UNITED NATIONAL BANCORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

COMMISSION FILE NUMBER 000-16931

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UNITED NATIONAL BANCORP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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NEW JERSEY 22-2894827
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

1130 ROUTE 22 EAST, BRIDGEWATER, NJ 08807-0010
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (908) 429-2200

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

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

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [x]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [x] No [ ]

The aggregate market value of the voting stock held by non-affiliates of the
registrant was $431 million as of January 31, 2003.

The number of shares of Registrant's Common Stock, $1.25 par value,
outstanding as of January 31, 2003 was 18,994,035.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Definitive Proxy Statement for the 2003 Annual Meeting of
Shareholders are incorporated by reference into Part III.

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INDEX -- FORM 10-K

PART I

ITEM 1. BUSINESS

GENERAL

United National Bancorp ('United', the 'Registrant' or the 'Company') is a
bank holding company registered with the Board of Governors of the Federal
Reserve System (the 'FRB') under the Bank Holding Company Act of 1956, as
amended. United was incorporated by United National Bank, the predecessor to
UnitedTrust Bank (the 'Bank') in the State of New Jersey on August 13, 1987 and
commenced operations August 1, 1988 as a bank holding company for the Bank.

At December 31, 2002, the Company had consolidated assets of $2.9 billion,
consolidated deposits of $2.2 billion and consolidated stockholders' equity of
$265 million. Based on consolidated assets at December 31, 2002, the Company was
the fifth largest independent commercial bank holding company headquartered in
New Jersey. At December 31, 2002, the total number of full-time equivalent
employees of the Company was 748.

The Bank, a wholly owned subsidiary of United, is a commercial bank
established in 1902, which is chartered under the laws of the State of New
Jersey. The Bank is a member of the Federal Reserve System (the 'Federal
Reserve') and the Federal Home Loan Bank (the 'FHLB') and its deposits are
insured by the Federal Deposit Insurance Corporation (the 'FDIC'). The Bank is
headquartered in Bridgewater, New Jersey and operates 53 banking offices in
central New Jersey and eastern Pennsylvania. In New Jersey, the Bank operates 12
offices in Somerset County, 10 offices in Hunterdon County, 10 offices in Warren
County, 6 offices in Union County, 3 offices in Middlesex County, 3 offices in
Morris County and 2 offices in Essex County. In Pennsylvania, the Bank operates
6 offices in Northampton County and 1 office in Lehigh County. The Bank also
operates 60 automatic teller machines ('ATMs') affiliated with the STAR System
and Plus nationwide networks and is a member of NYCE, Cirrus and Honor, a
Florida network.

United makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q
and Current Reports on Form 8-K, and amendments to such reports, available of
its website at www.unitedtrust.com without charge as soon as reasonably
practicable after filing or furnishing these reports to the Security and
Exchange Commission (the 'SEC').

INDUSTRY SEGMENTS

For data on industry segments, see the information under 'Lines of Business'
on pages 20-22 of this Report and under 'Note 18 -- Segment Reporting' on
pages 65-68 of this Report.

The Company serves a market area that has a diverse base of customers,
including corporations, small businesses and individuals. Through the Bank's 53
banking offices, the Company provides a broad range of commercial banking,
retail banking, real estate lending, private banking/trust and other financial
services.

The principal executive offices of both United and the Bank are located at
1130 Route 22 East, Bridgewater, New Jersey, and the telephone number at that
address is (908) 429-2200.

VISTA MERGER

On August 21, 2002, the Company acquired Vista Bancorp, Inc. ('Vista') in a
transaction accounted for under the purchase method of accounting (the 'Vista
Merger'). Under the terms of the Vista Merger, the Company acquired all
5,350,637 outstanding shares of Vista in exchange for 4,695,184 shares of the
Company's Common Stock and $37,943,095 in cash.

Based on its unaudited financial statement at June 30, 2002, Vista had total
assets of $713 million, deposits of $600 million and stockholders' equity of $66
million. Vista was headquartered in Phillipsburg, New Jersey and operated 16
banking offices in western New Jersey and eastern Pennsylvania.

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PRODUCTS AND SERVICES

The Company, through the Bank, provides a broad range of commercial banking,
retail banking, real estate lending, private banking/trust and other financial
services.

Personal Banking Services are provided by the Bank, through its network of
53 branches and 60 ATMs. Among the services provided at the branch locations
are: checking accounts, money market accounts, NOW accounts, certificates of
deposit, statement and passbook savings accounts, individual retirement accounts
('IRAs'), self-employed pension plans ('SEPs'), safe deposit services, credit
cards, consumer and other personal loans, home equity loans, mortgage loans,
lines of credit and other consumer financing vehicles.

The Bank offers a full range of trust and investment services for
individuals and corporations. These include: fiduciary services, estate
planning, custodial, employee benefits, pension, and profit sharing plans. The
market value of trust assets under administration was $735 million at December
31, 2002. Other services include the sale of alternative investment products,
such as mutual funds and tax-deferred annuities, and the sale of long-term care
insurance.

Brokerage services are offered to customers under a networking agreement
with UVest Financial Services, Inc.

Commercial Banking Services are provided to the Bank's commercial customers
at its branch locations as well as at its executive offices in Bridgewater, New
Jersey and its loan administration facility in Phillipsburg, New Jersey. These
services include secured and unsecured loans, term loans, lines of credit and
corporate credit cards. The Bank also participates in New Jersey Economic
Development Authority programs, which make tax-exempt, low interest rate
financing available to borrowers who wish to relocate or expand their activities
in New Jersey. As a Small Business Administration ('SBA') Preferred Lender, the
Bank is able to offer streamlined processing on SBA loans. In addition, the Bank
makes other Government loan programs available to qualified borrowers. As a
member of the Automated Clearing House, the Bank makes direct deposit services
available to its customers.

Other Subsidiaries of the Bank include United National Agency, Inc., a New
Jersey corporation that provides certain insurance products; United Commercial
Capital Group, LLC, a New Jersey limited liability company that provides timely
and innovative financing solutions for real estate and commercial transactions
that do not fit the parameters of traditional financings; and United National
Investment Company, Inc., a New Jersey corporation that manages a portion of the
Bank's investment portfolio and operates as an investment company under state
tax law.

COMPETITION

The Company and the Bank face strong competition in the communities they
serve from a number of sources, including other commercial banks, savings banks,
savings and loan associations, mortgage banking firms, credit unions, issuers of
commercial paper, money market funds, securities firms, consumer finance
companies, factoring companies and insurance companies. Competition for the
Company and the Bank is not limited to financial institutions based in New
Jersey. A number of large out-of-state and foreign commercial banks, bank
holding companies and other financial institutions have an established market
presence in New Jersey. Many of the financial institutions operating in New
Jersey engage in local, regional, national and international operations and have
greater resources than the Company.

SUPERVISION AND REGULATION

The banking industry is highly regulated. Statutory and regulatory controls
increase a bank holding company's cost of doing business and limit management's
options to deploy assets and maximize income. Areas subject to regulation and
supervision by the bank regulatory agencies include: the nature of business
activities; minimum capital levels; dividends; affiliate transactions; expansion
and closing of locations; acquisitions and mergers; interest rates paid on
certain types of deposits; reserves against deposits; terms, amounts and
interest rates charged to various types of borrowers; and investments.

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BANK HOLDING COMPANY REGULATION

The Company is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended (the 'Holding Company Act'), and is registered
as such with and is supervised by the FRB. The Company is required to file
reports with the FRB and provide such additional information as the FRB may
require.

The Company is required to obtain the approval of the FRB before it may
acquire all or substantially all of the assets of any bank, or direct or
indirect ownership of any voting securities of any bank if, after giving effect
to such acquisition, the Company would, directly or indirectly, own or control
more than 5% of the voting shares of that bank. The Holding Company Act also
prohibits acquisition by the Company of more than 5% of the voting shares of a
bank located outside the State of New Jersey, unless the acquisition is
specifically authorized by laws of the state in which the bank is located. In
addition to the approval of the FRB, prior approval must also be obtained from
any other banking agency having supervisory jurisdiction over the bank to be
acquired before a bank acquisition can be completed. Many states, including New
Jersey, have adopted legislation which permits banks and bank holding companies
resident in New Jersey to acquire banks and bank holding companies in states
with reciprocal legislation. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the 'Interstate Banking Act') provides that the FRB may
approve an acquisition by a bank holding company of a bank located in a state
other than the bank holding company's home state without regard to whether such
transaction is prohibited under the laws of any state. The Interstate Banking
Act also permits Federal banking agencies to approve interstate bank mergers
without regard to state law. States have authority to opt-out of the legislation
subject to certain conditions. In addition, the Interstate Banking Act permits
de novo branching across state lines but only with respect to states that
affirmatively adopt legislation authorizing de novo interstate branching.

A bank holding company is prohibited from engaging in, or acquiring direct
or indirect control of more than 5% of the voting shares of any company engaged
in non-banking activities unless the FRB, by order or regulation, has found such
activities to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto.

Under the FRB's regulations, a bank holding company is required to serve as
a source of financial and managerial strength to its subsidiary banks and may
not conduct its operations in an unsafe and unsound manner.

REGULATION OF THE BANK

On May 7, 2001, the Bank changed from a federally chartered bank to a state
chartered bank and in conjunction, changed its name from United National Bank to
UnitedTrust Bank. Since its charter change, the Bank has been subject to
regulation and examination by the Federal Reserve and the New Jersey Department
of Banking. Prior to its charter change, the Bank was subject to regulation and
examination by the Comptroller of the Currency ('Comptroller'). The deposits of
the Bank are insured by the FDIC to the extent provided by law.

The Company and the Bank are also subject to applicable provisions of New
Jersey law insofar as they do not conflict with or are not preempted by Federal
law.

COMMUNITY REINVESTMENT

Under the Community Reinvestment Act ('CRA'), as implemented by FRB
regulations, a member bank has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low- and moderate-income neighborhoods. The CRA
does not establish specific lending requirements or programs for financial
institutions, nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the Federal Reserve in
connection with its examination of the Bank to assess the Bank's record of
meeting the credit needs of its community and to take that record into account
in its evaluation of certain applications by the Bank. The CRA requires all
institutions to make public disclosure of their CRA ratings. The Bank received a
'Satisfactory' CRA rating in its most recent examination.

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DIVIDEND RESTRICTIONS AND OTHER ACTIONS

The Company is a legal entity separate and distinct from the Bank. Most of
the Company's revenues, including funds available for the payment of dividends
and for operating expenses, are provided by dividends paid to it by the Bank.
There are statutory and regulatory limitations on the amount of dividends that
may be paid to the Company by the Bank. The holders of the Company's Common
Stock are entitled to receive dividends, when, as and if declared by the Board
of Directors of the Company out of funds legally available. The only statutory
limitation is that such dividends may not be paid when the Company is insolvent.
As a practical matter, restrictions on the ability of the Bank to pay dividends
act as restrictions on the amount of funds available for payment of dividends by
the Company. As a New Jersey chartered commercial bank, the Bank is subject to
the restrictions on the payment of dividends contained in the New Jersey Banking
Act of 1948, as amended (the 'Banking Act'). Under the Banking Act, the Bank may
pay dividends only out of retained earnings, and out of surplus to the extent
that surplus exceeds 50% of stated capital. Under the Financial Institutions
Supervisory Act, the FDIC has the authority to prohibit a state chartered bank
from engaging in conduct that, in the FDIC's opinion, constitutes an unsafe or
unsound banking practice. Under certain circumstances, the FDIC could claim that
the payment of a dividend or other distribution by the Bank to the Company
constitutes an unsafe or unsound practice. The Company is also subject to FRB
policies which require, among other things, that a bank holding company must
maintain a minimum capital base. The FRB would most likely seek to prohibit any
dividend that would reduce a holding company's capital below these minimum
amounts. In addition, if the Company defers payment in its trust preferred
securities, it would be prohibited from paying dividends on its Common Stock
until the deferred payments had been made.

See 'Capital Adequacy' and 'Common Stock and Dividends' on page 32, 'Note
12 -- Capital Requirements' on page 55, and 'Cash Dividend Restrictions' on
pages 70-71 of this Report.

GOVERNMENTAL POLICIES AND LEGISLATION

The policies of regulatory authorities, including the Federal Reserve and
the FDIC, have had a significant effect on the operating results of commercial
banks in the past and are expected to do so in the future. An important function
of the Federal Reserve is to regulate national monetary policy (e.g., regulating
the money supply) through such means as open market dealings in securities, the
establishment of the discount rate on member bank borrowings, and changes in
reserve requirements on member bank deposits.

From time to time, various proposals are made in the United States Congress,
as well as in state legislatures, and before various bank regulatory
authorities, which would alter the powers of, and place restrictions on,
different types of banking organizations. It is impossible to predict whether
any proposals will be adopted and the impact, if any, of their adoption on the
business of the Company and the Bank.

CAPITAL REQUIREMENTS

The FRB measures capital adequacy for bank holding companies on the basis of
a risk-based capital framework and a leverage ratio. The minimum ratio of total
risk-based capital to risk-weighted assets is 8%. At least half of the total
capital must be common stockholders' equity (not inclusive of net unrealized
gains and losses on available for sale securities) and perpetual preferred
stock, less goodwill and other non-qualifying intangible assets ('Tier 1
capital'). The remainder (i.e., the 'Tier 2 risk-based capital') may consist of
hybrid capital instruments, perpetual debt, term subordinated debt, other
preferred stock and a limited amount of the allowance for loan losses. At
December 31, 2002, the Company had Tier 1 capital as a percentage of
risk-weighted assets of 10.34% and a total risk-based capital ratio of 11.36%.

In addition, the FRB has established minimum leverage ratio guidelines for
bank holding companies. These guidelines currently provide for a minimum
leverage ratio of 3% for bank holding companies that meet certain criteria,
including that they maintain the highest regulatory rating. All

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other bank holding companies are required to maintain a leverage ratio of at
least 100 to 200 basis points above the minimum. At December 31, 2002, the
Company had a leverage ratio of 7.40%.

The Bank is subject to the FDIC's Statement of Policy on Risk-Based Capital,
the requirements of which are substantially identical to the FRB's risk-based
capital framework. At December 31, 2002, the Bank had Tier 1 capital as a
percentage of risk-weighted assets of 10.14% and a total risk-based capital
ratio of 11.16%.

In addition to the Statement of Policy on Risk-Based Capital, the FDIC
requires banks to operate with a minimum Leverage Ratio of 3%. Under these
guidelines, institutions operating at the 3% minimum are expected to have well
diversified risk profiles, including no undue interest rate risk, excellent
asset quality, high liquidity and good earnings. Institutions not meeting these
characteristics, as well as institutions experiencing growth, would be expected
to maintain capital levels at least 100 to 200 basis points above the minimum.
The FDIC is authorized to set higher capital requirements for an individual bank
when the bank's particular circumstances so warrant. At December 31, 2002, the
Bank had a Leverage Ratio of 7.26%.

The FRB and the FDIC have regulations which identify concentration of credit
risk and certain risks arising from nontraditional activities, as well as an
institution's ability to manage these risks, as important factors in assessing
an institution's overall capital adequacy. The FRB capital adequacy guidelines
limit the amount of certain deferred tax assets that may be included in a bank
holding company's Tier 1 capital for risk-based and leverage capital purposes.

FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT OF 1989 ('FIRREA')

Under FIRREA, a bank insured by the FDIC can be held liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC in connection
with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to a commonly controlled
insured depository institution in danger of default. The term 'default' is
defined to mean the appointment of a conservator or receiver for such
institution and 'in danger of default' is defined generally as the existence of
certain conditions indicating that a 'default' is likely to occur in the absence
of regulatory assistance. Thus, the Bank could incur liability to the FDIC
pursuant to this statutory provision in the event of the default of any other
insured depository institution owned or controlled by the Company. At the
present time, the Bank is the only FDIC-insured depository institution
controlled by the Company.

Any such liability to the FDIC would be subordinated in right of payment to
deposit liabilities, secured obligations, any other general or senior liability
and any obligation subordinated to depositors or other general creditors, other
than obligations owed to any affiliate of the depository institution (with
certain exceptions) and any obligations to shareholders in such capacity. The
imposition of such liability in sufficient amounts, however, could lead to the
appointment of the FDIC as conservator or receiver for the Bank. If any insured
depository institution becomes insolvent and the FDIC is appointed its
conservator or receiver, within a reasonable period following such appointment
the FDIC may disaffirm or repudiate any contract or lease to which such
institution is a party, the performance of which it determines to be burdensome,
and the disaffirmance or repudiation of which it determines to promote the
orderly administration of the institution's affairs.

FIRREA broadened the enforcement powers of the Federal banking agencies,
including the power to impose fines and penalties, over all financial
institutions. FIRREA also prohibits an insured depository institution from
entering into a written or oral contract with any person for goods, products or
services that would jeopardize the safety or soundness of the institution.
Further, under FIRREA the failure to meet capital guidelines could subject a
financial institution to a variety of regulatory actions, including the
termination of deposit insurance by the FDIC.

FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 ('FDICIA')

FDICIA was enacted in December 1991 and was primarily designed to provide
additional financing for the FDIC by increasing its borrowing ability. The FDIC
was given the authority to increase deposit insurance premiums to repay any such
borrowing. In addition, FDICIA identifies the following capital

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standard categories for financial institutions: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. As a result of FDICIA, the various banking regulatory agencies
have set certain capital and other measures for determining the categories into
which financial institutions fall. FDICIA imposes progressively more restrictive
constraints on operations, management and capital distributions depending on the
category in which an institution is classified. Pursuant to FDICIA,
undercapitalized institutions must submit recapitalization plans, and a company
controlling a failing institution must guarantee such institution's compliance
with its plan. FDICIA also required the various regulatory agencies to prescribe
certain non-capital standards for safety and soundness relating generally to
operations and management, asset quality and executive compensation, and permits
regulatory action against a financial institution that does not meet such
standards.

GRAMM-LEACH-BLILEY FINANCIAL MODERNIZATION ACT

On November 12, 1999, the Gramm-Leach-Bliley Financial Modernization Act of
1999 (the 'Modernization Act') was signed into law. The Modernization Act:

1. allows bank holding companies meeting management, capital and CRA
standards to engage in a substantially broader range of nonbanking
activities than was previously permissible, including insurance
underwriting and making merchant banking investments in commercial and
financial companies; if a bank holding company elects to become a
financial holding company, it files a certification, effective in 30
days, and thereafter may engage in certain financial activities without
further approvals;

2. allows insurers and other financial services companies to acquire banks;

3. removes various restrictions that previously applied to bank holding
company ownership of securities firms and mutual fund advisory companies;
and

4. established the overall regulatory structure applicable to bank holding
companies that also engage in insurance and securities operations.

The FRB has adopted rules to allow banks to form subsidiaries to engage in
financial activities allowed for financial holding companies. Electing banks
must meet the same management and capital standards as financial holding
companies but may not engage in insurance underwriting, real estate development
or merchant banking. Sections 23A and 23B of the Federal Reserve Act apply to
financial subsidiaries and the capital invested by a bank in its financial
subsidiaries will be eliminated from the bank's capital in measuring all capital
ratios.

The Modernization Act also modified other current financial laws, including
laws related to financial privacy and community reinvestment.

ANTI-TERRORISM ACT

As part of the USA Patriot Act, signed into law on October 26, 2001,
Congress adopted the International Money Laundering Abatement and Financial
Anti-Terrorism Act of 2001 (the 'Act'). The Act authorizes the Secretary of the
Treasury, in consultation with the heads of other government agencies, to adopt
special measures applicable to financial institutions such as banks, bank
holding companies, broker-dealers and insurance companies. Among its other
provisions, the Act requires each financial institution: (i) to establish an
anti-money laundering program; (ii) to establish due diligence policies,
procedures and controls that are reasonably designed to detect and report
instances of money laundering in United States private banking accounts and
correspondent accounts maintained for non-United States persons or their
representatives; and (iii) to avoid establishing, maintaining, administering, or
managing correspondent accounts in the United States for, or on behalf of, a
foreign bank that does not have a physical presence in any country. In addition,
the Act expands the circumstances under which funds in a bank account may be
forfeited and requires covered financial institutions to respond under certain
circumstances to requests for information from federal banking agencies within
120 hours.

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The Act also amended the Bank Holding Company Act and the Bank Merger Act to
require the Federal banking agencies to consider the effectiveness of a
financial institution's anti-money laundering activities when reviewing an
application under these acts.

SECURITIES AND EXCHANGE COMMISSION

The Company's Common Stock is registered with the Securities and Exchange
Commission ('SEC') under the Securities Exchange Act of 1934 (the '1934 Act').
As a result of such registration, the Company and its officers, directors and
major shareholders are obligated to file certain reports with the SEC.
Furthermore, the Company is subject to proxy and tender offer rules promulgated
pursuant to the 1934 Act.

SARBANES-OXLEY ACT

The Sarbanes-Oxley Act of 2002 ('Sarbanes-Oxley Act'), which became law on
July 30, 2002, added new legal requirements for public companies affecting
corporate governance, accounting and corporate reporting.

The Sarbanes-Oxley Act provides for, among other things:

1. a prohibition on personal loans made or arranged by an issuer to its
directors and executive officers (with an exception for nearly all loans
made by banks);

2. independence requirements for audit committee members;

3. independence requirements for company auditors;

4. certification of financial statements and Forms 10-K and 10-Q reports by
the chief executive officer and the chief financial officer;

5. the forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer's securities by directors and senior
officers in the twelve-month period following initial publication of any
financial statements that later require restatement due to corporate
misconduct;

6. disclosure of off-balance sheet transactions;

7. two-business day filing requirements for insiders filing Form 4;

8. disclosure of a code of ethics for financial officers and prompt
disclosure on a Form 8-K of any change or waiver of such code;

9. 'real time' filing of periodic reports;

10. posting of certain SEC filings and other information on the Company
website;

11. the reporting of securities violations 'up the ladder' by both in-house
and outside attorneys;

12. restrictions on the use of non-GAAP financial measures;

13. the formation of a public accounting oversight board; and

14. various increased criminal penalties for violations of securities laws.

The Sarbanes-Oxley Act contains provisions which became effective upon enactment
on July 30, 2002 and provisions which become effective from within 30 days to
one year from enactment. The SEC has been delegated the task of enacting rules
to implement various provisions. In addition, each of the national stock
exchanges has proposed new corporate governance rules, including rules
strengthening director independence requirements for boards, the adoption of
corporate governance codes and charters for the nominating, corporate governance
and audit committees.

EFFECTS OF INFLATION

A bank's asset and liability structure differs from that of an industrial
company, since its assets and liabilities fluctuate over time based upon
monetary policies and changes in interest rates. The growth in

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a bank's earning assets, regardless of the effects of inflation, will increase
net interest income if a bank is able to maintain a consistent interest spread
between earning assets and supporting liabilities.

A purchasing power gain or loss from holding net monetary assets during the
year represents the effect of general inflation on monetary assets and
liabilities. Almost all of the assets and liabilities of the Company are
considered monetary because they are fixed in terms of dollars and, therefore,
are not materially affected by inflation.

CONCENTRATION OF CUSTOMERS AND SEASONALITY OF BUSINESS

No single person, group of persons, enterprise or other entity produces a
material portion of the Bank's deposits or loans. No customer accounts for as
much as two percent of the Bank's overall business. There is no material impact
on the Bank's volume, deposits or loans, as a result of seasonal changes. The
majority of the Bank's customers operate or reside within New Jersey and eastern
Pennsylvania. The ability of the Bank's customers to meet their contractual
obligations is, to a certain extent, dependent upon the economic conditions
existing in these states.

ITEM 2. PROPERTIES

The corporate headquarters and principal office of the Company are located
in leased facilities in Bridgewater, New Jersey, approximately 45 miles from New
York City. The Bridgewater facility has usable space of 65,000 square feet and
houses the executive offices of the Company and the Bank, as well as a banking
office of the Bank. The check and data processing center of the Bank is located
in leased facilities in Phillipsburg, New Jersey.

The Company provides banking services at 53 banking office locations. Of its
53 banking locations, the Company owns 25 and leases 28.

ITEM 3. LEGAL PROCEEDINGS

The Company is party, in the ordinary course of business, to litigation
involving collection matters, contract claims and other miscellaneous causes of
action arising from its business. Management does not consider that any current
proceedings depart from usual routine litigation and, in its judgment, the
Company's financial position and results of operations will not be materially
affected by these proceedings.

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

There were no matters submitted to a vote of security holders during the
fourth quarter of the Company's fiscal year ended December 31, 2002.

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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

The following is a list of the Company's executive officers, their ages and
their positions at December 31, 2002. All of these executive officers have been
employed by the Company or its bank subsidiaries for more than five years, with
the exception of Alfred J. Soles and H. Richard Minette.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock is traded in the over-the-counter market on the
NASDAQ Stock Market under the symbol, 'UNBJ.' The following table presents the
high and low closing sales prices of the Common Stock and the dividends declared
thereon for the periods noted below.

The Common Stock of the Company was held by 2,684 holders of record as of
December 31, 2002.

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ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with the
Consolidated Financial Statements and related notes thereto included elsewhere
in this Annual Report and 'Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations.'

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(1) Includes Federal funds purchased, securities sold under agreements to
repurchase less than one year, FHLB advances, U.S. Treasury demand notes and
borrowed funds.

(2) Includes other borrowed funds, securities sold under agreements to
repurchase greater than one year, obligations under capital lease, trust
capital securities and employee stock ownership plan debt.

(3) Efficiency ratio is calculated by dividing adjusted non-interest expense by
tax-equivalent net interest income and adjusted non-interest income.
Adjusted non-interest expense is total non-interest expense less one-time
charges, amortization of intangible assets and net costs to operate other
real estate. Adjusted non-interest income is total non-interest income less
net gains from securities transactions and non-recurring income.

(4) Non-performing loans consist of non-accrual loans, restructured loans and
loans past due 90 days or more and still accruing.

11

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion is an analysis of the financial condition and
results of operations of the Company for the years ended December 31, 2002, 2001
and 2000 and should be read in conjunction with the related financial statements
and accompanying notes presented elsewhere herein.

VISTA MERGER

On August 21, 2002, the Company acquired Vista Bancorp, Inc. ('Vista') in a
transaction accounted for under the purchase method of accounting (the 'Vista
Merger'). Under the terms of the Vista Merger, the Company acquired all
5,350,637 outstanding shares of Vista in exchange for 4,695,184 shares of the
Company's Common Stock and $37,943,095 in cash.

Based on its unaudited financial statement at June 30, 2002, Vista had total
assets of $713 million, deposits of $600 million and stockholders' equity of $66
million. Vista was headquartered in Phillipsburg, New Jersey and operated 16
banking offices in western New Jersey and eastern Pennsylvania.

The Company and Vista entered into this merger to enhance stockholder value
by building a community banking company able to provide more products and
services for its customers, more investment opportunities for clients and added
capital to deploy in the future. The Vista Merger enhances the combined
company's range of products and services and increases the distribution channels
available to customers. The acquisition of Vista has strengthened the Company's
market share position in the western New Jersey marketplace and has provided an
entry into Pennsylvania.

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995. Such statements are not
historical facts and include expressions about our confidence and strategies and
our expectations about earnings, opportunities, and market conditions. These
statements may be identified by such forward-looking terminology as 'expect',
'believe', 'anticipate', 'optimistic', or by expressions of confidence such as
'for the coming months', 'consistent', 'continue', 'strong', 'superior' or
similar statements or variations of such terms. Actual results may differ
materially from such forward-looking statements. The factors which may cause
such forward-looking statements to vary from actual results include, but are not
limited to, expected cost savings from the Vista Merger or other planned
programs not being realized or not being realized within the expected time
frame; income or revenues from the Vista Merger or other planned programs being
lower than expected or operating costs higher; competitive pressures in the
banking or financial services industries increasing significantly; business
disruption related to program implementation or methodologies; weakening of
economic conditions in New Jersey or Pennsylvania; changes in legal, regulatory
and tax structures; and unanticipated occurrences delaying planned programs or
initiatives or increasing their costs or decreasing their benefits. The Company
does not assume any obligation for updating any such forward-looking statements
at any time.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

'Management's Discussion and Analysis of Financial Condition and Results of
Operation' is based upon the Company's Consolidated Financial Statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. Note 1 to the Company's
Audited Consolidated Financial Statements for the year ended December 31, 2002,
contains a summary of the Company's significant accounting policies. Management
believes the Company's policy with respect to the methodology for the
determination of the allowance for loan losses involves a high degree of
complexity and requires management to make difficult and subjective judgments
which often require assumptions or estimates about highly uncertain matters.
Changes in these judgments, assumptions or estimates could materially impact
results of operations. This critical policy and its application is periodically
reviewed with the Audit Committee and with the full Board of Directors.

12

The allowance for loan losses is based upon Management's evaluation of the
adequacy of the allowance, including an assessment of known and inherent risks
in the portfolio, giving consideration to the size and composition of the loan
portfolio, actual loan loss experience, level of delinquencies, detailed
analysis of individual loans for which full collectibility may not be assured,
the existence and estimated net realizable value of any underlying collateral
and guarantees securing the loans, and current economic and market conditions.
Although Management attempts to obtain and use the best information reasonably
available, the level of the allowance for loan losses remains an estimate which
is subject to significant judgment and short-term change. Various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for loan losses. Such agencies may require the Company
to make additional provisions for loan losses based upon information available
to them at the time of their examination. Furthermore, the majority of the
Company's loans are secured by real estate in the State of New Jersey.
Accordingly, the collectibility of a substantial portion of the carrying value
of the Company's loan portfolio is susceptible to changes in local market
conditions and may be adversely affected should real estate values decline or
the Central New Jersey area experience an adverse economic shock. Future
adjustments to the allowance for loan losses may be necessary due to economic,
operating, regulatory and other conditions beyond the Company's control.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001

EARNINGS SUMMARY

The Company reported net income for 2002 of $20.4 million, down 17% from the
$24.8 million earned in 2001. Diluted per share earnings were $1.24 in 2002, or
23% below the $1.62 recorded for 2001. The decline in 2002 earnings resulted
from an increased loan loss provision primarily related to two large credits
(both involving fraud by the borrower) that had been placed on non-accrual and
from integration expenses related to the Vista Merger. The increases in net
interest income and non-interest expense during 2002 over 2001 were largely due
to the impact of the Vista Merger.

The return on average assets for the year was 0.88% in 2002 and 1.22% in
2001, while the return on average stockholders' equity for the year was 10.28%
in 2002 and 16.25% in 2001. The higher loan loss provisions recorded in the
first and second quarters of 2002 and the Vista integration costs incurred in
the second and third quarters of 2002 adversely affected the return on average
assets and the return on average stockholders' equity for the year 2002. The
return on average stockholders' equity was also adversely impacted by the Vista
Merger and the required application of the purchase method of accounting, which
resulted in a greater increase in stockholders' equity than would have occurred
under the pooling of interests method of accounting. The return on average
tangible stockholders' equity was 12.52% in 2002 and 16.89% in 2001. Tangible
stockholders' equity is defined as total stockholders' equity less total
intangible assets, including goodwill. The Company's efficiency ratio rose to
61.18% for 2002 from 57.34% for 2001 due to sluggish revenue growth.

NET INTEREST INCOME

The Company's most significant revenue source is net interest income, which
represents the difference between interest earned on assets and interest paid to
depositors and other creditors. A portion of the Company's total interest income
is derived from investments which are exempt from Federal taxation. Due to the
'tax-free' nature of these investments, the amount of pretax income realized
from them is less than the amount of pretax income realizable from comparable
investments subject to Federal taxation. For purposes of the following
discussion and analysis of financial condition and results of operations,
interest exempt from Federal taxation has been restated to a fully tax-
equivalent basis assuming a statutory tax rate of 35% for 2002, 2001 and 2000.
This was accomplished by adjusting this income upward to make it equivalent to
the level of taxable income required to earn the same amount after taxes.

13

A summary of net interest income on a tax-equivalent basis for 2002 and 2001
is presented in the following table:

For the year ended December 31, 2002, tax-equivalent net interest income
increased 13% from the prior year as the result of 13% growth in average
interest earning assets, partly offset by a two basis point decline in the net
interest margin.

An analysis of the major factors affecting the Company's net interest margin
during 2002 follows:

ANALYSIS OF NET INTEREST MARGIN

The two basis point narrowing in the net interest margin during 2002
compared to 2001 primarily resulted from the negative effect that the lower
interest rate environment had on the contribution of net non-interest bearing
funds, a less favorable mix of interest bearing liabilities, a shift in the mix
of earning assets from higher yielding loans to lower yielding securities and
short-term investments, and higher levels of non-performing loans. Wider spreads
on securities and loans served to partially offset these unfavorable factors.
During the second half of 2002, the Company's net interest margin was adversely
affected by an acceleration of prepayments on mortgage-related assets. Further
margin pressure could result from a continuation of such trends in the absence
of any shift in the Company's interest rate sensitivity position.

Average interest earning assets grew 13% in 2002 from 2001 as average loans,
securities and short-term investments all increased. Average loans increased
$150 million or 12% during 2002 compared to 2001, primarily from loans added in
the Vista Merger that was consummated in the third quarter of 2002. Average
securities rose $65 million or 10% in 2002 from 2001, also due to the Vista
Merger. Average short-term investments increased $35 million to $37 million in
2002 from $2 million in 2001, due to a sharp rise in prepayments on
mortgage-related assets.

Average deposits grew 16% in 2002 from 2001 and average core deposits (which
exclude time deposits of $100,000 and over) rose 22%. Average total deposits for
2002 contained approximately $216 million in such deposits resulting from the
Vista Merger. Excluding the effect of the Vista Merger, average total deposits
for 2002 increased $19 million or 1% from 2001, while average core deposits grew
$75 million or 6%. The increase in average core deposits in 2002 over 2001
excluding the impact of Vista Merger was largely attributable to a $23 million
or 9% growth in average demand deposits and a $62 million or 11% growth in
average savings deposits, which includes NOW and money market accounts. The
Company reduced its short-term borrowings by $110 million or 59% due to the
effect of the Vista Merger as well as to the aforementioned growth in average
core deposits. Average other borrowings, which consist of debt having an
original maturity of one year or more, increased $124 million or 61% during 2002
from 2001. The increase in average other borrowings was principally due to
liability extensions made in the second quarter of 2001 to reduce the liability
sensitivity of the Bank, higher amortizing advances from the Federal Home Loan
Bank of New York that were used to match fund certain fixed-rate loans and the
issuance of $30 million of trust preferred securities in December 2001.

14

AVERAGE CONSOLIDATED BALANCE SHEET, NET INTEREST INCOME AND NET INTEREST MARGIN
(TAX-EQUIVALENT BASIS)

- ---------

(1) Securities available for sale are stated at amortized cost.

(2) Average loan balances and yields include non-accruing loans. Loan fees are
included in the interest amounts and are not material.

15

The following table presents an analysis of the impact on interest income
and expense resulting from changes in average volumes and rates over the past
three years. For purposes of this disclosure, changes that are not solely due to
volume or rate have been allocated proportionally to both, based on their
relative absolute values.

VOLUME/RATE ANALYSIS (TAX-EQUIVALENT BASIS)

PROVISION FOR LOAN LOSSES

The provision for loan losses represents Management's estimate of the amount
necessary to be charged to operations to bring the allowance for loan losses to
a level that is considered adequate in relation to the risk of losses inherent
in the loan portfolio. Actual loan losses, net of recoveries, serve to reduce
the allowance.

The loan loss provision amounted to $11.2 million in 2002 representing an
$8.4 million increase from the 2001 provision of $2.8 million. The substantial
increase in the loan loss provision for 2002 was related primarily to two large
credits that were placed on non-accrual in the first and second quarters of
2002.

16

NON-INTEREST INCOME

Non-interest income has become an increasingly important source of revenue
for the Company. The major components of non-interest income are presented
below.

- ---------

NM -- Not meaningful.

Non-interest income amounted to $23.1 million in 2002, an increase of 2%
from the $22.7 million earned in 2001. The principal factors affecting this
comparison were the impact of the Vista Merger, which added approximately $1.5
million in other income and was largely responsible for the increases in service
charges on deposit accounts and in income on life insurance; a $1.2 million
recovery from the dissolution of the United Financial Services ('UFS') joint
venture in the first quarter of 2002; and a higher gain on the sale of a credit
card portfolio in the second quarter of 2002. These favorable factors were
partially offset by lower other service charges, commissions and fees and a
decrease in trust income. The decline in other service charges, commissions and
fees was primarily related to lower credit card fees resulting from the sale of
these portfolios in 2001 and 2002, while the decrease in trust income was due to
lower asset values under administration resulting from stock market conditions.

NON-INTEREST EXPENSE

The Company closely monitors non-interest expense growth. The following
table presents an analysis of the major categories of non-interest expenses:

17

Non-interest expense increased 19% to $68.7 million in 2002 over the $57.9
million incurred in 2001. A major factor in the overall expense increase was the
inclusion of approximately $4.5 million in non-interest expenses resulting from
the Vista Merger, which contributed to the growth in salary, occupancy,
furniture and equipment, marketing and telecommunication expenses. An increase
in merger-related and restructuring charges, pension plan and healthcare
expenses, legal and other professional service fees, and intangible asset
amortization related to the Vista Merger were also principal factors
contributing to the growth in expenses. Partly offsetting these expense
increases were declines in data processing expense related to the in-house
processing of checks and lower credit card expense resulting from the sale of
this portfolio.

The Company adopted the fair value based method to recognize compensation
expense on all of its outstanding stock option awards in the fourth quarter of
2002, in accordance with the provisions of Statement of Financial Accounting
Standards ('SFAS') No. 123, 'Accounting for Stock-Based Compensation,' as
amended by SFAS No. 148, which permits retroactive restatement. Accordingly, the
Company increased its employee benefit expense in its current and prior periods.
The impact on net income per diluted share was $(0.02) for each year in the
three-year period ended December 31, 2002.

INCOME TAXES

The provision for income taxes amounted to $3.7 million in 2002, down $5.8
million or 61% from the $9.5 million incurred in 2001. The decline in the income
tax provision in 2002 from 2001 was due to a 29% decrease in income before
provision for income taxes and a lower effective tax rate. The effective tax
rate was 15% for 2002 and 28% for 2001. The decline in the effective tax rate
for 2002 versus 2001 was largely due to an increase in the proportion of
tax-exempt income to income before provision for income taxes. For further
information regarding the provision for income taxes, see 'Note 13 -- Income
Taxes' on pages 56-57 of this Report.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

EARNINGS SUMMARY

Net income for 2001 was $24.8 million, largely unchanged from the $24.7
million earned in 2000. Diluted net income per share was $1.62 in 2001 compared
to $1.59 reported in 2000. The Company's operating income for 2001, defined as
net income excluding the effect of one-time charges, net of taxes, was $25.2
million, or $1.65 per diluted share. Net income for 2001 included a
non-recurring, after-tax charge of $0.5 million, or $0.03 per diluted share,
related to the conversion of United National Bank to a state chartered bank and
its name change to UnitedTrust Bank. On an operating basis, income per diluted
share increased 4% to $1.65 from the $1.59 reported in 2000.

In 2001, the return on average assets was 1.22% compared to 1.16% in 2000.
The return on average stockholders' equity was 16.25% in 2001 versus 20.48% in
2000. In addition, the efficiency ratio improved to 57.34% for 2001 from 58.60%
in 2000. The decrease in the efficiency ratio from 2000 to 2001 was due
primarily to an increase in net interest income.

NET INTEREST INCOME

A summary of net interest income on a tax-equivalent basis for 2001 and 2000
is presented in the following table:

For the year ended December 31, 2001, tax-equivalent net interest income
grew 4% from the prior year as a result of a 39 basis point widening of the net
interest margin, partly offset by lower levels of average interest earning
assets, principally loans and securities.

18

The net interest margin widened to 4.04% in 2001 from 3.65% in 2000. This 39
basis point improvement resulted primarily from a more rapid decline on rates
paid on deposits and borrowings than on earning asset yields. Also contributing
to the margin improvement in 2001 was the more rapid recognition of accretion on
certain securities purchased at a discount due to prepayments and calls. Partly
offsetting the margin expansion in these periods was a reduced contribution from
net non-interest bearing funds due to the lower interest rate environment.

Average interest earning assets declined 6% in 2001 from 2000 as both
average loans and securities decreased. Average loans fell $55 million or 4%
during 2001 compared to 2000 and resulted from $103 million in planned loan
sales made by the Company during 2001 to reposition its balance sheet. These
transactions involved the sale of $81 million in residential mortgage loans in
the first half of 2001 and $22 million in credit card receivables at June 30,
2001. Average securities declined $69 million or 10% in 2001 from 2000,
primarily due to higher than expected principal prepayments received on the
existing portfolio, as well as calls on certain Federal agency securities
resulting from a declining interest rate environment.

Average deposits and average core deposits (which exclude time deposits of
$100,000 and over) both declined 5% in 2001 from 2000. The 5% decline in average
total deposits resulted primarily from a lower level of average time deposits
and from a $25 million decrease in average savings deposits, including NOW and
money market accounts, of which nearly half was due a decrease in secured credit
card deposits resulting from the sale of this business in the second quarter of
2001. Average non-interest bearing deposits increased $9 million or 3% in 2001
from 2000.

NON-INTEREST INCOME

The major components of non-interest income for the years 2001 and 2000 are
presented below.

- ---------

NM -- Not meaningful.

In 2001, total non-interest income amounted to $22.7 million, a decrease of
$3.9 million or 15% from 2000. The decline in non-interest income in 2001 was
largely due to a $3.7 million decrease in net gains from securities transactions
and a $2.5 million reduction in other service charges, commissions and fees,
partially offset by a $1.3 million increase in other income, a $723,000 increase
in income on life insurance and a $542,000 gain on the disposition of the
Company's $22 million secured credit card portfolio at the end of the second
quarter of 2001.

Net gains on securities transactions of $0.2 million were recorded in 2001
compared with $3.9 million in 2000. The 2000 gains resulted from the sale of
certain equity securities.

The decline in other service charges, commissions and fees in 2001 was due
primarily to a decrease in fees generated from our credit card area related to
the aforementioned sale of credit card receivables.

The growth in income on life insurance in 2001 from 2000 resulted primarily
from additional purchases made in the second half of 2000, while the increase in
other income in 2001 from 2000 was primarily due to higher gains recognized from
the sale of residential mortgage loans.

19

NON-INTEREST EXPENSE

The following table presents an analysis of the major categories of
non-interest expenses for the years 2001 and 2000:

- ---------

NM -- Not meaningful.

Non-interest expense increased a modest 1% to $57.9 million in 2001 over the
$57.4 million recognized in 2000. Included in non-interest expense in 2001 were
pretax restructuring charges of $792,000 in connection with the conversion of
United National Bank to a state chartered bank and its name change to
UnitedTrust Bank. Excluding these charges, non-interest expense in 2001
decreased $241,000 or 0.4% from 2000.

During 2001, salaries, wages and employee benefits increased $1.7 million or
7% over 2000, reflecting normal salary adjustments, higher incentive
compensation related to the elimination of certain accruals in 2000 and
increased healthcare expenses, partly offset by a higher pension plan expense
credit in 2001. This expense increase was largely offset by lower data
processing, furniture and equipment, and credit card expenses related to the
aforementioned sale of the Company's secured credit card portfolio in 2001.

INCOME TAXES

The provision for income taxes was $9.5 million for 2001 unchanged from
2000. The effective tax rate was 28% in both 2001 and 2000. For further
information regarding the provision for income taxes, see 'Note 13 -- Income
Taxes' on pages 56-57 of this Report.

LINES OF BUSINESS

The Company, for management purposes, is segmented into the following lines
of business: Retail Banking, Commercial Banking, Investments, and Trust and
Investment Services. Activities not included in these lines are reflected in All
Other. Summary financial information on a fully tax-equivalent basis for the
lines of business is presented in 'Note 18 -- Segment Reporting' on pages 65-68
of this Report.

Line of business information is based on accounting practices that conform
to and support the current management structure, and is not necessarily
comparable with similar information for any other financial institution.

20

Income before taxes on a fully tax-equivalent basis includes revenues and
expenses directly associated with each line, plus allocations of certain
indirect revenues and expenses. Centrally provided corporate services and
general overhead are allocated in proportion to the contribution of each
business line to consolidated pretax income prior to the inclusion of these
costs. A matched maturity funds transfer method is employed to assign a cost of
funds to the earning assets of each business line, as well as to a value of
funds to the liabilities of each business line. The provision for loan losses is
allocated based on the historical net charge-off ratio for each line of
business.

RETAIL BANKING

Retail Banking meets the needs of individuals and small businesses. This
segment includes loans secured by one-to-four family residential properties,
construction financing, loans to individuals for household, family and other
personal expenditures, and lease financing. In addition, this segment includes
the branch network. Income before taxes for this segment in 2002, increased $6.0
million from 2001 due to an $11.8 million increase in net interest income and a
decrease of $0.8 million in the loan loss provision allocation. This was offset
by decreases in non-interest income of $1.7 million and an increase in
non-interest expense of $4.9 million. The higher net interest income was
primarily related to increased average consumer loans and wider-spread average
core deposits when compared to 2001. The decrease in the loan loss provision was
due to a reduction related to the sale of the unsecured credit card portfolio in
2002. The decrease in non-interest income was primarily due to the lower credit
card fees resulting from the sale of the unsecured credit card portfolio in
2002, while the increase in non-interest expense was mainly due to the Vista
transaction. Income before taxes in 2001 declined $7.8 million from 2000 due to
a $7.7 million decline in net interest income. The reduction in net interest
income was primarily related to a 7% decline in average deposits and narrowed
spreads on such deposits after funds credits.

COMMERCIAL BANKING

Commercial Banking provides term loans, demand secured loans, Small Business
Administration ('SBA') financing, floor plan loans and financing for commercial
and construction lending and commercial credit to middle-market businesses. It
also includes the operations of United Commercial Capital Group, which provides
non-traditional real estate and commercial financings. Pretax results in 2002
decreased $14.0 million to a pretax loss of $1.8 million from 2001 primarily due
to a $9.2 million increase in the loan loss provision allocation. Of this
amount, $3.7 million was related to the Suprema Specialties credit facility and
$2.4 million was due to a charge-off of a loan to an insurance premium financing
company. The remaining allocation was due to increased loan volume. In addition,
net interest income decreased $3.1 million from 2001 due to narrower loan
spreads and non-interest expense increased $2.5 million due to the Vista Merger.
In 2001, pretax income grew $4.4 million from 2000 due to a $3.3 million
increase in net interest income resulting from wider loan spreads after funds
charges. A $1.4 million reduction in the loan loss allocation was partially
offset by a $0.7 million increase in non-interest expense.

INVESTMENTS

The Investments segment is comprised of the Company's securities portfolio,
which includes U.S. Treasury and Federal Agency securities, tax-exempt
securities, mortgage-backed securities, corporate debt securities, equity
securities and short-term investments. Pretax income for 2002 increased $2.0
million over 2001 due to a $2.4 million increase in net interest income and a
$0.8 million increase in non-interest income, partially offset by a $1.2 million
increase in non-interest expense. The increase in net interest income was
largely due to a 16% growth in average investment securities. Pretax income for
2001 increased by $2.5 million over 2000 due to a $5.5 million rise in net
interest income resulting from higher spreads after funds charges on the
securities portfolio and after funds credits on borrowed funds. This was partly
offset by a $2.5 million decline in non-interest income resulting from lower
investment securities gains.

21

TRUST AND INVESTMENT SERVICES

The Trust and Investment Services segment derives revenue in the form of
fees generated for the services provided. The major sources of fee income are
generated from a full range of fiduciary services, ranging from mutual funds to
personal trust, investment advisory and employee benefits. Also included are
fees generated from the financial services area, which provides uninsured
financial products, including the sale of annuities, insurance and mutual funds.
In 2002, income before taxes for this segment decreased $1.8 million from 2001
due to a 10% decline in revenue resulting from a lower market value of trust
assets and a 23% increase in expenses, which was primarily due to a higher
occupancy expense allocation and increased commissions on alternative investment
products. Income before taxes in 2001 declined a modest $0.2 million from 2000.

ALL OTHER

The All Other segment primarily includes the impact of stockholders' equity
and the allowance for loan losses, as well as funds transfer-pricing offsets.
Additionally, certain revenues and expenses that are not considered allocable to
a line of business are reflected in this segment. Income before taxes in 2002
for this segment decreased $1.3 million from 2001 due to a $1.4 million decline
in net interest income related to a higher funds credit assigned to non-maturity
core deposits in Retail Banking in 2002, partially offset by prepayment penalty
income. Non-interest expense increased $1.2 million due primarily to $1.8
million in integration expenses relating to the Vista Merger. These unfavorable
factors were partially offset by an increase in non-interest income of $1.3
million due to a $1.2 million recovery from the dissolution of the UFS joint
venture. Income before taxes in 2001 increased $1.3 million from 2000 primarily
due to a $1.6 increase in funds transfer-pricing mismatch profits and a
reduction in non-interest expense of $0.4 million. These favorable variances
were offset in part by a decline in non-interest income of $0.8 million.

The following table shows the percentage contribution of the various lines
of business to consolidated income before taxes on a fully tax-equivalent basis:

22

FINANCIAL CONDITION

LOAN PORTFOLIO

At December 31, 2002, total loans increased 35% from year-end 2001,
primarily attributable to the effect of the Vista Merger. At the end of the
second quarter of 2002, the Company sold the remainder of its credit card
portfolio, which totaled $22 million at the time of the sale. A high level of
loan prepayments during 2002 that resulted from the low-interest rate
environment served to limit the growth of the loan portfolio, particularly in
the commercial, consumer and residential mortgage loan portfolios. Total loans
declined 4% from December 31, 2000 to December 31, 2001 as the result of $103
million in planned loan sales made by the Company during 2001 to reposition its
balance sheet. These transactions involved the sale of $81 million in
residential mortgage loans in the first half of 2001 and $22 million in credit
card receivables at June 30, 2001. Excluding these sales, total loans grew 4%
during 2001. An analysis of loans outstanding, net of unearned income, is
presented in the following table:

A significant portion of the Company's loan portfolio (including commercial
and consumer loans) is secured by real estate assets. Substantially all of the
Company's loans are to customers located within New Jersey. Accordingly, the
Company is subject to deterioration of credit quality within its loan portfolio
in the event that the New Jersey economy in general and/or the real estate
market in New Jersey weakens. The Company has not engaged in international
lending and, at year-end 2002, had four Shared National Credits totaling $28.5
million. The Company strives to maintain a balanced loan portfolio with each of
the four major segments of the portfolio approximating a quarter of the total
portfolio. At December 31, 2002, commercial real estate loans (consisting of
construction and commercial mortgage loans) were 29% of total loans, residential
mortgage loans were 27% of total loans, consumer loans, including lease
financing, were 24% of total loans, and commercial loans were 20% of total
loans.

Although the Bank has a legal lending limit to any one borrower of $34
million, it is the policy of the Bank to limit total credit exposure (i.e., both
outstanding loans and unused loan commitments) to any single lending
relationship to $15 million, or approximately 43% of the Bank's legal lending
limit. The Executive Committee of the Board of Directors of the Bank has
authorized seven exceptions to this policy, which aggregated $144 million at
year-end 2002. At that date, the Company had 52 relationships with total credit
exposure in excess of $5 million. The total of such credit exposure was
approximately $543 million, or 29% of total loans and total unused loan
commitments.

The average recorded balances of impaired loans during 2002, 2001 and 2000
were $1.4 million, $0.6 million and $0.5 million, respectively. For additional
discussion on impaired loans, see 'Asset Quality' below.

The Company will continue to compete for what it believes are quality loans
in those sectors of the business community where such loans are most prevalent.

ASSET QUALITY

Lending policies are formulated by the Company's Senior Lending Officer and
reviewed and approved by the Board of Directors of the Company and the Bank.
Loan approval requirements are dictated by the policies for the respective loan
areas of the Bank, which are based on, but not limited to, reputation of the
customer, collateral securing the loan, capital, ability to repay, and current
economic

23

conditions. Individual approval limits for each of the Bank's loan officers are
reviewed and reset from time to time. Authority for approval of credits between
$1 million and $5 million, is retained by the Bank's Management Loan Committee,
consisting of the Bank's Chief Executive Officer, President, Chief Operating
Officer and Senior Lending Officer, Executive Vice President Commercial and
Consumer Lending, Executive Vice President Real Estate Lending and the Senior
Credit Officer, as appropriate. Credit extensions exceeding $5 million must be
approved by both the Management Loan Committee and by the Executive Committee of
the Board of Directors of the Bank.

The Bank maintains a risk rating system for all commercial, construction and
commercial real estate loans. Each of these loans is evaluated and given a
rating upon origination. Loan officers are required to identify potentially
deteriorating loan situations through a self-reporting system. Subsequently,
these loans are monitored on a regular basis by the Bank's Credit Quality
Committee and rating revisions may be made. Additionally, the Bank's independent
loan review consultant reviews substantially all credits that are rated special
mention or worse. Each month, the Bank's lending staff reviews delinquent loans
for all loan portfolios with the Credit Quality Committee of the Bank,
consisting of the same management group as the Bank's Management Loan Committee
as well as other lending department heads, and the Executive Committee of the
Board of Directors of the Bank. These processes allow for implementation of a
strategy to react in the early stage of a potential credit concern.

The Company's independent loan review function is an integral part of its
overall loan administration. The Bank has engaged an independent consultant to
perform the loan review function. The independent consultant is responsible for
the evaluation of credit extensions with respect to quality, documentation and
risk criteria. The consultant's direct reporting line to the Audit Committee of
the Board of Directors of the Bank is intended to maintain its independence and
to provide assurance that troubled loan situations will be identified and proper
procedures followed to establish corrective measures. The loan review and the
self-reporting and risk rating systems are designed to provide the Company with
an early warning mechanism to detect loans to customers with deteriorating
financial conditions or loans that may represent potentially troubled
situations. In addition, the Company's internal audit department reviews loan
documentation and collateral as part of its regular audit procedures.

NON-PERFORMING ASSETS

The Company defines non-performing assets as non-accrual loans, impaired
loans, loans past due 90 days or more and still accruing, other real estate
owned and other assets owned. At December 31, 2002, non-performing assets
totaled $16.3 million or 0.57% of total assets, up from the $6.6 million or
0.34% of total assets at December 31, 2001.

Non-performing loans at December 31, 2002 were $15.7 million or 0.95% of
total loans, compared to $6.4 million or 0.52% of total loans at December 31,
2001. The $9.3 million increase from 2001 resulted primarily from the impact of
the Vista Merger and a rise in non-performing lease financings, which is
included in the consumer loan portfolio.

At December 31, 2002, the Company's holdings in other real estate owned
amounted to $570,000 compared to $127,000 at December 31, 2001. Foreclosures
will continue to result in assets migrating from non-performing loans to other
real estate owned. It is the Company's intent to actively negotiate and dispose
of these properties at fair market values which are considered reasonable under
the circumstances. In 2002, the Company recognized $98,000 in net costs relating
to these properties compared to $29,000 in net recoveries 2001. Other assets
owned amounted to $30,000 at year-end, a decrease of $34,000 from 2001.

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The level of non-performing assets and certain related ratios over the past
five years are set forth in the following table:

- ---------

(1) Generally represents those loans on which Management has determined that
borrowers may be unable to meet contractual principal and/or interest
obligations or where interest or principal is past due for a period of 90
days or more (except when such loans are both well-secured and in the
process of collection). When loans are placed on non-accrual status, all
accrued but unpaid interest is reversed.

(2) Represents loans on which payments of interest and/or principal are
contractually past due 90 days or more, but are currently accruing interest
at the previously negotiated rates, based on a determination that such loans
are both well-secured and in the process of collection.

(3) Consists of real estate acquired through foreclosure.

(4) Consists of assets, other than real estate, acquired through repossession,
forfeiture or abandonment.

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LOAN LOSS EXPERIENCE

The following table presents an analysis of the allowance for loan losses,
including charge-offs and recoveries by loan category, for the last five years.