       |      |  
|Diluted earnings per common share:                                                                                        |             |                                       |       |      |  
|                                                                                                                          | As reported |                                       | $     | 1.48 |  
|                                                                                                                          | Pro forma   |                                       |       | 1.46 |  
|                                                                                                                          |             |                                       |       |      |  

| | On a per share basis, the weighted average estimated fair values of options granted during 2002 and 2001 were $2.68 and $2.09, respectively.  These fair values were
estimated using the Black Scholes option-pricing model and the following weighted average assumptions:  dividend yield of 2.6% in 2002 and 2.8% in 2001; expected volatility rates of 46% in 2002 and 14% in 2001; expected option life of eight
years in 2002 and six years in 2001; and risk-free interest rates of 3.6% in 2002 and 4.3% in 2001.                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Borrowings Under 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                                                                                                                                                                                                                                                                                  

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##### Table Of Contents

CORNERSTONE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial
Statements

December 31, 2002 and 2001

|    | 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.   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                 
|(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 $2,885,000 and
$2,368,000 at December 31, 2002 and 2001, 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 below. Mortgage-backed securities consist of pass-through securities
guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae.                                                                                  

|                    |                                   | Amortized Cost |   | Gross Unrealized Gains |  | Gross Unrealized Losses |       | Fair Value |  
|------------------- | --------------------------------- | -------------- | - | ---------------------- |  | ----------------------- | ----- | ---------- | -
|                    |                                   |                |   |                        |  |                         |       |            |  
|                    |                                   | (In thousands) |  
|December 31, 2002   |                                   |                |   |                        |  |                         |       |            |  
|Available for sale: |                                   |                |   |                        |  |                         |       |            |  
|                    | U.S. Government Agency securities |                | $ | 9,082                  |  | $                       | 160   |            | $
|                    | Mortgage-backed securities        |                |   | 2,152                  |  |                         |      |            |  
|                    |                                   |                |   |                        |  |                         |       |            |  
|                    | Total                             |                | $ | 11,234                 |  | $                       | 160   |            | $
|                    |                                   |                |   |                        |  |                         |       |            |  
|Held to maturity:   |                                   |                |   |                        |  |                         |       |            |  
|                    | U.S. Government Agency securities |                | $ | 20,746                 |  | $                       | 911   |            | $
|                    | Mortgage-backed securities        |                |   | 5,937                  |  |                         | 142   |            |  
|                    | Other securities                  |                |   | 75                     |  |                         |      |            |  
|                    |                                   |                |   |                        |  |                         |       |            |  
|                    | Total                             |                | $ | 26,758                 |  | $                       | 1,053 |            | $
|                    |                                   |                |   |                        |  |                         |       |            |  
|December 31, 2001   |                                   |                |   |                        |  |                         |       |            |  
|Available for sale: |                                   |                |   |                        |  |                         |       |            |  
|                    | U.S. Government Agency securities |                | $ | 9,541                  |  | $                       | 242   |            | $
|                    |                                   |                |   |                        |  |                         |       |            |  
|Held to maturity:   |                                   |                |   |                        |  |                         |       |            |  
|                    | U.S. Government Agency securities |                | $ | 25,918                 |  | $                       | 455   |            | $
|                    | Mortgage-backed securities        |                |   | 9,356                  |  |                         | 153   |            |  
|                    | Other securities                  |                |   | 75                     |  |                         |      |            |  
|                    |                                   |                |   |                        |  |                         |       |            |  
|                    | Total                             |                | $ | 35,349                 |  | $                       | 608   |            | $
|                    |                                   |                |   |                        |  |                         |       |            |  

There were no sales of securities
during the years ended December 31, 2002 and 2001.

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##### Table Of Contents

CORNERSTONE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial
Statements

December 31, 2002 and 2001

| | The following is a summary of the amortized cost and fair value of debt securities (other than mortgage-backed securities) at December 31, 2002, by remaining period to
contractual maturity.  Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay their obligations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                    |  | Available for Sale |                | Held to Maturity |  
|----------------------------------- |  | ------------------ | -------------- | ---------------- | -
|                                    |  |                    |                |                  |  
|                                    |  |                    | Amortized Cost |                  |  
|                                    |  |                    |                |                  |  
|                                    |  | (In thousands)     |               
|One year or less                    |  | $                  | 3,500          |                  | $
|Over one year, less than five years |  |                    | 5,582          |                  |  
|Five years or more                  |  |                    |               |                  |  
|                                    |  |                    |                |                  |  
|Total                               |  | $                  | 9,082          |                  | $
|                                    |  |                    |                |                  |  

|    | In addition to securities pledged as collateral for the repurchase agreement borrowings described in note 7, securities with a fair value of $2,068,000 and $1,018,000 were
pledged as collateral for other purposes at December 31, 2002 and 2001, 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 comprise the majority of the portfolio.  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 (excluding loans held for sale) consisted of the following at December 31:                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                                |                 | 2002           |         | 2001   |  
|------------------------------- | --------------- | -------------- | ------- | ------ | -
|                                |                 |                |         |        |  
|                                |                 | (In thousands) |        
|Loans secured by real estate:   |                 |                |         |        |  
|                                | Residential     |                | $       | 46,085 |  
|                                | Non-residential |                |         | 49,977 |  
|                                | Construction    |                |         | 11,429 |  
|Commercial loans                |                 |                | 14,024  |        |  
|Consumer and other loans        |                 |                | 2,259   |        |  
|                                |                 |                |         |        |  
|Total loans                     |                 |                | 123,774 |        |  
|Allowance for loan losses       |                 |                | (2,234  | )      |  
|Deferred loan (fees) costs, net |                 |                | (65     | )      |  
|                                |                 |                |         |        |  
|Total loans, net                |                 | $              | 121,475 |        | $
|                                |                 |                |         |        |  

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##### Table Of Contents

CORNERSTONE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial
Statements

December 31, 2002 and 2001

| | Loans held for sale at December 31, 2002 consisted of residential mortgage and Small Business Administration (SBA) loans of $7,057,000 and $187,000, respectively.
SBA loans held for sale were $755,000 at December 31, 2001.  The estimated market value of loans held for sale at December 31, 2002 and 2001 exceeded cost and, accordingly, a lower-of-cost-or-market adjustment was not required. Proceeds from
sales of residential mortgage and SBA loans totaled $16,684,000 in 2002, resulting in a gain on sale of $595,000. The principal balances of SBA loans serviced for others, which are not included in the Companys consolidated statements of
condition, totaled $6,796,000 at December 31, 2002.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | The following is a summary of changes in the allowance for loan losses for the years ended December 31:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|                             |  | 2002           |       | 2001 |  
|---------------------------- |  | -------------- | ----- | ---- | -
|                             |  |                |       |      |  
|                             |  | (In thousands) |      
|Balance at beginning of year |  | $              | 1,848 |      | $
|Provision for loan losses    |  |                | 363   |      |  
|Loan charge-offs             |  |                | (49   | )    |  
|Recoveries                   |  |                | 72    |      |  
|                             |  |                |       |      |  
|Balance at end of year       |  | $              | 2,234 |      | $
|                             |  |                |       |      |  

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

|                                                                                                              |  | 2002           |        | 2001 |  
|------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | ---- | -
|                                                                                                              |  |                |        |      |  
|                                                                                                              |  | (In thousands) |       
|Total loans past due 90 days or more                                                                          |  | $              | 1,758  |      | $
|Less loans on accrual status (adequately secured and probable of collection)                                  |  |                | (1,609 | )    |  
|                                                                                                              |  |                |        |      |  
|Non-accrual loans past due 90 days or more                                                                    |  |                | 149    |      |  
|Loans current or past due less than 90 days for which interest payments are being applied to reduce principal |  |                | 11     |      |  
|                                                                                                              |  |                |        |      |  
|Total recorded investment in impaired loans                                                                   |  | $              | 160    |      | $
|                                                                                                              |  |                |        |      |  

| | Repayments of approximately $1,292,000 on loans past due 90 days or more on accrual status at December 31, 2002 were received in January 2003.                                                                                                                                                                                                      
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                     
| | The Companys impaired loans at December 31, 2002 and 2001 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 $367,000 in 2002 and $474,000 in 2001.

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##### Table Of Contents

CORNERSTONE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial
Statements

December 31, 2002 and 2001

|    | Interest contractually due during the respective years on loans considered impaired at December 31 totaled $14,000 in 2002 and $65,000 in 2001.  The portion of
the 2002 and 2001 amounts actually collected was $3,000 and $50,000, respectively.  No interest income was recorded on impaired loans in 2002 and 2001 while such loans were considered to be impaired.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                        
|(5) | Premises and Equipment                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                        
|    | Premises and equipment are summarized as follows at December 31:                                                                                                                                                                                                                                                                                                       

|                                               |  | 2002           |       | 2001 |  
|---------------------------------------------- |  | -------------- | ----- | ---- | -
|                                               |  |                |       |      |  
|                                               |  | (In thousands) |      
|Land                                           |  | $              | 695   |      | $
|Buildings and improvements                     |  |                | 2,028 |      |  
|Furniture and equipment                        |  |                | 2,929 |      |  
|Vehicles                                       |  |                | 223   |      |  
|                                               |  |                |       |      |  
|Total                                          |  |                | 5,875 |      |  
|Less accumulated depreciation and amortization |  |                | 2,913 |      |  
|                                               |  |                |       |      |  
|Premises and equipment, net                    |  | $              | 2,962 |      | $
|                                               |  |                |       |      |  

|(6) | Time Deposits                                                                                          
|--- | -------------------------------------------------------------------------------------------------------
|    |                                                                                                        
|    | The following is a summary of time deposits by remaining period to contractual maturity at December 31:

|                                       |  | 2002           |        | 2001 |  
|-------------------------------------- |  | -------------- | ------ | ---- | -
|                                       |  |                |        |      |  
|                                       |  | (In thousands) |       
|90 days or less                        |  | $              | 21,461 |      | $
|91 to 180 days                         |  |                | 10,110 |      |  
|181 days to one year                   |  |                | 21,383 |      |  
|                                       |  |                |        |      |  
|Total one year or less                 |  |                | 52,954 |      |  
|Over one year, less than two years     |  |                | 7,328  |      |  
|Over two years, less than three years  |  |                | 4,966  |      |  
|Over three years, less than four years |  |                | 4,119  |      |  
|Over four years, less than five years  |  |                | 123    |      |  
|Greater than five years                |  |                | 10     |      |  
|                                       |  |                |        |      |  
|Total                                  |  | $              | 69,500 |      | $
|                                       |  |                |        |      |  

| | Time deposits of $100,000 or more aggregated $18,415,000 and $12,122,000 at December 31, 2002 and 2001, respectively.
| | ---------------------------------------------------------------------------------------------------------------------

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##### Table Of Contents

CORNERSTONE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial
Statements

December 31, 2002 and 2001

|(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:

|                                                |                          | 2002                   |       | 2001  |  
|----------------------------------------------- | ------------------------ | ---------------------- | ----- | ----- | -
|                                                |                          |                        |       |       |  
|                                                |                          | (Dollars in thousands) |      
|Repurchase agreement borrowings:                |                          |                        |       |       |  
|                                                | At year end              |                        | $     | 5,723 |  
|                                                | Average for the year     |                        |       | 5,889 |  
|                                                | Maximum at any month end |                        |       | 6,149 |  
|Fair value of collateral securities at year end |                          |                        | 5,815 |       |  
|Weighted average interest rates on borrowings:  |                          |                        |       |       |  
|                                                | At year end              |                        |       | 1.42  | %
|                                                | Average for the year     |                        |       | 1.34  |  
|                                                |                          |                        |       |       |  

|    | The repurchase agreement borrowings at December 31, 2002 mature within three months.  Interest expense on securities repurchase agreements was $79,000 in 2002 and
$138,000 in 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | The Bank may borrow funds from the FHLB of Boston 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 $10,422,000 at December 31, 2002.  There were no FHLB advances outstanding at December 31, 2002 and 2001.  Interest expense on FHLB advances was $1,000 in 2002 and $6,000 in 2001.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(8) | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | The components of income tax expense are as follows for the years ended December 31:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                         |          | 2002           |       | 2001 |  
|------------------------ | -------- | -------------- | ----- | ---- | -
|                         |          |                |       |      |  
|                         |          | (In thousands) |      
|Federal:                 |          |                |       |      |  
|                         | Current  |                | $     | 928  |  
|                         | Deferred |                |       | (33  | )
|                         |          |                |       |      |  
|                         |          |                | 895   |      |  
|                         |          |                |       |      |  
|State:                   |          |                |       |      |  
|                         | Current  |                |       | 225  |  
|                         | Deferred |                |       | (5   | )
|                         |          |                |       |      |  
|                         |          |                | 220   |      |  
|                         |          |                |       |      |  
|Total income tax expense |          | $              | 1,115 |      | $
|                         |          |                |       |      |  

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##### Table Of Contents

CORNERSTONE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial
Statements

December 31, 2002 and 2001

| | 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:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                             |  | 2002           |       | 2001 |  
|-------------------------------------------- |  | -------------- | ----- | ---- | -
|                                             |  |                |       |      |  
|                                             |  | (In thousands) |      
|Income tax at federal statutory rate         |  | $              | 998   |      | $
|State income tax, net of federal tax benefit |  |                | 145   |      |  
|Bank-owned life insurance and other items    |  |                | (28   | )    |  
|                                             |  |                |       |      |  
|Actual income tax expense                    |  | $              | 1,115 |      | $
|                                             |  |                |       |      |  

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

|                          |                                                      | 2002           |     | 2001 |  
|------------------------- | ---------------------------------------------------- | -------------- | --- | ---- | -
|                          |                                                      |                |     |      |  
|                          |                                                      | (In thousands) |    
|Deferred tax assets:      |                                                      |                |     |      |  
|                          | Allowance for loan losses                            |                | $   | 720  |  
|                          | Non-accrual interest                                 |                |     | 101  |  
|                          | Other deductible temporary differences               |                |     | 78   |  
|                          |                                                      |                |     |      |  
|                          |                                                      |                | 899 |      |  
|                          |                                                      |                |     |      |  
|Deferred tax liabilities: |                                                      |                |     |      |  
|                          | Net unrealized gain on securities available for sale |                |     | 60   |  
|                          | Other taxable temporary differences                  |                |     | 58   |  
|                          |                                                      |                |     |      |  
|                          |                                                      |                | 118 |      |  
|                          |                                                      |                |     |      |  
|Net deferred tax assets   |                                                      | $              | 781 |      | $
|                          |                                                      |                |     |      |  

|    | 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 commitments to originate loans, unused lines of credit and standby letters of credit (credit-related financial instruments) that involve,
to varying degrees, elements of credit risk and interest rate risk in addition to the risks associated with loans recognized in the consolidated statements of condition.  Substantially all of these credit-related financial instruments have been
entered into with customers in the Companys primary lending area described in note 4.

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##### Table Of Contents

CORNERSTONE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial
Statements

December 31, 2002 and 2001

| | The contract amounts of credit-related financial instruments reflect the extent of the Companys involvement with those classes of financial instruments.  The
Companys exposure to credit loss in the event of nonperformance by the counterparty is represented by the contract amount.  The Company uses the same credit policies in extending commitments, lines of credit and standby letters of credit
as it does for on-balance sheet instruments.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | The contract amounts of these off-balance sheet financial instruments at December 31, 2002 and 2001 are summarized below:                                                                                                                                                                                                                                                                                                                                 

|                               |  |                | 2002   |  |   | 2001   | 
|------------------------------ |  | -------------- | ------ |  | - | ------ | 
|                               |  |                |        |  |   |        | 
|                               |  | (In thousands) |       
|Unused lines of credit         |  | $              | 14,745 |  | $ | 15,317 | 
|Commitments to originate loans |  |                | 1,817  |  |   |       | 
|Standby letters of credit      |  |                | 1,650  |  |   | 1,595  | 
|                               |  |                |        |  |   |        | 

| | Lines of credit and commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the
contract.  These agreements generally have fixed expiration dates, or other termination clauses, and may require payment of a fee.  Since certain of the lines of credit and commitments are expected to expire without being funded, the
contract amounts do not necessarily represent future cash requirements.  In extending lines of credit and commitments, the Company evaluates each customers creditworthiness on a case-by-case basis.  The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based on managements credit evaluation of the customer.                                                                                                                                                       
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Substantially all of the Companys outstanding standby letters of credit are performance standby letters of credit within the scope of FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.  These are irrevocable undertakings by the Company, as guarantor, to make payments in the event a
specified third party fails to perform under a nonfinancial contractual obligation.  Most of the Companys performance standby letters of credit arise in connection with lending relationships and have terms of one year or less.  The
maximum potential future payments the Company could be required to make equals the contract amount of the standby letters of credit shown in the preceding table.  The Companys recognized liability for performance standby letters of credit
was insignificant at December 31, 2002.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | The Company also enters into forward contracts to sell residential mortgage loans it has closed (loans held for sale) or that it expects to close (commitments to originate loans
held for sale).  These contracts are used to reduce the Companys market price risk during the period from the commitment date to the sale date.  The notional amount of the Companys forward sales contracts was approximately
$8,900,000 at December 31, 2002. Changes in the fair value of the forward sales contracts, loan origination commitments and closed loans at December 31, 2002 were insignificant.                                                                                                                                                                                                                                                                                                                             

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##### Table Of Contents

CORNERSTONE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial
Statements

December 31, 2002 and 2001

|     | Operating Lease Commitments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     | The Company was obligated under various operating leases for its branch offices and other office space at December 31, 2002.  The leases include renewal options and
require the Company to pay applicable costs for utilities, maintenance, insurance and real estate taxes.  Rent expense under operating leases was $433,000 in 2002 and $325,000 in 2001.                                                                                                                                                                                                                                                                                                                                                                               
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     | At December 31, 2002, the future minimum rental payments under operating leases, excluding renewal option periods, were $376,000 for 2003, $346,000 for 2004, $263,000 for
2005, $122,000 for 2006 and $32,000 for 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     | 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 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, 2002 and 2001, 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.                                                                                                                                                                                                                                                                                          

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##### Table Of Contents

CORNERSTONE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial
Statements

December 31, 2002 and 2001

| | The following is a summary of the Banks actual capital amounts and ratios as of December 31, 2002 and 2001, 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, 2002 and 2001 were substantially the same as the Banks actual ratios set forth below.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                          |        |                        |        |                          |  |                                    |      | FDIC Requirements |      
|------------------------- | ------ | ---------------------- | ------ | ------------------------ |  | ---------------------------------- | ---- | ----------------- | -----
|                          |        |                        |        |                          |  |                                    |      |                   |      
|                          |        | Bank actual            |        | Minimum capital adequacy |  | Classification as well capitalized |     
|                          |        |                        |        |                          |  |                                    |     
|                          |        | Amount                 |        | Ratio                    |  | Amount                             |      | Ratio             |      
|                          |        |                        |        |                          |  |                                    |      |                   |      
|                          |        | (Dollars in thousands) |       
|December 31, 2002         |        |                        |        |                          |  |                                    |      |                   |      
|Leverage (tier I) capital |        | $                      | 18,991 |                          |  | 9.2                                | %    | $                 | 8,258
|Risk-based capital:       |        |                        |        |                          |  |                                    |      |                   |      
|                          | Tier I |                        |        | 18,991                   |  |                                    | 13.0 |                   |      
|                          | Total  |                        |        | 20,772                   |  |                                    | 14.2 |                   |      
|December 31, 2001         |        |                        |        |                          |  |                                    |      |                   |      
|Leverage (tier I) capital |        | $                      | 17,673 |                          |  | 9.6                                | %    | $                 | 7,397
|Risk-based capital:       |        |                        |        |                          |  |                                    |      |                   |      
|                          | Tier I |                        |        | 17,673                   |  |                                    | 14.7 |                   |      
|                          | Total  |                        |        | 19,177                   |  |                                    | 16.0 |                   |      
|                          |        |                        |        |                          |  |                                    |      |                   |      

| | The Banks actual Tier I capital represents total stockholders 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | On April 2, 2002, the Company announced a 10% stock dividend which was distributed on June 14, 2002 to shareholders of record as of May 31, 2002.  Under the terms
of the dividend, stockholders received a dividend of one share of common stock for every ten shares owned as of the record date.  A total of 109,123 common shares was issued.  An amount equal to the fair value of these shares was charged
to retained earnings, with a corresponding combined increase in common stock and additional paid-in capital.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | The Bancorps ability to pay cash dividends to its shareholders is largely dependent on the ability of the Bank to pay cash 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 2002 and 2001 (after cash dividends) totaled $2,417,000.              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Dividend Reinvestment Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 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.  A shareholder can invest up to $5,000 in additional shares each quarter.  A total of 6,687 and 9,529 additional common shares were issued under this plan during 2002 and 2001, respectively.                                                                                                                        

F-19



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##### Table Of Contents

CORNERSTONE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial
Statements

December 31, 2002 and 2001

|     | 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 2002 and 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:

|                                                                                               |  |                | 2002 |   |   | 2001 |  
|---------------------------------------------------------------------------------------------- |  | -------------- | ---- | - | - | ---- | -
|                                                                                               |  |                |      |   |   |      |  
|                                                                                               |  | (In thousands) |     
|Net unrealized holding (losses) gains arising during the year on securities available for sale |  | $              | (80  | ) | $ | 275  |  
|Related deferred income taxes                                                                  |  |                | 33   |   |   | (108 | )
|                                                                                               |  |                |      |   |   |      |  
|Other comprehensive (loss) income                                                              |  | $              | (47  | ) | $ | 167  |  
|                                                                                               |  |                |      |   |   |      |  

|     | The Companys accumulated other comprehensive income, which is included as a separate component of stockholders equity, represents the net unrealized gains of
$158,000 and $238,000 on securities available for sale at December 31, 2002 and 2001, respectively, less related deferred income taxes of $60,000 and $93,000, respectively.                                                                        
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                                                                                                                     
|(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 225,500 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, 2002, a total of 27,228 options were available for future grants under the 1996
Plan.                  
|     |                                                                                                                                                                                                                                                                                                                                                                                                                     
|     | 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, 2002.  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

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##### Table Of Contents

CORNERSTONE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial
Statements

December 31, 2002 and 2001

| | 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 2002 are summarized as follows:                                                                                                                                                                                                      

|                                 |  | Number of options |         | Weighted average exercise price |  
|-------------------------------- |  | ----------------- | ------- | ------------------------------- | -
|                                 |  |                   |         |                                 |  
|Outstanding at December 31, 2000 |  |                   | 154,363 |                                 | $
|Granted                          |  |                   | 25,025  |                                 |  
|Expired                          |  |                   | (545    | )                               |  
|                                 |  |                   |         |                                 |  
|Outstanding at December 31, 2001 |  |                   | 178,843 |                                 |  
|Granted                          |  |                   | 12,155  |                                 |  
|Expired                          |  |                   | (726    | )                               |  
|Exercised                        |  |                   | (3,025  | )                               |  
|                                 |  |                   |         |                                 |  
|Outstanding at December 31, 2002 |  |                   | 187,247 |                                 |  
|                                 |  |                   |         |                                 |  

| | Substantially all stock options outstanding at December 31, 2002 and 2001 were exercisable at those dates.  Outstanding options at December 31, 2002 consisted of
176,962 non-qualified options and 10,285 incentive options with weighted average exercise prices of $12.13 and $8.68, respectively.  The weighted average remaining term of outstanding options was 4.7 years at December 31, 2002, with
option exercise prices ranging from $8.68 to $17.82.                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Restricted Stock Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | An initial award of shares of restricted stock was made in January 2002 under the terms of the 2001 Restricted Stock Plan.  An equal number of treasury shares was
appropriated for distribution on 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 is being
recognized as compensation expense on a straight-line basis over the vesting period. Expense recognized in 2002 amounted to $37,000.                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 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 899 shares and 1,447 shares were issued to directors under this plan during 2002 and 2001, respectively.

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##### Table Of Contents

CORNERSTONE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial
Statements

December 31, 2002 and 2001

|(13) | Earnings Per Common Share                                                              
|---- | ---------------------------------------------------------------------------------------
|     |                                                                                        
|     | The following is a summary of the basic and diluted EPS calculations for 2002 and 2001:

|                                  |  | Income (1)                            |       | Shares |  | Earnings Per Share | 
|--------------------------------- |  | ------------------------------------- | ----- | ------ |  | ------------------ | 
|                                  |  |                                       |       |        |  |                    | 
|                                  |  | (In thousands, except per share data) |      
|2002                              |  |                                       |       |        |  |                    | 
|Basic EPS                         |  | $                                     | 1,820 |        |  | 1,191              | 
|Effect of dilutive securities (2) |  |                                       |      |        |  | 41                 | 
|                                  |  |                                       |       |        |  |                    | 
|Diluted EPS                       |  | $                                     | 1,820 |        |  | 1,232              | 
|                                  |  |                                       |       |        |  |                    | 
|2001                              |  |                                       |       |        |  |                    | 
|Basic EPS                         |  | $                                     | 1,500 |        |  | 1,179              | 
|Effect of dilutive securities (2) |  |                                       |      |        |  | 26                 | 
|                                  |  |                                       |       |        |  |                    | 
|Diluted EPS                       |  | $                                     | 1,500 |        |  | 1,205              | 
|                                  |  |                                       |       |        |  |                    | 

|   
|---
|   
|(1)
|   
|(2)

|(14) | Employee Savings Plan and Salary Continuation Agreements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     | 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 $74,000 in 2002 and $64,000 in 2001.                                                                                                                                                                                                                                                                        
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     | Effective April 1, 2002, the Company entered into salary continuation agreements with certain executive officers, providing for specified benefit payments for a 15-year period
commencing upon the executives normal retirement date.  The agreements also provide for specified benefits upon early termination, disability and death.  The Companys obligation to pay these benefits is unfunded.  Salaries
and employee benefits expense includes an accrual of $145 for the period from the effective date of the agreements through December 31, 2002.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(15) | Related Party Transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     | Loans made to the Companys officers, employees, directors and their associates and affiliated businesses totaled $4,311,000 at December 31, 2002.  During 2002,
new loans made directly or indirectly to these related parties totaled $333,000 and payments totaled $524,000.  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.                                                                    

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##### Table Of Contents

CORNERSTONE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial
Statements

December 31, 2002 and 2001

|     | 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 $94,000 in 2002 and $10,000 in 2001. 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.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     | 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:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|                                   |                             | 2002            |         | 2001                 | 
|---------------------------------- | --------------------------- | --------------- | ------- | -------------------- | 
|                                   |                             |                 |         |                      | 
|                                   |                             | Carrying amount |         | Estimated fair value | 
|                                   |                             |                 |         |                      | 
|                                   |                             | (In thousands)  |        
|Financial assets:                  |                             |                 |         |                      | 
|                                   | Cash and cash equivalents   |                 | $       | 34,204               | 
|                                   | Securities                  |                 |         | 38,150               | 
|                                   | Loans                       |                 |         | 128,719              | 
|                                   | FHLB stock                  |                 |         | 521                  | 
|                                   | Accrued interest receivable |                 |         | 1,081                | 
|Financial liabilities:             |                             |                 |         |                      | 
|Deposits without stated Maturities |                             |                 | 113,521 |                      | 
|                                   | Time deposits               |                 |         | 69,500               | 
|                                   | Borrowings                  |                 |         | 5,723                | 
|                                   | Accrued interest payable    |                 |         | 126                  | 
|                                   |                             |                 |         |                      | 

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##### Table Of Contents

CORNERSTONE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial
Statements

December 31, 2002 and 2001

|     | 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.                                                
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     | 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, loan origination commitments and standby 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, 2002 and 2001, the fair values of these financial
instruments approximated the related carrying amounts, which were insignificant.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(17) | Recent Accounting Standards                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     | SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, requires that long-lived assets be measured at the lower of carrying amount or fair value
less the cost to sell, and broadens the reporting of discontinued operations. This statement was effective in 2002 but did not affect the Companys consolidated financial statements.                                                                                                                                              

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##### Table Of Contents

CORNERSTONE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial
Statements

December 31, 2002 and 2001

| | SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections,updates, clarifies and simplifies several
existing accounting pronouncements. Among other things, SFAS No. 145 eliminates the requirement in SFAS No. 4 to report material gains and losses from extinguishments of debt as extraordinary items, net of related income taxes. Adoption of this
statement did not affect the Companys 2002 consolidated financial statements.                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, requires that a liability be recognized for these costs only when incurred. Prior to SFAS
No. 146, a liability was recognized when an entity committed to an exit plan. This statement is effective for exit or disposal activities initiated after December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | SFAS No. 147, Acquisitions of Certain Financial Institutions, eliminates the requirement to amortize an excess of fair value of liabilities assumed over the fair value of
assets acquired in certain acquisitions of financial institutions. SFAS No. 147 also amends SFAS No. 144 to include in its scope long-term customer relationship intangible assets of financial institutions, such as core deposit intangibles. Adoption
of this statement did not affect the Companys 2002 consolidated financial statements.                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure, amends SFAS No. 123 to provide alternative methods of transition for an
entity that voluntarily changes to the fair-value-based method of accounting for stock-based employee compensation.  SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 for fiscal years ending after December 15,
2002.  The required disclosures applicable to the Company are included in note 1 to the consolidated financial statements.                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,
requires that certain disclosures be made by a guarantor in its financial statements about its obligations under guarantees.  The required disclosures applicable to the Company are included in note 9 to the consolidated financial
statements.  The interpretation also requires the recognition, at fair value, of a liability by a guarantor at the inception of certain guarantees issued or modified after December 31, 2002.  This recognition requirement is not expected to
have a material impact on the Companys consolidated financial statements.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | FASB Interpretation No. 46, Consolidation of Variable Interest Entities, provides guidance on the identification of entities controlled through means other than voting
rights.  The interpretation specifies how a business enterprise should evaluate its interests in a variable interest entity to determine whether to consolidate that entity.  A variable interest entity must be consolidated by its primary
beneficiary if the entity does not effectively disperse risks among the parties involved.  The adoption of this interpretation is not expected to have a significant effect on the Companys consolidated financial statements.                                                                    

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##### Table Of Contents

CORNERSTONE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial
Statements

December 31, 2002 and 2001

|(18) | Parent Company Financial Information                                                                                                                                                                   
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                        
|     | Set forth below are the Bancorps condensed statements of condition as of December 31, 2002 and 2001, together with the related condensed statements of income and cash
flows for the years then ended.

|                                                                                 |                        |                | 2002  |        |   | 2001  |       
|-------------------------------------------------------------------------------- | ---------------------- | -------------- | ----- | ------ | - | ----- | ------
|                                                                                 |                        |                |       |        |   |       |       
|                                                                                 |                        | (In thousands) |      
|Condensed Statements of Condition                                                |                        |                |       |        |   |       |       
|Assets:                                                                          |                        |                |       |        |   |       |       
|                                                                                 | Cash                   |                | $     | 213    |   | $     | 152   
|                                                                                 | Investment in the Bank |                |       | 19,089 |   |       | 17,819
|                                                                                 | Other                  |                |       | 215    |   |       | 95    
|                                                                                 |                        |                |       |        |   |       |       
|                                                                                 | Total                  |                | $     | 19,517 |   | $     | 18,066
|                                                                                 |                        |                |       |        |   |       |       
|Liabilities and stockholders equity:                                            |                        |                |       |        |   |       |       
|                                                                                 | Liabilities            |                | $     | 179    |   | $     | 125   
|                                                                                 | Stockholders equity   |                |       | 19,338 |   |       | 17,941
|                                                                                 |                        |                |       |        |   |       |       
|                                                                                 | Total                  |                | $     | 19,517 |   | $     | 18,066
|                                                                                 |                        |                |       |        |   |       |       
|Condensed Statements of Income                                                   |                        |                |       |        |   |       |       
|Dividends received from the Bank                                                 |                        | $              | 700   |        | $ | 515   |       
|Non-interest expense                                                             |                        |                | 318   |        |   | 190   |       
|                                                                                 |                        |                |       |        |   |       |       
|Income before income tax benefit and equity in the Banks undistributed earnings |                        |                | 382   |        |   | 325   |       
|Income tax benefit                                                               |                        |                | 121   |        |   | 75    |       
|                                                                                 |                        |                |       |        |   |       |       
|Income before equity in the Banks undistributed earnings                        |                        |                | 503   |        |   | 400   |       
|Equity in the Banks undistributed earnings                                      |                        |                | 1,317 |        |   | 1,100 |       
|                                                                                 |                        |                |       |        |   |       |       
|Net income                                                                       |                        | $              | 1,820 |        | $ | 1,500 |       
|                                                                                 |                        |                |       |        |   |       |       
|                                                                                 |                        |                |       |        |   |       |       

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##### Table Of Contents

CORNERSTONE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial
Statements

December 31, 2002 and 2001

|                                      |                                             | 2002           |     | 2001   |  
|------------------------------------- | ------------------------------------------- | -------------- | --- | ------ | -
|                                      |                                             |                |     |        |  
|                                      |                                             | (In thousands) |    
|Condensed Statements of Cash Flows    |                                             |                |     |        |  
|Cash flows from operating activities: |                                             |                |     |        |  
|                                      | Net income                                  |                | $   | 1,820  |  
|                                      | Equity in the Banks undistributed earnings |                |     | (1,317 | )
|                                      | Other adjustments, net                      |                |     | (66    | )
|                                      |                                             |                |     |        |  
|                                      | Net cash provided by operating activities   |                |     | 437    |  
|                                      |                                             |                |     |        |  
|Cash flows from financing activities: |                                             |                |     |        |  
|                                      | Dividends paid on common stock              |                |     | (515   | )
|                                      | Proceeds from issuance of common stock      |                |     | 139    |  
|                                      |                                             |                |     |        |  
|                                      | Net cash used in financing activities       |                |     | (376   | )
|                                      |                                             |                |     |        |  
|Net increase in cash                  |                                             |                | 61  |        |  
|Cash at beginning of year             |                                             |                | 152 |        |  
|                                      |                                             |                |     |        |  
|Cash at end of year                   |                                             | $              | 213 |        | $
|                                      |                                             |                |     |        |  
|                                      |                                             |                |     |        |  

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##### Table Of Contents

SIGNATURES



In accordance with the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant caused this Amendment Number
One to the report to be signed on its behalf by the undersigned, thereunto duly authorized



|      |  |                |  | CORNERSTONE BANCORP, INC. (Registrant)
|----- |  | -------------- |  | --------------------------------------
|     
|Date: |  | April 24, 2003 |  |                                       
|      |  |                |  |                                       



|      |  |                |  | 
|----- |  | -------------- |  | 
|     
|Date: |  | April 24, 2003 |  | 
|      |  |                |  | 



**************



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##### Table Of Contents



CERTIFICATIONS



I, Merrill J. Forgotson,
certify that:



1. I have reviewed this annual report as amended
on Form 10-KSB/A, Amendment Number 1 for year ended December 31, 2002 (the annual report) of Cornerstone Bancorp, Inc.;



2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;



3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;



4. The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



5. The registrants other certifying officers
and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



6. The registrants other certifying officers
and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material weaknesses.



|Date: April 24, 2003 |  |  |  | /S/    MERRILL J.
FORGOTSON
|-------------------- |  |  |  | ---------------------------
|                     |  |  |  |                            





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##### Table Of Contents



**************



I, Ernest J. Verrico,
certify that:



1. I have reviewed this annual report as amended
on Form 10-KSB/A, Amendment Number 1 for year ended December 31, 2002 (the annual report) of Cornerstone Bancorp, Inc.;



2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;



3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;



4. The registrants other certifying officers and I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date); and
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| | c) |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
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5. The registrants other certifying officers
and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
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6. The registrants other certifying officers
and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material weaknesses.



|Date: April 24, 2003 |  |  |  | /S/    ERNEST J.
VERRICO
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