SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

(Mark One)

|X|        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
                       EXCHANGE ACT OF 1934 [FEE REQUIRED]

For the Fiscal Year Ended December 31, 1995

|_|     TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from ______________________ to ______________________

                         Commission File Number: 0-17353

                            FMS FINANCIAL CORPORATION
             (Exact name of registrant as specified in its charter)

                              New Jersey                        22-2916440
         (State or other jurisdiction of incorporation       (I.R.S. Employer
          or organization)                                  Identification No.)

          Sunset and Salem Roads, Burlington, New Jersey          08016
             (Address of principal executive offices)           (Zip Code)

Registrant's telephone number, including area code:           (609) 386-2400
                                                              ---------------

Securities registered pursuant to Section 12(b) of the Act:       None
                                                              ---------------

Securities registered pursuant to Section 12(g) of the Act:

                    Common Stock, par value $.10 per share
                               (Title of Class)

      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 to this
Form 10-K.[X]

      Based on the closing  sales price of $17.00 per share of the  registrant's
common stock on March 1, 1996, as reported on the Nasdaq  National Market System
the  aggregate  market  value of  voting  stock  held by  non-affiliates  of the
registrant was approximately  $42.6 million.  On such date,  2,505,796 shares of
the registrant's Common Stock were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

      1.    Portions of Annual Report to Stockholders for the Fiscal Year Ended
            December 31, 1995.  (Parts II and IV)

      2.    Portions of Proxy Statement for the 1996 Annual Meeting of
            Stockholders. (Part III)


<PAGE>



                                    PART I

Item 1.  Business

General

      The  Corporation.   FMS  Financial  Corporation  (the  "Corporation")  was
incorporated  under the laws of the State of New Jersey on September 1, 1988 for
the purpose of  becoming a savings and loan  holding  company.  On December  21,
1988,  the  Corporation  acquired  all of  the  common  stock  of  Farmers'  and
Mechanics'  Savings  Bank,  SLA,  now known as Farmers and  Mechanics  Bank (the
"Bank" or "Farmers and  Mechanics")  following the Bank's  conversion from a New
Jersey chartered mutual to a New Jersey chartered stock savings institution.

      Prior to the acquisition of all of the outstanding  stock of the Bank, the
Corporation had no assets or liabilities and engaged in no business  activities.
Subsequent to the acquisition of Farmers and Mechanics,  the Corporation engaged
in no  significant  activity  other  than  holding  the  stock  of the  Bank and
operating a savings and loan  business  through  the Bank,  and the  issuance in
July, 1994 of 10%  subordinated  debentures due 2004 in the aggregate  principal
amount of $10 million.  Accordingly,  the  information set forth in this report,
including  financial  statements and related data, relates primarily to the Bank
and its subsidiaries.

     The Corporation's  executive offices are located at Sunset and Salem Roads,
Burlington, New Jersey. Its telephone number is (609) 386-2400.

      The Bank.  Farmers and  Mechanics  commenced  operations in 1871 under the
name  Farmers and  Mechanics  Building and Loan  Association.  The Bank became a
member of the  Federal  Home Loan Bank  ("FHLB")  System and has had its savings
deposits federally insured by the Savings  Association  Insurance Fund ("SAIF"),
and  its  predecessor  the  Federal  Savings  and  Loan  Insurance   Corporation
("FSLIC"), since 1952. The Bank is subject to regulation by the Office of Thrift
Supervision ("OTS") and the Federal Deposit Insurance Corporation ("FDIC").  See
"Regulation."  Effective  October 26, 1994, the Bank changed its name to Farmers
and  Mechanics  Bank.  The name  change  was  approved  by the  Bank's  Board of
Directors,  the Corporation and the OTS. The Bank conducts its business  through
its main  administrative  office and sixteen branch offices  located  throughout
Burlington  County,  New Jersey.  At December 31, 1995, the Bank's total assets,
deposits and stockholders' equity amounted to $501 million, $429 million and $39
million, respectively.

      Farmers and  Mechanics is primarily  engaged in the business of attracting
deposits  from the  general  public and  originating  loans which are secured by
residential real estate. To a lesser extent, the Bank also originates  consumer,
commercial real estate and construction loans and invests in U.S. government 
securities and mortgage-related securities.

      Farmers  and  Mechanics  considers  its  primary  market  area for savings
deposits  to be  Burlington  County,  New Jersey,  while its primary  market for
lending activities consists of Burlington County, and, to a lesser extent, other
regions of southern New Jersey.

Lending Activities

     General.   The  principal  lending  activity  of  the  Bank  has  been  the
origination of conventional  fixed-rate and  adjustable-rate  mortgage loans for
the  purpose  of  financing  or  refinancing  one-to  four-  family  residential
properties. To a lesser extent, the Bank also originates commercial real estate,


<PAGE>



consumer,  construction and commercial  business loans. As of December 31, 1995,
97.93% of the Bank's loans were real estate loans, of which 84.74%  consisted of
loans secured by mortgages on one-to four-family residential properties of which
0.70% were insured or guaranteed  real estate loans,  1.47% were consumer loans,
and 0.60% were commercial  business loans. Such percentages have been calculated
before  the  deduction  of loans in  process,  deferred  loan fees and loan loss
reserves. See "--Analysis of Loan Portfolio".

      The Bank also sells fixed-rate loans in the secondary  mortgage market and
has in the past purchased adjustable-rate loans.

                                      2


<PAGE>



Analysis of Loan Portfolio

      The  following  table  sets  forth  the  composition  of the  Bank's  loan
portfolio and mortgage-backed and related securities portfolio in dollar amounts
and in percentages of the respective portfolios at the dates indicated.

<TABLE>
<CAPTION>

                                                                   At December 31,
                                  1995                1994                1993              1992              1991
                                 ------              ------              ------            ------            -----

                            Carrying  Percent  Carrying   Percent   Carrying Percent  Carrying Percent  Carrying  Percent
                             Value    of Total   Value    of Total   Value   of Total  Value   of Total  Value    of Total
                              ------  ------    --------     ----    -------   ------   ------- ------   -------    ------
                                                             (Dollars In Thousands)

Mortgage loans:

<S>                         <C>        <C>      <C>         <C>     <C>         <C>    <C>       <C>    <C>        <C>
  One- to four-family       $249,278   84.74%   $245,874    84.83%  $237,382    86.03% $222,178  85.08% $199,766   83.23%

  Commercial real
    estate                    34,721   11.81      32,228    11.12     28,892    10.47    29,136  11.38    25,409   10.58


  Construction......           4,063    1.38       5,699     1.97      4,157     1.51     2,760   1.06     4,200    1.75
                             -------             -------             -------            -------          -------

      Total mortgage
        loans                288,062             283,801             270,431            254,074          229,375

Consumer and other loans:
  Consumer..........           4,337    1.47       4,317     1.49      4,119     1.49     4,234   1.62     6,740    2.81
  Commercial business          1,779    0.60       1,712     0.59      1,377     0.50     2,248   0.86     3,903    1.63
                              ------             -------             -------             ------          -------

      Total consumer
        and other loans        6,116               6,029               5,496              6,482           10,643
                              ------             -------             -------            -------          -------

      Total loans...         294,178  100.00%    289,830   100.00%   275,927   100.00%  260,556 100.00%  240,018  100.00%
                                      ======               ======              ======           ======            ======


Less:

  Unearned discount, premium,
    loans in process,
    deferred loan fees, net.. (3,011)             (3,949)             (4,114)            (3,187)          (4,857)

  Allowance for loan
    losses..........          (2,767)             (2,621)             (2,589)            (2,380)          (1,839)
                              ------            --------             -------            -------          -------

    Total loans, net        $288,400            $283,260            $269,224           $254,989         $233,322
                             =======             =======             =======            =======          =======

Mortgage-backed securities
held to maturity and
available for sale:

  FHLMC.............         $54,039   43.47%    $64,474    44.99%   $56,258    43.77%  $52,602  41.68%  $50,368   46.80%
  FNMA..............          41,507   33.38      48,746    34.01     36,533    28.42    32,617  25.84    23,574   21.90
  GNMA..............          15,225   12.25      17,522    12.23     16,879    13.13    15,425  12.22    10,973   10.19
  Real estate investment
    mortgage conduit           7,291    5.86       7,577     5.29     10,187     7.93    12,564   9.96    12,945   12.03
  Collateralized mortgage
    obligations.....           5,485    4.41       3,863     2.69      6,485     5.05    10,474   8.30     9,772    9.08
  Mortgage pass throughs         784    0.63       1,131     0.79      2,190     1.70     2,525   2.00        --      --
                              ------  ------    --------     ----    -------   ------   ------- ------   -------  ------

   Total mortgage-backed
     and related securities $124,331  100.00%   $143,313   100.00%  $128,532   100.00% $126,207 100.00% $107,632  100.00%
                             =======  ======     =======   ======    =======   ======   ======= ======   =======  ======
</TABLE>




                                               3


<PAGE>



      The following table sets forth the Bank's loan  originations  and loan and
mortgage-backed and related securities  purchases,  sales and principal payments
for the periods indicated.

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,

                                                         1995       1994       1993       1992       1991
                                                         ----       ----       ----       ----       ----

                                                                        (In Thousands)

Total loans receivable (gross):

<S>                                                    <C>        <C>        <C>        <C>        <C>
  At beginning of period..................             $289,830   $275,926   $260,556   $240,018   $254,388

  Mortgage loans originated:

    One-to four-family....................               34,775     52,902     87,061     88,468     33,103

    Commercial real estate................                7,144      6,806      6,509     10,902      7,112

    Construction..........................                2,925      3,516         --        125      1,120
                                                        -------    -------  ---------    -------    -------

      Total mortgage loans originated.....               44,844     63,224     93,570     99,495     41,335



  Mortgage and consumer loans purchased:

    One to four family....................                   --         --         --      8,072         --

    Consumer..............................                   --        127         --         --         --
                                                     ----------    ------  ---------- ---------- ----------

      Total mortgage and consumer loans purchased            --        127         --      8,072         --



Total mortgage loans originated and purchased            44,844     63,351     93,570    107,567     41,335

Consumer loans originated.................                1,048        475        834        710      1,067

Transfer of mortgage loans to real estate owned             (57)    (1,091)      (362)      (619)    (1,650)

Sale of loans.............................               (1,118)    (1,739)   (12,362)   (23,125)   (10,771)

Principal repayments......................              (40,369)   (47,092)   (66,310)   (63,995)   (44,351)
                                                        -------    -------    -------    -------    -------

Total loans receivable at end of period...             $294,178   $289,830   $275,926   $260,556   $240,018
                                                        =======    =======    =======    =======    =======



Mortgage backed securities:

At beginning of period....................             $131,873   $128,532   $126,207   $107,632   $ 67,985

Mortgage backed securities purchased......                   --     51,051     54,697     49,827     59,138

Mortgage backed securities sold...........                   --         --         --     (1,000)    (9,426)

Amortization and repayments...............              (20,318)   (31,039)   (52,372)   (30,252)   (10,065)

Reclass of collateralized mortgage obligations

  to investments available for sale.......                   --   (16,671)        --         --         --
                                                     ----------  -------   ---------- ---------- ----------

At end of period (1)......................             $111,555   $131,873   $128,532   $126,207   $107,632
                                                        =======    =======    =======    =======    =======
</TABLE>

-------------------
(1)   Consists of held to maturity portfolio and excludes available for sale 
      securities.

                                              4


<PAGE>



      Residential  Loans.  The primary lending activity of the Bank has been the
origination  of  conventional  mortgage  loans to enable  borrowers  to purchase
existing homes,  refinance  existing  mortgage loans or construct new homes. The
Bank generally originates mortgage loans with terms of 15 to 30 years, amortized
on a monthly  basis,  with  principal  and interest  due each month.  Typically,
residential  real estate  loans remain  outstanding  for  significantly  shorter
periods than their  contractual  terms because borrowers may refinance or prepay
loans at their option.

      Regulations  permit  thrift  institutions  to make home loans on which the
interest rate,  loan balance or term to maturity may be adjusted,  provided that
the  adjustments  are  tied to  specified  indices.  The Bank  presently  offers
mortgage  loans that adjust every year after an initial  fixed term of one, two,
five or seven  years,  at an interest  rate higher than the  corresponding  U.S.
Treasury  Security Index.  The interest rates on these mortgages adjust annually
after the one,  two,  five or seven  year  anniversary  date of the loan with an
interest rate  adjustment  cap of 1.5% per year and not to exceed 11.5% over the
life of the loan.  At  December  31,  1995,  adjustable-rate  residential  first
mortgage  loans  amounted to $69.9  million,  or 23.8% of the Bank's  total loan
portfolio.

      Fixed-rate mortgage loans are underwritten  according to Federal Home Loan
Mortgage  Corporation   ("FHLMC")  and  Federal  National  Mortgage  Association
("FNMA")  guidelines.  The Bank sells  fixed-rate  loans in the secondary market
from time to time when such sales are consistent with the Bank's asset/liability
management  goals and can be achieved on terms  favorable to the Bank.  The Bank
generally  charges a higher  interest  rate on such loans if the property is not
owner-occupied.  At December  31,  1995,  $151.6  million or 51.5% of the Bank's
total loan portfolio, consisted of long-term fixed-rate first mortgage loans.

      The Bank's  lending  policies  generally  limit the maximum  loan-to-value
ratio on owner-occupied  residential  mortgage loans to 90% of the lesser of the
appraised  value or purchase  price,  with the condition  that private  mortgage
insurance  is  required  on loans  with  loan-to-value  ratios in excess of 80%.
Mortgage loans on investment  properties  are made by the Bank at  loan-to-value
ratios up to 70%. The loan-to-value ratio,  maturity and other provisions of the
loans made by the Bank have  generally  reflected the policy of making less than
the maximum loan permissible  under applicable  regulations,  in accordance with
established  lending  practices,  market  conditions and underwriting  standards
maintained by the Bank. The Bank requires title, fire and casualty  insurance on
all properties securing real estate loans made by the Bank.

      The Bank  actively  solicits  and  originates  home equity  loans and home
equity reserve lines of credit  secured by the equity in the borrower's  primary
residence. These loans generally have terms of 10 to 15 years, some of which are
fixed rates and some of which have rates that adjust  based upon the prime rate.
At December  31,  1995,  the Bank had home  equity  loans in the amount of $12.6
million or 4.3% of its total loan portfolio. Also at December 31, 1995, the Bank
had  approved  $34.3  million in home  equity  lines of credit,  of which  $15.1
million was outstanding.

      Construction  Loans. The Bank originates loans to finance the construction
of one-to four-family dwellings or commercial real estate.  Generally,  the Bank
only  makes  interim  construction  loans to  individuals  if it also  makes the
permanent  mortgage  loan on the  property.  Construction  loans to builders are
generally  made only if the Bank  makes the  permanent  mortgage  loan or if the
builder  has a contract  for sale and the  purchaser  has  received a  permanent
mortgage  commitment.  At  December  31,  1995,  the Bank's  construction  loans
amounted to $2.1 million, net of loans in process.

                                      5


<PAGE>



      Interim  construction  loans to builders  generally have terms of up to 18
months and  interest  rates  which  adjust at a positive  spread  over the prime
interest  rate.  Construction  loans  to  build  single  family  residences  are
available with the interest rate tied to the prime rate. The loans are available
to borrowers who qualify for a permanent loan or have a commitment  from another
lender for the permanent mortgage loan to pay the construction loan.

      Construction  financing is generally considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a  construction  loan is  dependent  largely upon the accuracy of the
initial  estimate of the  property's  value at  completion of  construction  and
development and the estimated cost (including interest) of construction.  During
the  construction  phase,  a number of factors  could  result in delays and cost
overruns.  If the estimate of  construction  costs proves to be inaccurate,  the
Bank may be required to advance funds beyond the amount originally  committed to
permit  completion  of the  development.  If the  estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with a project having a value which is insufficient to assure full repayment.

      Commercial  Real Estate Loans.  Loans  secured by  commercial  real estate
(e.g.,  shopping centers,  medical  buildings,  retail offices) and multi-family
dwelling units (e.g., apartment projects with more than four units), constituted
$34.7  million,  or 11.8%,  of the Bank's  total loan  portfolio at December 31,
1995. Commercial real estate loans and multi-family  residential loans have been
made in amounts up to $2.3 million, with most of such loans ranging in size from
$100,000 to $1.0 million. Permanent loans on commercial properties are generally
originated  in amounts up to 75% of the  appraised  value of the  property.  The
Bank's permanent  commercial real estate loans are secured by improved  property
such as office  buildings,  retail stores,  warehouse and other  non-residential
buildings,  most of  which  are  located  in the  Bank's  primary  market  area.
Commercial real estate loans and  multi-family  residential  loans are generally
made at rates which adjust at a positive  spread over the prime interest rate or
are  balloon  loans  which  mature  in  three  to  five  years  with   principal
amortization for a period of up to 25 years.

     Loans secured by commercial real estate are generally  larger and involve a
greater degree of risk than one-to  four-family  residential  mortgage loans. Of
primary  concern in  commercial  and  multi-family  real  estate  lending is the
borrower's  credit worthiness and the feasibility and cash flow potential of the
project.  Loans secured by income  properties  are generally  larger and involve
greater risks than residential  mortgage loans because payments on loans secured
by income  properties are often dependent on successful  operation or management
of the  properties.  As a result,  repayment  of such  loans may be subject to a
greater extent than residential  real estate loans to adverse  conditions in the
real  estate  market or the  economy.  In order to monitor  cash flows on income
properties,  the Bank requires borrowers and loan guarantors, if any, to provide
annual  financial  statements and rent rolls on commercial real estate loans. At
December 31, 1995, the five largest  commercial  real estate loans totalled $6.8
million  with no single  loan  larger  than $2.3  million.  All such  loans were
current and were  performing  in  accordance  with their terms and the  property
securing such loans in the Bank's market area.

      Consumer.  Regulations permit federally  chartered thrift  institutions to
make secured and unsecured consumer loans up to 35% of the institution's assets.
Consumer loans  generally bear higher interest rates than  residential  mortgage
loans, but they also involve a higher risk of default.

      The Bank makes  various  types of secured  and  unsecured  consumer  loans
including education loans, lines of credit,  automobile loans (new and used) and
loans  secured by deposit  accounts.  As of December  31, 1995,  consumer  loans
totalled $4.3 million, or 1.5% of the Bank's total loan portfolio.

                                      6


<PAGE>



Consumer loans generally have terms of six months to 5 years,  some of which are
at fixed rates and some of which have rates that adjust periodically.

      The Bank  intends to continue to  emphasize  the  origination  of consumer
loans.  The Bank believes that the shorter term and the normally higher interest
rates  available  on  various  types of  consumer  loans  have been  helpful  in
maintaining a profitable  spread  between the Bank's  average loan yield and its
cost of funds.

      Consumer loans are advantageous to the Bank because of their interest rate
sensitivity,  but they also involve more credit risk than  residential  mortgage
loans because of the higher potential of defaults and the difficulties  involved
in disposing of the collateral, if any.

      Commercial  Business Loans.  The Bank's  portfolio of commercial  business
loans amounted to $1.8 million,  or 0.6% of the Bank's total loan portfolio,  at
December 31, 1995. These commercial business loans are underwritten on the basis
of the  borrower's  ability  to  service  such  debt  from  income.  The  Bank's
commercial  business loans are generally  made to small and mid-sized  companies
located within the Bank's primary lending area. In most cases, the Bank requires
additional  collateral  of  equipment,  chattel or other assets  before making a
commercial business loan.

      Loan Originations, Purchases and Sales. In the past, the Bank has retained
in its portfolio  most of the loans it originates.  However,  the Bank's general
policy is to originate  fixed-rate  mortgage  loans under terms,  conditions and
documentation  which permit sale to the FHLMC,  FNMA, or other  investors in the
secondary  market.  Adjustable-rate  mortgage loans are generally not originated
under  terms and  conditions  that  would  permit  their  sale in the  secondary
mortgage  market to FHLMC or FNMA. From time to time, the Bank's policy has been
to sell the majority of its  fixed-rate  mortgage  loan  originations.  Gains or
losses on such sales may occur. This policy was established to reduce the Bank's
vulnerability  to rapid  interest  rate  movements  and to  provide  a source of
funding for ongoing  commitments.  Fixed-rate  mortgages designated for sale are
accounted  for  separately  and are  carried at the lower of cost or market on a
monthly basis in accordance  with applicable  accounting  rules. At December 31,
1995, the Bank had no loans available-for-sale. The Bank continually monitors
the loan inventory and its commitments.

      Loan  Commitments.  The Bank issues loan  origination  commitments to real
estate  developers  and  qualified  borrowers  primarily  for the  construction,
purchase and refinancing of residential  real estate and commercial real estate.
Such  commitments are made on specified terms and conditions,  including in most
cases the payment of a  non-refundable  commitment  fee based on a percentage of
the amount of committed  funds.  At December 31, 1995, the Bank had  outstanding
loan origination commitments of approximately $25.7 million.

      Loan  Origination and Other Fees. In addition to interest earned on loans,
the Bank receives loan origination fees or "points" for originating  loans. Loan
points are a percentage of the  principal  amount of the mortgage loan which are
charged to the borrower for origination of the loan. The Bank's loan origination
fees generally range from 2% to 3% on conventional  residential mortgages and 1%
to 2% on  commercial  real  estate  loans.  All  loan  origination  fees  net of
incremental  direct loan origination  costs, are deferred and amortized over the
contractual life of the related loans.

      The Bank recognizes  other fees and service  charges on loans.  Other fees
and service charges consist of late fees, loan service fees, fees collected with
a change in borrower or other loan modifica-

                                      7


<PAGE>



tions.  The Bank  recognized  other  fees and  service  charges on loans of $157
thousand  for the year ended  December  31, 1995 and $179  thousand for the year
ended December 31, 1994.

      Residential  Mortgage Loan Servicing.  The Bank services loans retained in
its portfolio and loans which were originated by the Bank and resold through the
secondary  mortgage market with the servicing  rights to those loans retained by
the Bank.  The loan  servicing  activities  of the Bank include  collecting  and
remitting  loan  payments,  holding  escrow funds for the payment of real estate
taxes and insurance  premiums and generally  administering the loans.  Under the
loan  servicing  contracts,  the Bank receives  servicing fees that are withheld
from the monthly  payments  made to investors.  The  servicing  spreads on loans
serviced  are usually  based on the unpaid  principal  balance of the loan being
serviced  and  typically  range from .25  percent to .375  percent  per annum of
declining  principal  balance on the  loans.  At  December  31,  1995,  the Bank
serviced  for others 736 loans with an  outstanding  aggregate  balance of $34.4
million.  Loan servicing income for the years ended December 31, 1995, and 1994,
was $113 thousand and $132 thousand, respectively.

      Collection  Procedures.  The Bank's collection  procedures  provide that a
late charge will be assessed after a loan is 15 days delinquent.  When a loan is
more than 30 days  delinquent,  the borrower  will be contacted by mail or phone
and payment requested. If the delinquency continues,  subsequent efforts will be
made to contact the  delinquent  borrower.  In certain  instances,  the Bank may
modify the loan or grant a limited  moratorium  on loan  payments  to enable the
borrower  to  reorganize  his  financial  affairs.  If the loan  continues  in a
delinquent  status  for 90  days or  more,  the  Bank  generally  will  initiate
foreclosure proceedings.

      Non-Performing  Loans.  Loans are generally  placed on non-accrual  status
when either principal or interest is 90 days or more past due.  Interest accrued
and unpaid at the time a loan is placed on non-accrual status is charged against
interest  income.  Subsequent  payments  are either  applied to the  outstanding
principal balance or recorded as interest income, depending on the assessment of
the ultimate collectibility of the loan.

      Impaired Loans.  The Bank considers all  non-accrual  loans as well as any
loans in which it is  probable  that the Bank  will be  unable  to  collect  all
amounts  due  according  to the  contractual  terms  of the  loan  agreement  as
impaired.  Small  balances of homogeneous  loans such as delinquent  residential
mortgages and delinquent  consumer  installment loans are collectively  measured
for  impairment  and a reserve is  established  based on  historical  loss data.
Certain  larger  balance  impaired  loans and other  impaired loans are reviewed
individually  and  reserves  are  established  based on a  discounted  cash flow
analysis or as a practical expedient,  the underlying collateral value. Interest
income on impaired loans is recognized on a cash basis.

                                      8


<PAGE>



      The  following  table sets forth  information  regarding  impaired  loans,
troubled debt restructured and real estate owned assets by the Bank at the dates
indicated.

<TABLE>
<CAPTION>

                                                      At December 31,

                                        1995       1994       1993       1992       1991
                                        ----       ----       ----       ----       ----
                                                  (Dollars in Thousands)

Impaired loans - non-accrual:

Mortgage loans:
<S>                                   <C>        <C>        <C>        <C>       <C>
  One-to four-family.............     $2,502     $1,446     $3,395     $2,780    $ 2,070

  Commercial real estate.........      1,604      1,040      1,266      1,261        662

  Consumer and other.............          6        469         13        571        604
                                     -------     ------     ------     ------     ------

    Total impaired non-accrual loans  $4,112     $2,955     $4,674     $4,612    $ 3,336
                                       =====      =====      =====      =====     ======


Other impaired loans.............        354         --         --         --         --

Troubled debt restructuring......    $634(1)     $1,143     $  663     $  642     $  938

Real estate owned, net...........        669      1,812      1,624      1,714      3,791

Other non-performing assets......      1,228      1,428      1,453      2,203      3,117
                                       -----      -----      -----      -----     ------

Total non-performing assets......     $6,997     $7,338     $8,414     $9,171    $11,182
                                       =====      =====      =====      =====     ======



Total non-accrual loans to net loans   1.43%      1.04%      1.74%      1.81%      1.47%
                                       ====       ====       ====       ====       ====

Total non-accrual loans to
  total assets                         0.82%      0.61%      1.05%      1.07%      0.86%
                                       ====       ====       ====       ====       ====

Total non-performing assets to total
  assets                               1.39%      1.52%      1.89%      2.12%      2.84%
                                       ====       ====       ====       ====       ====

</TABLE>


(1)  Loans restructured prior to SFAS Nos. 114 and 118 effective date and
     performing in accordance with the terms of the restructuring agreement.

      Classified  Assets.  Classified  assets generally  consist of assets which
have  possible  credit risk and/or have  sufficient  degree of risk or potential
weakness  to warrant  management's  close  attention.  Each asset is  assigned a
quality rating based on  management's  best  judgement  concerning the degree of
risk and the likelihood of repayment or orderly liquidation. Quality ratings are
divided into the  following  groups:  Pass and Special  Mention  (unclassified),
Substandard, Doubtful and Loss.

      An asset classified  Substandard is inadequately  protected by the current
net worth and paying  capacity of the obligor or of the collateral  pledged,  if
any. Assets so classified  have  well-defined  weakness or weaknesses.  An asset
classified  Substandard has shown an inability or  unwillingness  on the part of
the borrower  and/or  guarantors  to meet their  obligations  or the  collateral
securing the obligation has  deteriorated in some condition.  Such assets have a
well-defined weakness that points to the distinct possibility that the Bank will
not be paid back in a timely  fashion and it may require  legal action to effect
payment.

      An asset  classified  Doubtful  has all the  weaknesses  inherent in those
classified  Substandard with the added  characteristic  that the weaknesses make
collection or  liquidation  in full, on the basis of currently  existing  facts,
conditions, and values, highly questionable and improbable. The possibility of a
loss on a Doubtful  asset is high.  However,  due to  important  and  reasonably
specific  pending  factors,  which may work to strengthen (or weaken) the asset,
its  classification as an estimated loss is deferred until its more exact status
can be determined.

      An asset  classified Loss is considered  uncollectible  and of such little
value that its  continuance  as an asset,  without  establishment  of a specific
valuation  allowance or charge-off,  is not warranted.  This classification does
not necessarily  mean that an asset has absolutely no recovery or salvage value;
but

                                      9


<PAGE>



rather,  it is not  practical  or  desirable  to defer  writing  off a basically
worthless asset even though partial recovery may be effected in the future.

      Federal regulations require that each insured institution classify its own
assets on a regular  basis.  In addition,  in connection  with  examinations  of
insured institutions,  OTS and FDIC examiners have authority to identify problem
assets and, if appropriate,  classify them.  Assets classified as Substandard or
Doubtful  require the  institution  to  establish  general  allowances  for loan
losses.  If an  asset  or  portion  thereof  is  classified  Loss,  the  insured
institution  must either establish  specified  allowances for loan losses in the
amount of 100 percent of the portion of the asset classified Loss, or charge off
such amount.  General  loss  allowances  established  to cover  possible  losses
related  to  assets  classified  Substandard  or  Doubtful  may be  included  in
determining  an  institution's  regulatory  capital,  while  specific  valuation
allowances  for loan losses do not qualify as regulatory  capital.  OTS and FDIC
examiners may disagree with the insured institution's classification and amounts
reserved.

                                      10


<PAGE>



      The  following  table sets forth  information  with  respect to the Bank's
classified assets for the periods  indicated.  The Bank had no assets classified
as Loss for the periods indicated.

<TABLE>
<CAPTION>

                                                   At December 31,

                                   1995       1994        1993       1992       1991
                                  ------     ------      ------     ------     -----
                                                    (In Thousands)

Classified Assets:

 Substandard Loans:

<S>                                 <C>        <C>         <C>        <C>       <C>
  One- to four-family.........      $2,502     $1,446      $3,395     $2,234    $2,203

  Commercial real estate......       4,247      3,763       5,503      5,782     5,961

  Consumer and other..........           6        469          13        415       215
                                   -------     ------      ------     ------    ------

    Total loans...............       6,755      5,678       8,911      8,431     8,379
                                     -----     ------      ------     ------    ------



 Real Estate held for development,

    net ......................       1,228      1,428       1,453      2,203     3,117

 Real estate owned, net.......         669      1,812       1,624      1,714     3,791
                                    ------     ------      ------     ------    ------

  Total Substandard...........      $8,652    $ 8,918     $11,988    $12,348   $15,287
                                     =====     ======      ======     ======    ======



  Doubtful loans..............    $     --  $      --  $     --     $    625  $    535
                                   -------   --------   ---------    -------   -------

  Total Doubtful..............    $     --  $      --  $     --     $    625  $    535
                                   =======   ========   =========    =======   =======



Total Classified Assets.......      $8,652    $ 8,918     $11,988    $12,973   $15,822
                                     =====     ======      ======     ======    ======
</TABLE>


      At December 31, 1995, the Bank's  non-performing loans consisted primarily
of loans  secured  by  residential  and  commercial  real  estate.  The  largest
non-performing  loan consisted of a loan in the amount of $775 thousand  secured
by a first mortgage on a commercial real estate property operating as a wine and
spirits/delicatessen.

      For a full  explanation of the Bank's assets  classified as Substandard at
December 31, 1995, see "--Subsidiary and Land Development Activities".

      Real Estate Owned.  The Bank's real estate owned classified as Substandard
at December 31, 1995,  consisted of properties  valued at $982 thousand,  gross.
These  properties  are carried at the lower of book value or fair  market  value
less estimated costs to sell and are analyzed by management on a periodic basis.
The real estate owned is comprised of (i) two  residential  single  family homes
with a net book value of $126 thousand,  (ii) 18 acres of land,  with a net book
value of $818 thousand,  which is zoned for the  construction of 109 townhouses,
and (iii) a condominium with a net book value of $38 thousand.  See "--Provision
for Loan and Real Estate Losses."

      Provision for Loan and Real Estate Losses.  A provision for loan losses is
charged to operations  based on management's  evaluation of the risk inherent in
its loan portfolio in relation to the level of the allowance for loan losses and
changes  in the  nature  and  volume of its loan  activity.  For the year  ended
December  31,  1995,  the Bank  charged  $120  thousand  and $354  thousand,  to
operations   as  a  provision  for  losses  on  loans  and  real  estate  owned,
respectively.

      The Bank provides  valuation  reserves for anticipated losses on loans and
real estate when management  determines that a significant  decline in the value
of the  collateral  has  occurred,  as a  result  of  which,  the  value  of the
collateral  is less than the amount of the unpaid  principal of the related loan
plus

                                      11


<PAGE>



estimated  costs of  acquisition  and sale. In addition,  the Bank also provides
reserves  based on the dollar amount and type of collateral  securing its loans,
in order to protect against unanticipated  losses.  Although management believes
that it uses the best information available to make such determinations,  future
adjustments to reserves may be necessary,  and net income could be significantly
affected,  if circumstances  differ  substantially  from the assumptions used in
making  the  initial  determinations.  At  December  31,  1995,  the Bank had an
allowance  for loan losses of $2.8 million.  In 1995,  the Bank charged off $120
thousand in the  allowance  for losses on real  estate  owned,  resulting  in an
allowance of $313 thousand as of December 31, 1995.

      As a  result  of  the  decline  in  real  estate  market  values  and  the
significant losses experienced by many financial institutions,  there has been a
greater level of scrutiny by regulatory  authorities  of the loan  portfolios of
financial  institutions,  undertaken  as  a  part  of  the  examination  of  the
institutions by the FDIC, OTS or other federal or state regulators.  The results
of recent  examinations  of other  depository  institutions  indicate that these
regulators may be applying more conservative  criteria in evaluating real estate
market values. While the Bank believes it had established its existing allowance
for loan losses in accordance  with  Generally  Accepted  Accounting  Principles
("GAAP") at December 31, 1995, there can be no assurance that  regulators,  when
reviewing the Bank's loan portfolio in the future,  will not request the Bank to
significantly   increase  its  allowance  for  loan  losses,  thereby  adversely
impacting the Bank's  financial  condition and earnings.  The Bank's most recent
regulatory  examination  was completed in January 1995. No further  additions to
the allowance for loan losses were required as a result of the examination.

      The  following  table sets forth an analysis of the Bank's  allowance  for
loan losses for the periods indicated.

<TABLE>
<CAPTION>

                                             For the Year Ended December 31,

                                  1995       1994        1993         1992        1991
                                  ----       ----        ----         ----        ----
                                                 (Dollars in Thousands)

<S>                                <C>        <C>          <C>         <C>         <C>
Balance at beginning of period     $2,622     $2,589       $2,380      $1,839      $  992

Loans charged-off:

  One-to four-family..........        (13)       (44)          --         (18)       (510)

  Commercial real estate......         --         --           --          --          --

  Construction................         --         --           --          --          --

  Consumer....................         (6)       (37)          (8)         (6)        (35)

  Commercial business.........         --        (38)          --         (95)         --
                                    -----     ------        -----      ------        ----

    Total charge-offs.........        (19)      (119)          (8)       (119)       (545)

Recoveries....................         44         86           15           8          21
                                    -----       ----         ----       -----       -----

Net loans charged-off.........         25        (33)           7        (111)       (524)
                                    -----      -----         ----      ------      ------

Provision for possible loan losses    120         66          202         652       1,371
                                    -----      -----        -----       -----       -----

Balance at end of period......     $2,767     $2,622       $2,589      $2,380      $1,839
                                    =====      =====        =====       =====       =====

Ratio of net charge-offs to
  average loans outstanding
  during the period                 0.009%     0.012%     (0.003%)      0.046%      0.217%

</TABLE>


                                            12


<PAGE>




      The  following  table sets forth the  breakdown of the  allowance for loan
losses by loan category and the percent of loans in each category to total loans
receivable  for the periods  indicated.  The allocation of the allowance to each
category is not  necessarily  indicative  of future losses and does not restrict
the use of the allowances to absorb losses in any category.

<TABLE>
<CAPTION>

                                                                       At December 31,

                                   1995                 1994                 1993                 1992                1991
                                  ------               ------               ------               ------              -----

                                      Percent of           Percent of          Percent of          Percent of            Percent of
                                      Loans to             Loans to            Loans to            Loans to              Loans to
                             Amount   Total Loans Amount   Total Loans Amount  Total Loans Amount  Total Loans  Amount   Total Loans
                            --------  ----------- ------   ----------- ------  ----------- ------  -----------  ------   -----------

Allowance for                                                      (Dollars in Thousands)

  Loans:

<S>                         <C>           <C>       <C>        <C>     <C>         <C>     <C>           <C>     <C>        <C>
  One-to four-family......  $1,718(1)     84.74%   $1,656      84.83%  $1,613      86.00%  $  927        85.08%  $  385     83.23%

  Commercial real estate..     819(2)     11.81       757      11.12      757      10.47      897        11.38      876     10.58

  Construction............      21         1.38        29       1.97       13       1.51       10         1.06       37      1.75

  Consumer and other......      68(1)      1.47        70       1.49       66       1.52      286         1.62      219      2.81

  Commercial business.....     141(2)      0.60       110       0.59      140       0.50      260         0.86      322      1.63
                            ------      -------     -----    -------    -----    -------    -----      -------    -----   -------


      Total allowance for
        loan losses         $2,767       100.00%   $2,622     100.00%  $2,589     100.00%  $2,380       100.00%  $1,839    100.00%
                            ======       ======    ======     ======   ======     ======   ======       ======   ======    ======
</TABLE>






(1) Includes reserves for impaired loans collectively measured for impairment 
    of residential  real estate and  consumer loans of $144  thousand and 
    $6 thousand, respectively.

(2) Includes reserves for impaired loans individually measured for impairment 
    of commercial  real estate and  commercial business of $241 thousand and 
    $109 thousand, respectively.

                                               13


<PAGE>

      Changes in the allowance for losses on real estate owned are as follows:

<TABLE>
<CAPTION>

                                                Year Ended December 31,

                                      1995       1994        1993         1992         1991
                                     ------     ------       ------       -----       ------
                                                       (In Thousands)

<S>                                   <C>      <C>            <C>        <C>           <C>
Balance at beginning of year..        $ 79      $  --         $  --      $ 16          $ --


Provisions charged to operations       354        158            29       729           481

Charge-offs...................        (120)       (79)          (29)     (745)         (465)

Recoveries....................          --         --            --        --            --
                                       ---       ----           ---       ---           ---

  Balance at end of year......        $313      $  79         $  --      $ --          $ 16
                                       ===       ====          ====       ===           ===
</TABLE>




Mortgage-Backed Securities

      The Bank purchases mortgage-backed securities guaranteed by the Government
National   Mortgage   Association   ("GNMA")  and  the  FNMA  and  participation
certificates   issued  by  the  FHLMC.  GNMA   mortgage-backed   securities  are
certificates issued and backed by the GNMA and are secured by interests in pools
of  mortgages  which are fully  insured by the  Federal  Housing  Administration
("FHA") or partially  guaranteed by the Veterans'  Administration  ("VA"). FHLMC
mortgage-backed  securities are participation certificates issued and guaranteed
by the  FHLMC  and  secured  by  interests  in pools of  conventional  mortgages
originated   by   financial   institutions.   At  December   31,   1995,   these
mortgage-backed  securities held to maturity,  consisting of GNMA, FHLMC,  FNMA,
and private  pass-through  certificates  amounted to $111.5  million or 22.2% of
total assets.

Investment Activities

      Farmers and Mechanics investment policy is to ensure safety and soundness,
provide and maintain the liquidity ratios required under regulations of the OTS,
optimize  the  Bank's  return on  investments,  provide  low-risk,  high-quality
assets,  manage the overall interest rate sensitivity of the portfolio and serve
as a vehicle to absorb  excess funds when loan demand is low and to infuse funds
when loan demand is high. The amount of the Bank's  investment  portfolio at any
time  will  depend in part  upon the  Bank's  loan  origination  volume  and the
availability of attractive long-term investments. Investment decisions are based
on a thorough  analysis of each investment to determine  quality,  prospects for
yield and appreciation and any inherent risks. See "Regulation."

      At December 31, 1995, Farmers and Mechanics had an investment portfolio of
$66.3  million,  of which  $22.8  million  was  available  for sale,  consisting
primarily of U.S.  Government  securities  and  obligations  of U.S.  Government
agencies.  For more information on the Bank's investment  activities see Notes 2
and 3 of the Notes to the Consolidated  Financial  Statements.  Other investment
activities of the Bank, which are not reported as part of the Bank's  investment
portfolio,  include  an  investment  of $4.1  million  in FHLB  stock,  which is
required as part of its  membership  in the  Federal  Home Loan Bank system (see
"--Regulation -- Federal Home Loan Bank System"),  and $181 thousand in interest
bearing deposits and overnight investments.

                                      14


<PAGE>



      The following  table sets forth the carrying value and market value of the
Bank's investment  securities and securities available for sale, FHLB stock, and
interest bearing deposits and overnight investments at the dates indicated.

<TABLE>
<CAPTION>

                                                              At December 31,

                                               1995                 1994                 1993
                                              ------               ------               -----

                                                  Estimated            Estimated           Estimated
                                        Carrying   Market    Carrying   Market    Carrying  Market
                                         Value      Value     Value      Value     Value     Value
                                         -------    -------   -------    -------  -------    -------
                                                              (In Thousands)

Investment securities held to maturity:

<S>                                      <C>        <C>       <C>        <C>      <C>        <C>    
  U.S. government and agency securities  $34,086    $34,110   $20,964    $19,726  $17,044    $17,078

  Reverse Repurchase Agreements.......     9,000      9,000        --         --       --         --

  Municipal bonds.....................       464        464       240        235      106        107

  U.S. Treasuries.....................        15         14        --         --       --         --

Investment securities available for sale:

  U.S. Agencies.......................     7,928      7,928        --         --       --         --

  U.S. Treasuries.....................     1,980      1,980        --         --       --         --

  REMIC's.............................     7,291      7,291     7,577      7,577       --         --

  CMO's...............................     5,485      5,485     3,863      3,863       --         --

  ARM mutual fund ....................        --         --        --         --    3,513      3,513

  Common Stock........................        84         84        26         26       26         26
                                         -------    -------   -------    -------  -------    -------

      Total investment securities.....    66,333     66,356    32,670     31,427   20,689     20,724
                                          ------     ------    ------     ------  -------     ------

  Federal Home Loan Bank of New York
    stock.............................     4,058      4,058     3,728      3,728    3,488      3,488

  Interest bearing deposits and overnight
    investments.......................       181        181     1,955      1,955      528        528
                                          ------     ------    ------     ------  -------     ------

     Total investments................   $70,572    $70,595   $38,353    $37,110  $ 24,705   $24,740
                                          ======     ======    ======     ======   =======    ======

</TABLE>



                                            15


<PAGE>



      The following table sets forth the scheduled maturities,  carrying values,
market  values  and  average  yields  for the Bank's  investment  securities  at
December 31, 1995.


<TABLE>
<CAPTION>
                                                                                        More than
                    One Year or Less       One to Five Years    Five to Ten Years       Ten Years       Total Investment Securities
                   Carrying    Average    Carrying    Average   Carrying  Average   Carrying  Average   Carrying  Market   Average
                     Value      Yield      Value       Yield     Value     Yield     Value     Yield     Value    Value    Yield
                   -------    -------    -------     -------   -------   -------    -----     -----     -------  -------   -------

Investment securities held to                                       (Dollars in Thousands)
maturity:

 U.S. government and
<S>                   <C>        <C>        <C>         <C>     <C>         <C>      <C>        <C>      <C>        <C>        <C>  
  agency obligations  $2,000     4.80%      $8,999      5.39%   $14,591     7.26%    $8,496     7.50%    $34,086    $34,110    6.68%

 Municipal Bond.....     360      4.08         104       5.09        --        --        --        --        464        464     4.30

 Reverse Repurchase

  Agreements........   9,000      6.07          --         --        --        --        --        --      9,000      9,000     6.07

 U.S. Treasuries....      --        --          15       3.50        --        --        --        --         15         14     3.50

 MBS................      --        --       9,490       7.36    12,140      7.78    89,925      7.11    111,555    113,605     7.21

Investment securities
available for sale:

 Common stock.......      84        --          --         --        --        --        --        --         84         84       --

 U.S. Government....      --        --       4,907       5.19     5,000      7.25        --        --      9,907      9,907     6.22

 CMOs...............     229      4.59       2,186       6.42        --        --     3,070      5.50      5,485      5,485     5.83

 REMICs.............      --        --          --         --        --        --     7,291      5.86      7,291      7,291     5.86
                      ------      ----    --------     ------   -------    ------     -----    ------     ------      -----     ----

   Total............ $11,673     5.72%     $25,701      6.16%   $31,731     7.46%  $108,782     7.01%   $177,887   $179,960    6.89%
                      ======     ====       ======      ====     ======     ====    =======     ====     =======    =======    ====

</TABLE>





                                            16


<PAGE>



Subsidiary and Land Development Activities

      Farmers and Mechanics is generally  permitted to invest an amount equal to
3% of its total assets in subsidiary  service  corporations  with at least 1% of
that investment in community reinvestment activities.  Under such 3% limitation,
at December 31,  1995,  Farmers and  Mechanics  was  authorized  to invest up to
approximately  $15.0 million in the stock of or loans to its subsidiary  service
corporations.  As of  December  31,  1995,  the net  book  value  of the  Bank's
investment in stock,  unsecured  loans, and conforming loans in its subsidiaries
was $1.2  million,  all of which had been  invested in the Bank's  wholly  owned
subsidiary  corporations,   which  were  organized  to  engage  in  real  estate
development activities.

      Under FIRREA,  savings associations are required to deduct from capital an
increasing  percentage  of their  investments  in, and  extensions of credit to,
service  corporations  engaged  in  activities  which  are not  permissible  for
national  banks.  The real estate  development  activities of the Bank's service
corporation  are not  permissible  for national banks, as promulgated by FIRREA.
Absent the  approval  of a request for an  additional  time period over which to
phase-in the deduction,  the deduction rose to 100% on July 1, 1994. At December
31,  1995,  the Bank's  investment  in and advances to  subsidiaries  engaged in
non-permissible  activities  amounted to $1.2  million of which $1.2 million was
deducted from tangible, core and risk-based capital.

      Real estate held for  development  represents a high degree of credit risk
because  of the  relatively  long  period of time  needed  to  obtain  necessary
developmental approvals and the uncertainty of future market conditions.  During
recent periods, conditions in the real estate market deteriorated as a result of
unfavorable interest rates, the general unavailability of credit, a slow down in
home sales and  construction,  and a surplus of  available  real  estate.  These
conditions have contributed to many project failures throughout the industry and
have reduced the demand for land. As a result, property values have declined and
substantial  losses  have been  incurred by many  institutions.  During the year
ended December 31, 1995,  and 1994,  the Bank recorded  provisions for losses on
real estate held for development  totalling $200 thousand and $0,  respectively.
There can be no assurance  that  conditions in the economy or real estate market
will not deteriorate further.

      The Board of Directors of Land  Financial  Services,  Inc., a wholly owned
subsidiary  of the Bank,  passed a resolution  in February 1991 to cease all new
direct  real  estate  investment  activities.  In  addition,  the Board  further
resolved that there shall be no new real estate  investment  in connection  with
existing  assets  except those  investments  which are necessary to preserve and
protect the  existing  assets so that such assets can be  liquidated  as soon as
practical. Management believes that divesture of its present land investment may
take several years, depending on market conditions.

Deposit Activities and Other Sources of Funds

      General.  Deposits are the major source of Farmers and Mechanics funds for
lending and other  investment  purposes.  In addition to  deposits,  Farmers and
Mechanics  derives  funds  from  loan  principal  and  interest  repayments  and
prepayments,  principal and interest payments on mortgage-backed  securities and
other  investment  securities,  advances  from the  FHLB of New  York and  other
borrowings (see  "Borrowings"  below).  Loan repayments are a relatively  stable
source of funds,  while deposit  inflows and outflows and loan  prepayments  are
significantly  influenced by general interest rates and money market conditions.
Borrowings may be used on a short term basis to compensate for reductions in the
availability of funds from other sources. They may also be used on a longer term
basis for general business purposes.

                                      17


<PAGE>




      Deposits.  Deposits are attracted  from within the Bank's  primary  market
area of Burlington County, New Jersey, through the offering of a broad selection
of deposit instruments including regular NOW accounts, Super NOW accounts, money
market  accounts,  regular  passbook  accounts,  certificates of deposit and IRA
accounts. Deposit account terms vary, according to the minimum balance required,
the time periods the funds must remain on deposit and the interest  rate,  among
other factors. The Bank is a member of an automated teller machine network.

      The Bank  regularly  evaluates the internal  cost of funds,  surveys rates
offered by competing institutions, reviews the Bank's cash flow requirements for
lending and  liquidity and executes  rate changes when deemed  appropriate.  The
Bank does not have any brokered  deposits and has no present intention to accept
or solicit such deposits.

      Certificates of Deposit Maturity Schedule.  The following table sets forth
the amount and maturities of the Bank's  certificates of deposit at December 31,
1995.

<TABLE>
<CAPTION>

                           Less than     1 to       2 to      After
                             1 year     2 years   3 years    3 years     Total
                            --------    -------   -------    -------    ------

                                               (In Thousands)

<S>                          <C>        <C>       <C>       <C>          <C>     
 2.01 - 4.00%............    $ 16,554   $     13  $     --  $      --    $ 16,567

 4.01 - 6.00%............      91,518     20,572    11,824     18,033     141,947

 6.01 - 8.00%............      34,559      8,724     2,429     21,315      67,027

 8.01 - 10.00%...........         658        188     1,081      1,902       3,829

10.01 - 12.00%...........          51          3        --         59         113
                            ---------   --------  --------   --------    --------

     Total...............    $143,340    $29,500   $15,334    $41,309    $229,483
                              =======     ======    ======     ======     =======
</TABLE>




      Certificates  of  Deposit  in  Excess of  $100,000.  The  following  table
indicates the amount of the Bank's  certificates  of deposit of $100,000 or more
by time remaining until maturity as of December 31, 1995.

Maturity Period of Deposits                        Certificates of
                                                       Deposit
                                                   ---------------
                                                   (In Thousands)

Three months or less.............................      $ 3,608

Three through six months.........................        2,755

Six through twelve months........................        2,778

Over twelve months...............................        6,483
                                                        ------

     Total.......................................      $15,624
                                                        ======





                                      18


<PAGE>



      Deposit  Rate.  The  following  table sets forth the  distribution  of the
Bank's deposit  accounts at the dates indicated and the weighted average nominal
interest rates on each category of deposits presented.

<TABLE>
<CAPTION>

                                                                     At December 31,

                                          1995                             1994                             1993
                                         ------                           ------                           -----

                                                   Weighted                         Weighted                         Weighted
                                        Percent    Average                Percent    Average               Percent    Average
                             Average   of Total    Nominal     Average   of Total    Nominal    Average   of Total    Nominal
                             Balance   Deposits      Rate      Balance   Deposits     Rate      Balance   Deposits     Rate
                             -------   --------    --------    -------   --------   --------   --------   --------   --------

                                                                     (In Thousands)

<S>                           <C>         <C>          <C>      <C>         <C>         <C>     <C>          <C>         <C>  
Passbook and regular savings  $66,798      15.93%       2.54%   $66,608      15.52%      2.50%  $ 57,781      14.19%      2.71%

NOW checking accounts.....     63,607      15.17        1.11     60,226      14.03       1.09     49,545      12.17       1.48

Money market deposit accounts  58,990      14.06        2.66     71,423      16.64       2.67     71,609      17.59       2.88

Certificates of deposit...    229,103      54.63        5.21    221,990      51.70       4.44    219,454      53.89       5.06

Surrogate statement.......        896       0.21        6.10      9,094       2.11       4.81      8,795       2.16       4.89
                              -------    -------     -------   --------     ------     ------   --------     ------      -----

  Total Deposits..........   $419,394     100.00%       3.81%  $429,341     100.00%      3.39%  $407,184     100.00%      3.91%
                              =======     ======      ======    =======     ======     ======    =======     ======      =====

</TABLE>




                                      19


<PAGE>



      Borrowings.  Savings  deposits are the primary source of funds for Farmers
and Mechanics  lending and investment  activities  and for its general  business
purposes.  From time to time, however, the Bank has relied upon other borrowings
to  supplement  its  supply of  lendable  funds and to meet  deposit  withdrawal
requirements.

      The FHLB functions as a central reserve bank providing  credit for savings
and loan  associations  and certain other member  financial  institutions.  As a
member,  Farmers and  Mechanics is required to own capital  stock in the FHLB of
New York and is  authorized  to apply for advances on the security of such stock
and certain of its home  mortgages  and other  assets  (principally,  securities
which are obligations of, or guaranteed by, the United States), provided certain
standards  related to credit  worthiness have been met. Under its current credit
policies,  the FHLB of New York limits advances to 30% of a member's assets.  At
December 31, 1995, the Bank had $24.5 million in FHLB advances  outstanding at a
weighted-average interest rate of 5.96%. The advances are collateralized by FHLB
stock and certain first mortgage loans.

      On July 28, 1994 the  Corporation  issued $10 million of 10%  Subordinated
Debentures (the  "Debentures")  due 2004.  Interest is payable on the Debentures
semi-annually  on February 1 and August 1 of each year. The Corporation made its
first interest  payment on the  Debentures on February 1, 1995. The  Corporation
used the proceeds for expansion of the Corporation's  operations  through branch
acquisitions and general corporate purposes. The Debentures were issued under an
Indenture  which provides that the  Corporation  cannot declare or pay dividends
on, or  purchase,  redeem or acquire  for value its  capital  stock,  return any
capital to holders of capital stock as such, or make any  distribution of assets
to capital  stockholders  as such,  unless,  from and after the date of any such
dividend  declaration or the date of any such purchase,  redemption,  payment or
distribution  specified above,  the Corporation  retains at all times cash, cash
equivalents  (as  determined in accordance  with generally  accepted  accounting
principles)  or  marketable  securities  (with a market value as measured on the
applicable Declaration Date or Redemption Date) in an amount sufficient to cover
the two consecutive semi-annual interest payments that will be due and payable.

Personnel

      As of December 31, 1995, the Corporation,  including its subsidiaries, had
143  full-time  employees  and 99 part-time  employees.  The  employees  are not
represented  by  a  collective   bargaining   unit.   Management   believes  its
relationship with its employees is good.

Competition

      The Bank faces strong  competition in its  attraction of savings  deposits
and in the  origination of real estate loans.  Its most direct  competition  for
savings  deposits  has  historically  come from other  thrift  institutions  and
commercial banks located in Burlington County and the contiguous  counties.  The
Bank's  competition  for real  estate  loans is  principally  from other  thrift
institutions, commercial banks, and mortgage banking companies.

      The Bank  competes for loans  principally  through the interest  rates and
loan fees it charges and the  efficiency and quality of the services it provides
borrowers,  real  estate  brokers,  and home  builders.  The Bank  competes  for
deposits by offering  depositors  a wide variety of savings  accounts,  checking
accounts,  convenient office  locations,  tax-deferred  retirement  programs and
other miscellaneous services.

                                      20


<PAGE>




Regulation

      Set forth below is a brief  description  of certain laws which are related
to the  regulation of the Bank and the  Corporation.  The  description  does not
purport  to be  complete  and is  qualified  in its  entirety  by  reference  to
applicable laws and regulations.

Regulation of the Corporation

      General.  The  Corporation is a unitary  savings and loan holding  company
subject to regulatory oversight by the OTS. As such, the Corporation is required
to  register  and file  reports  with the OTS and is subject to  regulation  and
examination by the OTS. In addition,  the OTS has enforcement authority over the
Corporation and its non-savings association  subsidiaries which also permits the
OTS to restrict or prohibit  activities that are determined to be a serious risk
to the subsidiary savings association. This regulation and oversight is intended
primarily  for  the  protection  of the  depositors  of the  Bank  and  not  for
stockholders of the Corporation.

      Restrictions  on  Acquisitions.  If the  Corporation  acquires  control of
another savings  institution as a separate  subsidiary (other than a financially
troubled  institution  acquired  pursuant to special  provisions  of the Federal
Deposit Insurance Act), the Corporation would become a multiple savings and loan
holding company whose activities and those of its  subsidiaries  (other than the
Bank or any other  savings  association)  would become  subject to  restrictions
under the Home  Owners' Loan Act  ("HOLA").  No such  multiple  savings and loan
holding  company or  subsidiary  thereof that is not a savings  association  may
commence,  or continue for more than 180 days after becoming a multiple  savings
and loan holding company or subsidiary thereof, any business activity other than
(i)  furnishing  or  performing  management  services for a  subsidiary  savings
association;  (ii) conducting an insurance agency or an escrow  business;  (iii)
holding  or  managing  properties  used  or  occupied  by a  subsidiary  savings
association;  or (iv)  acting as a trustee  under deeds of trust.  In  addition,
unless  prohibited  or limited  by the OTS,  such a  multiple  savings  and loan
holding  company  may  engage in  non-banking  activities  permissible  for bank
holding companies,  including,  but not limited to, investment advice,  leasing,
underwriting credit insurance,  management  consulting services,  and securities
brokerage  activities,  as the Federal  Reserve Board  determines  under section
4(c)(8) of the Bank  Holding  Company  Act of 1956  ("BHCA"),  and may engage in
those activities authorized by the OTS. Such a multiple savings and loan holding
company must obtain prior OTS  approval  before it may engage in any  particular
activity  permissible  for bank holding  companies  under section 4(c)(8) of the
BHCA.

      Federal  law  generally  provides  that no  "person,"  acting  directly or
indirectly or through or in concert with one or more other persons,  may acquire
"control"  as that term is defined in OTS  regulations,  of a  federally-insured
savings  institution  without giving at least 60 days' written notice to the OTS
and providing the OTS an  opportunity  to disapprove  the proposed  acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things,  that (i) the acquisition would substantially  lessen competition;  (ii)
the financial  condition of the acquiring  person might jeopardize the financial
stability  of  the  savings  institution  or  prejudice  the  interests  of  its
depositors;  or (iii) the  competency,  experience or integrity of the acquiring
person or the proposed  management  personnel  indicates that it would not be in
the  interest  of the  depositors  or the public to permit the  acquisitions  of
control by such person.

                                      21


<PAGE>



      Payment of  Dividends.  The  Corporation's  principal  source of income is
dividends to the extent declared and paid by the Bank.  Therefore,  restrictions
on the Bank's ability to pay dividends may impact on the  Corporation's  ability
to pay dividends to stockholders.

Regulation of the Bank

      General. As a federally-chartered,  SAIF-insured savings bank, the Bank is
subject to extensive  regulation by the OTS and the FDIC. Lending activities and
other  investments  must comply with various  federal  statutory and  regulatory
requirements.   The  Bank  is  also  subject  to  certain  reserve  requirements
promulgated by the Federal Reserve Board.

      The OTS, in  conjunction  with the FDIC,  regularly  examines the Bank and
prepares  reports for the  consideration of the Bank's Board of Directors on any
deficiencies that they find in the Bank's  operations.  The Bank's  relationship
with its depositors and borrowers is also regulated to a great extent by federal
law,  especially  in such matters as the  ownership of savings  accounts and the
form and content of the Bank's mortgage documents.

      The Bank  must  file  reports  with the OTS and the  FDIC  concerning  its
activities  and  financial  condition,   in  addition  to  obtaining  regulatory
approvals  prior to entering into certain  transactions  such as mergers with or
acquisitions  of other savings  institutions.  This  regulation and  supervision
establishes a comprehensive  framework of activities in which an institution can
engage and is intended  primarily for the protection of the SAIF and depositors.
The  regulatory  structure  also  gives  the  regulatory  authorities  extensive
discretion in connection with their  supervisory and enforcement  activities and
examination  policies,  including policies with respect to the classification of
assets and the  establishment  of adequate  loan loss  reserves  for  regulatory
purposes.  Any change in such  regulations,  whether by the OTS, the FDIC or the
Congress could have a material adverse impact on the  Corporation,  the Bank and
their operations.

      The  Federal  Deposit  Insurance  Corporation   Improvement  Act  of  1991
("FDICIA")  imposes  a number  of  mandatory  supervisory  measures  on  savings
associations,  such as the Bank. The FDICIA requires  financial  institutions to
take certain actions relating to their internal operations, including: providing
annual reports on financial  condition and management to the appropriate federal
banking regulators;  having an annual independent audit of financial  statements
performed by an independent public  accountant;  and establishing an independent
audit committee  comprised solely of outside directors.  The FDICIA also imposes
certain operational and managerial standards on financial  institutions relating
to internal controls,  loan documentation,  credit  underwriting,  interest rate
exposure,  asset  growth,  compensation,  fees and  benefits.  The  FDICIA  also
requires the FDIC to assess  deposit  insurance  premiums  based on risk.  It is
anticipated  that  the  Bank  will  be  subject  to  certain  additional  FDICIA
requirements in fiscal year 1996.

      Insurance of Deposit Accounts.  The Bank's deposit accounts are insured by
the SAIF to a maximum of $100,000 for each insured member (as defined by law and
regulation).  FIRREA  gives  the FDIC  the  authority  to  suspend  the  deposit
insurance of any savings  association  without tangible capital.  However,  if a
savings association has positive capital when it includes qualifying  intangible
assets,  the FDIC cannot  suspend  deposit  insurance  unless  capital  declines
materially, the institution fails to enter into and remain in compliance with an
approved  capital plan or the  institution  is operating in an unsafe or unsound
manner.

                                      22


<PAGE>



      Regardless of an institution's capital level, insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
or  unsound  practices,  is  in an  unsafe  or  unsound  condition  to  continue
operations  or has violated  any  applicable  law,  regulation,  rule,  order or
condition  imposed  by the  FDIC or the  institution's  primary  regulator.  The
management of the Bank is unaware of any practice,  condition or violation  that
might lead to termination of its deposit insurance.

      The FDIC charges an annual  assessment for the insurance of deposits based
on the risk a particular  institution  poses to its deposit insurance fund. This
risk  classification is based on an institution's  capital group and supervisory
subgroup  assignment.  In  addition,  the FDIC is  authorized  to increase  such
deposit  insurance  rates,  on a semi-annual  basis,  if it determines  that the
reserve  ratio of the SAIF will be less  than the  designated  reserve  ratio of
1.25% of SAIF-insured deposits. In setting these increased assessments, the FDIC
must seek to restore and preserve the ratio to that designated reserve level, or
such higher  reserve ratio as  established  by the FDIC. In addition,  under the
FDICIA, the FDIC may impose special assessments on SAIF members to repay amounts
borrowed from the U.S.  Treasury or for any other reason deemed necessary by the
FDIC. The Bank's federal  deposit  insurance  premium expense for the year ended
December 31, 1995, amounted to $974 thousand.

      In August 1995, the FDIC lowered the insurance  premium for members of the
BIF,  primarily  commercial  banks,  to a range of  between  0.04%  and 0.31% of
deposits.  In November 1995, the FDIC again lowered BIF premiums further whereby
most  BIF-insured  institutions  would  pay only  the  statutory  minimum  of $2
thousand  annually.  This reduction in insurance  premiums for BIF members could
place SAIF  members,  primarily  savings  associations,  such as the Bank,  at a
material competitive  disadvantage to BIF members and, for the reasons set forth
below,  could have a material  adverse  effect on the results of operations  and
financial condition of the Bank in future periods.

      The disparity in insurance  premiums  between those  required for the Bank
and BIF members  could  allow BIF  members to attract  and retain  deposits at a
lower  effective  cost  than  that  possible  for the Bank  and put  competitive
pressure  on the  Bank  to  raise  its  interest  rates  paid on  deposits  thus
increasing  its cost of funds and possibly  reducing net  interest  income.  The
resultant  competitive  disadvantage could result in the Bank losing deposits to
BIF members who have a lower cost of funds and are therefore  able to pay higher
rates of interest on  deposits.  Although  the Bank has other  sources of funds,
these other sources may have higher costs than those of deposits.

      Several  alternatives  to mitigate  the effect of the  BIF/SAIF  insurance
premium  disparity  have recently been  proposed by the U.S.  Congress,  federal
regulators, industry lobbyists and the Administration.  One plan that has gained
support  of  several  sponsors  would  require  all  SAIF  member  institutions,
including  the Bank, to pay a one-time fee of  approximately  85 basis points on
the amount of deposits held by the member  institution to recapitalize the SAIF.
If an 85 basis point (0.85%)  assessment  was effected,  based on deposits as of
March 31, 1995,  the Bank's pro rata share would  amount to $2.3  million  after
taxes. If the Bank is required to pay the proposed  special  assessment,  future
deposit   insurance   premiums   are  expected  to  be  reduced  from  0.23%  to
approximately 0.06%. Based upon the Bank's deposits as of December 31, 1995, the
Savings Bank's deposit  insurance  expense would decrease by approximately  $460
thousand  per year  after  taxes.  Management  of the Bank is unable to  predict
whether this proposal or any similar proposal will be enacted or whether ongoing
SAIF premiums will be reduced to a level comparable to that of BIF premiums.

     Examination  Fees.  In  addition  to federal  deposit  insurance  premiums,
savings  institutions  like the  Bank are  required  by OTS  regulations  to pay
assessments to the OTS to fund the operations of the

                                      23


<PAGE>



OTS. The general  assessment is paid on a semi-annual basis and is computed
based on total assets of the institution, including subsidiaries.

      Regulatory Capital  Requirements.  OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total  adjusted  assets,  (2) a leverage  ratio (core capital) equal to 3% of
total adjusted assets and (3) a risk-based capital  requirement equal to 8.0% of
total risk-weighted assets.

      Tangible  capital is defined as core  capital less all  intangible  assets
(including  supervisory  goodwill),  plus purchased  mortgage  servicing  rights
valued  at the lower of the  maximum  percentage  established  by the OTS or the
amount   includable  in  core  capital.   Core  capital  is  defined  as  common
stockholders'  equity  (including  retained  income),   noncumulative  perpetual
preferred  stock and minority  interests in the equity  accounts of consolidated
subsidiaries,  plus purchased  mortgage  servicing rights valued at the lower of
90% of fair market value, 90% of original cost or 100% of the current  amortized
book value as determined under GAAP, and qualifying  supervisory goodwill,  less
nonqualifying intangible assets.

      The OTS leverage ratio  regulation  establishes a core capital ratio of at
least  3%  for  those  savings  associations  in  the  strongest  financial  and
managerial  condition based on the "CAMEL" rating system currently in use by the
OTS.  Those  savings  associations  receiving  a CAMEL  rating of "1",  the best
possible  rating on a scale of 1 to 5, are  required to maintain a ratio of core
capital to  adjusted  total  assets of 3%. All other  savings  associations  are
required  to  maintain  minimum  core  capital of at least 4% of total  adjusted
assets,  with a maximum core capital ratio  requirement  5%. In determining  the
required  minimum  core capital  ratio,  the OTS will assess the quality of risk
management  and the level of risk in each savings  association on a case-by-case
basis. The OTS did not indicate in the proposed regulation the standards it will
use in  establishing  the  appropriate  core  capital  requirement  for  savings
associations not rated "1" under the CAMEL rating system.  At December 31, 1995,
the Savings Bank's ratio of core capital to total adjusted assets was 7.38%.

      The OTS  regulations  also  require  savings  associations  to deduct from
capital,  for purposes of meeting the leverage  tangible and risk-based  capital
requirements,  their  investments  in  and  loans  to a  subsidiary  engaged  in
activities not permissible for a national bank ("nonconforming subsidiaries") in
increasing amounts until fully deducted after June 30, 1994 (or June 30, 1996 if
the OTS specifically  permits such extended  period).  At December 31, 1995, the
Bank had $1.2 million  invested in  nonconforming  subsidiaries all of which was
deducted from the Bank's regulatory capital.

      On  January  20,  1993,  the  OTS  issued  a  statement  imposing  certain
limitations on the inclusion of net deferred tax assets calculated under FAS 109
in regulatory capital.  Deferred tax assets that are dependent on future taxable
income or the  institution's  tax planning  strategies  may only be counted as a
component  of Tier 1 capital to the extent they do not exceed the lesser of: (i)
10% of Tier 1 capital, or (ii) the amount of such benefits which may be realized
based on one year's projected earnings.

      The  risk-based  capital  standard for savings  institutions  requires the
maintenance of total  risk-based  capital (which is defined as core capital plus
supplementary  capital)  of 8.0% of  risk-weighted  assets.  The  components  of
supplementary capital include, among other items, cumulative perpetual preferred
stock,  perpetual  subordinated debt, mandatory  convertible  subordinated debt,
intermediate-term  preferred stock and the allowance for loan losses.  Allowance
for loan and lease losses  includable in  supplementary  capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is

                                      24


<PAGE>



limited  to 100% of core  capital.  A savings  association  must  calculate  its
risk-weighted  assets by multiplying  each asset and  off-balance  sheet item by
various risk factors as determined  by the OTS,  which range from 0% for cash to
100% for delinquent  loans,  property acquired through  foreclosure,  commercial
loans and other assets.

      OTS Regulations set forth the methodology for calculating an interest rate
risk ("IRR") component which is added to the risk-based capital requirements for
OTS regulated thrift institutions.  Under the Regulations,  savings associations
with a greater than "normal"  level of interest rate exposure will be subject to
a deduction  from total  capital for purposes of  calculating  their  risk-based
capital  requirement.  Specifically,  interest rate exposure will be measured as
the decline in net portfolio  value due to a 200 basis point  decrease in market
interest rates.  The IRR component to be deducted from total capital is equal to
one-half  the  difference  between an  institution's  measured  exposure and the
"normal"  level of  exposure  which is defined as two  percent of the  estimated
economic value of its assets.

      Prompt Corrective  Action.  The FDICIA also establishes a system of prompt
corrective  action to resolve  the  problems of  undercapitalized  institutions.
Under  this  system,  the  banking  regulators  are  required  to  take  certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the  institution's  degree of  capitalization.  Under the OTS final
rule implementing the prompt corrective action provisions,  an institution shall
be deemed to be (i) "well  capitalized"  if it has total  risk-based  capital of
10.0% or more, has a Tier I risk-based  capital ratio (core or leverage  capital
to risk-weighted assets) of 6.0% or more, has a leverage capital of 5.0% or more
and is not subject to any order or final capital  directive to meet and maintain
a specific capital level for any capital measure, (ii) "adequately  capitalized"
if it  has a  total  risk-based  capital  ratio  of  8.0%  or  more,  a  Tier  I
risked-based  ratio of 4.0% or more and a leverage capital ratio of 4.0% or more
(3.0% under  certain  circumstances)  and does not meet the  definition of "well
capitalized,"  (iii)  "undercapitalized"  if it has a total  risk-based  capital
ratio that is less than 8.0%,  a Tier I  risk-based  capital  ratio that is less
than 4.0% or a  leverage  capital  ratio that is less than 4.0% (3.0% in certain
circumstances),   (iv)  "significantly  undercapitalized"  if  it  has  a  total
risk-based  capital  ratio that is less than 6.0%, a Tier I  risk-based  capital
ratio that is less than 3.0% or a leverage  capital ratio that is less than 3.0%
and (v)  "critically  undercapitalized"  if it has a ratio of tangible equity to
total  assets  that is equal to or less than 2.0%. In  addition,  under  certain
circumstances,  a federal  banking  agency  may  reclassify  a well  capitalized
institution as adequately  capitalized and may require an adequately capitalized
institution  or an  undercapitalized  institution  to  comply  with  supervisory
actions as if it were in the next lower  category  (except that the FDIC may not
reclassify  a   significantly   undercapitalized   institution   as   critically
undercapitalized).

      Dividend  and Other  Capital  Distribution  Limitations.  OTS  regulations
require  the  Bank to give  the OTS 30  days'  advance  notice  of any  proposed
declaration of dividends to the Corporation, and the OTS has the authority under
its supervisory  powers to prohibit the payment of dividends to the Corporation.
In  addition,  the Bank may not  declare or pay a cash  dividend  on its capital
stock if the effect  thereof  would be to reduce the  regulatory  capital of the
Bank below the amount required for the liquidation account established  pursuant
to the Bank's Conversion.

      OTS  regulations  impose  limitations  upon all capital  distributions  by
savings  institutions,  such  as  cash  dividends,  payments  to  repurchase  or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out  merger and other  distributions  charged against  capital.  The rule
establishes  three tiers of  institutions,  based primarily on an  institution's
capital  level.  An  institution  that  exceeds  all  fully  phased-in   capital
requirements  before  and  after  a  proposed  capital   distribution  ("Tier  1
institution")  and has not  been  advised  by the OTS that it is in need of more
than the normal supervision

                                      25


<PAGE>



can,  after  prior  notice but without the  approval  of the OTS,  make  capital
distributions during a calendar year equal to the greater of (i) 100% of its net
income to date during the  calendar  year plus the amount  that would  reduce by
one-half  its  "surplus  capital  ratio"  (the  excess  capital  over its  fully
phased-in  capital  requirements) at the beginning of the calendar year, or (ii)
75% of its net income over the most recent four quarter  period.  Any additional
capital  distributions  require prior  regulatory  approval.  As of December 31,
1995,  the Bank was a Tier 1  institution.  In the event the Bank's capital fell
below its fully phased-in requirement or the OTS notified it that it was in need
of  more  than  normal   supervision,   the  Bank's   ability  to  make  capital
distributions  could be  restricted.  In  addition,  the OTS  could  prohibit  a
proposed  capital  distribution  by any  institution,  which would  otherwise be
permitted by the regulation,  if the OTS determines that such distribution would
constitute an unsafe or unsound practice.

      Finally, under the FDICIA, a savings association is prohibited from making
a  capital   distribution  if,  after  making  the  distribution,   the  savings
association would be "undercapitalized".

      Qualified Thrift Lender Test. HOLA requires savings institutions to meet a
QTL  test.  If the Bank  maintains  an  appropriate  level of  Qualified  Thrift
Investments (primarily residential mortgages and related investments,  including
certain  mortgage-backed  securities) ("QTIs") and otherwise qualifies as a QTL,
it will continue to enjoy full borrowing  privileges  from the FHLB of New York.
The  required  percentage  of QTIs is 65% of  portfolio  assets  (defined as all
assets minus intangible  assets,  property used by the institution in conducting
its business and liquid assets equal to 10% of total assets). Certain assets are
subject to a  percentage  limitation  of 20% of portfolio  assets.  In addition,
savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as
qualifying  QTIs. The method for measuring  compliance with the QTL test is on a
monthly basis in nine out of every 12 months.  As of December 31, 1995, the Bank
was in compliance with its QTL requirement with 83.69% of its assets invested in
QTIs.

      Community  Reinvestment.  Under the Community Reinvestment Act ("CRA"), as
implemented  by OTS  regulations,  a savings  association  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 OTS, in connection with its  examination of a savings  institution,
to assess the institution's  record of meeting the credit needs of its community
and to take such record into account in its  evaluation of certain  applications
by such  institution.  The Bank received an "Outstanding"  rating as a result of
its last evaluation in October 1995.

      Loans-to-One  Borrower.  Under the HOLA, as amended,  savings institutions
are subject to the national bank limits on loans-to-one  borrower.  Generally, a
savings  association may not make a loan or extend credit to a single or related
group of borrowers in excess of 15% of the association's  unimpaired capital and
surplus.  An additional  amount may be lent, equal to 10% of unimpaired  capital
and surplus, if such loan is secured by readily-marketable  collateral, which is
defined to include  certain  securities  and  bullion,  but  generally  does not
include  real  estate.  The Bank does not have any loans to one  borrower  which
exceed these limits.

     Transactions With Related Parties. Generally,  restrictions on transactions
with affiliates require that transactions  between a savings  association or its
subsidiaries  and  its  affiliates  be on  terms  as  favorable  to the  Bank as
transactions with non-affiliates. In addition, certain of these transactions are
restricted to

                                      26


<PAGE>



a  percentage  of the  Bank's  capital.  Affiliates  of  the  Bank  include  the
Corporation  and any company which would be under common  control with the Bank.
In addition,  a savings  association  may not lend to any  affiliate  engaged in
activities not  permissible for a bank holding company or acquire the securities
of any affiliate which is not a subsidiary.  The OTS has the discretion to treat
subsidiaries of savings associations as affiliates on a case-by-case basis.

      The Bank's authority to extend credit to executive officers, directors and
10%  shareholders,  as well as such entities such persons  control are currently
governed by Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O
promulgated by the Federal Reserve Board. Among other things,  these regulations
require such loans to be made on terms substantially similar to those offered to
unaffiliated individuals,  place limits on the amount of loans the Bank may make
to such persons  based,  in part, on the Bank's  capital  position,  and require
certain approval procedures to be followed. OTS regulations,  with the exception
of minor variations, apply Regulation O to savings associations.

      Liquidity Requirements.  All savings associations are required to maintain
an average daily  balance of liquid assets equal to a certain  percentage of the
sum of its  average  daily  balance of net  withdrawable  deposit  accounts  and
borrowings payable in one year or less. The liquidity  requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings  associations.  At the present  time,  the required  liquid
asset ratio is 5%. The Bank's  liquidity  ratio equalled  10.63% at December 31,
1995.

      Liquid  assets for  purposes of this ratio  include  specified  short-term
assets (e.g.,  cash,  certain time deposits,  certain  banker's  acceptances and
short-term  U.S.  Government  obligations),  and long-term  assets  (e.g.,  U.S.
Government  obligations  of more  than one and less  than  five  years and state
agency obligations with a minimum term of 18 months). The regulations  governing
liquidity  requirements  include as liquid  assets debt  securities  hedged with
forward  commitments  obtained  from, or debt  securities  subject to repurchase
agreements  with,  members of the  Association of Primary  Dealers in the United
States  Government  Securities or banks whose  accounts are insured by the FDIC,
debt securities directly hedged with a short financial future position, and debt
securities  that  provide the holder with a right to redeem the  security at par
value,  regardless  of the stated  maturities  of the  securities.  FIRREA  also
authorized  the OTS to  designate  as  liquid  assets  certain  mortgage-related
securities  with  less  than  one year to  maturity.  Short-term  liquid  assets
currently must constitute at least 1% of an association's  average daily balance
of net withdrawable deposit accounts and current borrowings.  Monetary penalties
may be imposed upon associations for violations of liquidity requirements.

      Federal  Home  Loan Bank  System.  The Bank is a member of the FHLB of New
York,  which is one of 12 regional  FHLBs that  administers  the home  financing
credit  function  of  savings  associations.  Each FHLB  serves as a reserve  or
central bank for its members within its assigned region.  It is funded primarily
from  proceeds  derived from the sale of  consolidated  obligations  of the FHLB
System.  It makes loans to members (i.e.,  advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.

      As a member,  the Bank is required to purchase and  maintain  stock in the
FHLB of New York in an  amount  equal to at  least  1% of its  aggregate  unpaid
residential  mortgage loans, home purchase  contracts or similar  obligations at
the beginning of each year.  At December 31, 1995,  the Bank had $4.1 million in
FHLB stock, which was in compliance with this requirement.

      The FHLB is  required  to provide  funds for the  resolution  of  troubled
savings  associations  and to contribute to affordable  housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions

                                      27


<PAGE>



have  adversely  affected the level of FHLB dividends paid and could continue to
do so in the future. For the year ended December 31, 1995, dividends paid by the
FHLB of New York to the Bank totalled $308 thousand.

      Federal Reserve System.  The Federal Reserve Board requires all depository
institutions  to maintain  non-interest  bearing  reserves at  specified  levels
against  their  transaction  accounts  (primarily  checking,  NOW and  Super NOW
checking  accounts) and non-personal time deposits.  The balances  maintained to
meet the reserve  requirements  imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS.

      Savings  associations  have  authority to borrow from the Federal  Reserve
Bank "discount  window," but Federal Reserve policy  generally  requires savings
associations  to exhaust  all OTS  sources  before  borrowing  from the  Federal
Reserve System. The Bank had no such borrowings at December 31, 1995.

Item 2.  Properties

      The following table sets forth the location of the Bank's offices, the net
book value of each facility,  including  furniture,  fixtures and equipment,  as
well as certain additional  information relating to these offices as of December
31, 1995.  The net book value of the Bank's  investment  in office  property and
equipment,  including  electronic  data  processing  equipment,  totalled  $12.8
million at December 31, 1995.

<TABLE>
<CAPTION>

                                Year Facility
                                 Opened or                        Square
                                  Acquired     Total   Net Book  Footage of   Owned/
                                 in Merger  Investment Value(1)  Building     Leased
                                ----------- ---------- --------  ----------   ------
                                              (Dollars in Thousands)

<S>                                <C>        <C>      <C>       <C>          <C>     
Burlington Township...........     1962       $4,214   $1,695    6,624        Owned
  Administrative Building
  811 Sunset Road & Salem Road
  Burlington, NJ  08016

Burlington Township...........     1992        2,195    1,903   24,315        Owned
  Administrative Building
  3 Sunset Road & Route 541
  Burlington, NJ  08016

Burlington Township Branch....     1984        1,264      883    3,512        Owned
  809 Sunset Road & Salem Road
  Burlington, NJ  08016

City of Burlington Branch.....     1958          372      150    3,575        Owned
  352 High Street
  Burlington, NJ 08016

Medford Lakes Branch..........     1967          533      194    1,848        Owned
  Lakes Shopping Center
  712 Stokes Road
  Medford, NJ 08055

Moorestown Branch.............     1979        1,057      624    5,473        Owned
  53 East Main Street
  Moorestown, NJ 08057


                                       28


<PAGE>





Edgewater Park Branch.........     1975          778      585    2,600        Owned
  1149 Cooper Street & Elm Street
  Edgewater, NJ 08010

Mt. Laurel Branch.............     1973        1,800    1,198    4,700        Owned
  4522 Church Road & Church Street
  Mt. Laurel, NJ 08054

Lumberton Branch..............     1991          787      584    2,856    Leased (2)
  Lumberton Plaza
  1636-61 Route 38
  Lumberton, NJ 08048

Willingboro Branch............     1991          416      357    1,617        Owned
  399 Charleston Road & JFK Way
  Willingboro, NJ 08046

Medford Branch................     1991          114       44    2,500       Leased
  Taunton Forge Shopping Center
  200 Tuckerton Road & Taunton Road
  Medford, NJ 08055

Southampton Branch............     1992          657      558    2,250        Owned
  1841 Route 70 & Red Lion Circle
  Southampton, NJ  08088

Eastampton Branch.............     1994          571      498    2,266        Owned
  1191 Woodlane Road
  Eastampton, NJ  08060

Willingboro East Branch.......     1994          626      549    3,200        Owned
  611 Beverly-Rancocas Road
  Willingboro, NJ 08046

Willingboro West Branch.......     1994          402      381    3,100        Owned
  1 Rose Street & Beverly-Rancocas Road
  Willingboro, NJ 08046

Delran Branch.................   1995(5)         604      596    2,891        Owned
  3002 North Route 130
  Delran, NJ 08075

Bordentown Branch.............   1995(6)         404      404    3,600        Owned
  335 Farnsworth Avenue
  Bordentown, NJ 08505

Voorhees Land.................     1990          373      373     N/A         Owned
  Evesham Road & Main Street
  Voorhees, NJ 08043

Cinnaminson Building..........   1994(3)         498      498   32,200        Owned
  2601 & 2603 Route 130
  Cinnaminson, NJ 08077

                                       29


<PAGE>





Medford 541 Land..............   1994(4)         262      262     N/A         Owned
  7 Wilkins Station Road
  Medford, NJ 08055

Cinnaminson Land..............   1995(7)         170      170     N/A         Owned
  1703 Highland Avenue
  Cinnaminson, NJ 08077

Medford 541-2 Land............   1995(8)         267      267     N/A         Owned
  Church Road & Route 541
  Medford, NJ 08055

    Total.....................               $18,364  $12,773
                                              ======   ======
<FN>
(1)   As of December 31, 1995.  Represents the net book value of land,
      building, furniture, fixtures and equipment owned by the Bank.
(2)   Lease expires August 20, 2021.
(3)   Purchased in April 1994, a future location for retail banking.
(4)   Medford 541 land purchased in September 1994, will be put up for sale in
      lieu of another parcel of land.
(5)   Branch opened in July 1995.
(6)   Purchased in November 1995.  Branch opened in February 1996.
(7)   Purchased in June 1995 and is a future location for retail banking.
(8)   Purchased in October 1995 and is a future location for retail banking.
</FN>
</TABLE>

Item 3.  Legal Proceedings

      The Bank is  periodically  involved as a plaintiff or defendant in various
legal  actions,  such as actions to enforce liens,  condemnation  proceedings on
properties in which the Bank holds  mortgage  interests,  matters  involving the
making and servicing of mortgage loans and other matters  incident to the Bank's
business. In the opinion of management, none of these actions individually or in
the aggregate is believed to be material to the financial  condition or business
of the Bank.

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

     No matters were  submitted to a vote of security  holders during the fourth
quarter of the fiscal year ended December 31, 1995.

                                    Part II

Item 5.  Market for the Registrant's Common Equity and Related Stockholder
         Matters

     The  information  contained  under  the  section  captioned  "Stock  Market
Information" in the  Corporation's  Annual Report to Stockholders for the Fiscal
Year Ended  December 31, 1995 (the "Annual  Report") is  incorporated  herein by
reference.

Item 6.  Selected Financial Data

     The information contained in the table captioned "Financial  Highlights" in
the Annual Report is incorporated herein by reference.

                                      30


<PAGE>




Item 7.  Management's Discussion and Analysis of Financial Condition and 
         Results of Operations

     The information contained in the section captioned "Management's Discussion
and Analysis of Financial  Condition  and Results of  Operations"  in the Annual
Report is incorporated herein by reference.

Item 8.  Financial Statements and Supplementary Data

      The  Corporation's  financial  statements are listed in Item 14 herein are
incorporated herein by reference.

Item 9.   Changes in and Disagreements with Accountants on Accounting and 
          Financial Disclosure

      None.

                                   Part III

Item 10.  Directors and Executive Officers of the Registrant

     The  information  contained  under the  section  captioned  "Proposal  I --
Election of Directors" in the  Corporation's  definitive proxy statement for the
Corporation's  1996 Annual Meeting of  Stockholders  (the "Proxy  Statement") is
incorporated herein by reference.

      The executive officers of the Corporation are as follows:

Name                         Age(1)    Position

Charles B. Yates..........     56      Chairman of the Board

Craig W. Yates............     53      President and Chief Executive Officer

Channing L. Smith.........     52      Vice President and Chief Financial
                                       Officer

James E. Igo..............     39      Senior Vice President and Mortgage
                                       Officer

Thomas M. Topley..........     35      Senior Vice President and Corporate
                                       Secretary


(1)  At December 31, 1995.

      The principal office of each executive officer is set forth below.

                                      31


<PAGE>



      Charles B. Yates is Chairman of the Board of the Corporation and the Bank.
Mr.  Yates has been a  private  investor  for seven  years.  He  previously  was
president  of  Yates  Industries,   Inc.,  a  New  York  Stock  Exchange  listed
manufacturing  company from 1967 to 1982.  He was also Vice Chairman of Square D
Corporation from 1982 to 1983 and served as Assemblyman and State Senator in the
New Jersey Legislature from 1972 to 1982.

      Craig W. Yates serves as President and Chief Executive Officer.  He became
a director of the Bank in January 1990 and President of the  Corporation and the
Bank on December 31, 1990. For the previous five years,  Mr. Yates was a private
investor.  In his  capacity  as  President,  Mr.  Yates is  responsible  for the
operations of the Corporation pursuant to the policies and procedures adopted by
the Board of Directors.

      Channing L. Smith serves as Vice  President  and Chief  Financial  Officer
since October 1994. In this capacity he is responsible for the management of the
accounting,  treasury,  investment,  data  processing,  loan servicing and human
resources of the Bank. From April 1994 to October 1994, he served as controller.
From January 1990 to April 1993 he served as  corporate  Controller  for Circuit
Foil USA.

      James E. Igo has  served as Vice  President  and Senior  Mortgage  Lending
Officer since November 1991. In that capacity he is responsible for overall loan
production,  credit  quality,  product  development  and the creation of lending
policies and procedures.  From September 1990 to November 1991, he served as the
Vice  President,  Commercial  Lending.  Prior to 1990,  Mr. Igo was Senior  Vice
President and Senior Lending Officer for a commercial bank.

      Thomas M. Topley has served as Vice  President of  Operations  since April
1993 and as  Corporate  Secretary  since April  1992.  In that  capacity,  he is
responsible for corporate records, retail branch administration,  and accounting
operations.  From June 1990 to April 1993,  Mr. Topley served as Vice  President
and Controller for the Bank.

Item 11.  Executive Compensation

      The  information  contained  under the  section  captioned  "Proposal I --
Election  of  Directors  Executive  Compensation"  in  the  Proxy  Statement  is
incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

      (a)   Security Ownership of Certain Beneficial Owners

            Information   required  by  this  item  is  incorporated  herein  by
            reference to the Section captioned "Voting  Securities and Principal
            Holders Thereof" of the Proxy Statement.

      (b)   Security Ownership of Management

            Information   required  by  this  item  is  incorporated  herein  by
            reference  to the  section  captioned  "Proposal  I --  Election  of
            Directors" of the Proxy Statement.

                                      32


<PAGE>



      (c)   Management of the Corporation  knows of no  arrangements,  including
            any  pledge by any  person of  securities  of the  Corporation,  the
            operation  of which may at a  subsequent  date result in a change in
            control of the registrant.

Item 13.  Certain Relationships and Related Transactions

      The information  required by this item is incorporated herein by reference
to the section  captioned  "Proposal I --  Election  of  Directors"  and "Voting
Securities and Principal Holders Thereof" of the Proxy Statement.

                                    Part IV

Item 14.  Exhibits, Financial Statements, and Reports on Form 8-K*

      (a)   The following documents are filed as part of this report:

            1.    The  following   financial   statements   and  the  report  of
                  independent   auditors  of  the  Registrant  included  in  the
                  Registrants   1995   Annual   Report   to   Stockholders   are
                  incorporated herein by reference and also in Item 8 hereof.

                  (a)   Report of Coopers & Lybrand L.L.P.

                  (b)   Consolidated Statements of Financial
                        Condition as of December 31, 1995 and 1994

                  (c)   Consolidated Statements of Operations for the
                        years ended December 31, 1995, 1994 and 1993

                  (d)   Consolidated Statements of Cash Flows for the
                        years ended December 31, 1995, 1994 and 1993

                  (e)   Consolidated Statements of Changes in Stockholders' 
                        Equity for the years ended December 31, 1995, 1994 and 
                        1993

                  (f)   Notes to Consolidated Financial Statements

            2.    No financial  statement  schedules are provided herein because
                  the  required  information  is either  not  applicable  or not
                  required or is shown in the consolidated  financial statements
                  or in the notes thereto.

            3.    Exhibits

                  3.1   Certificate of Incorporation (Incorporated by reference
                        to the Registrant's Form S-1 Registration Statement 
                        No. 33-24340).

                  3.2   Bylaws (Incorporated by reference to the Registrant's 
                        Form S-1 Registration Statement No. 33-24340).

                                      33


<PAGE>



                  4     Agreement  to furnish  copy to  Securities  and Exchange
                        Commission  upon  request  of  Indenture  dated July 28,
                        1994,  relating to 10% Subordinated  Debentures due 2004
                        in   aggregate   principal   amount   of  $10   million.
                        (Incorporated by reference to Registrant's Annual Report
                        on Form 10-K for the  fiscal  year  ended  December  31,
                        1994).

                  10.1  Stock Option and Incentive Plan (Incorporated by 
                        reference to the Registrant's Form S-8 Registration 
                        Statement No. 33-24340).

                  11    Statement regarding computation of per share earnings.

                  13    Annual Report to Stockholders for the Fiscal Year Ended
                        December 31, 1995.

                  21    Subsidiaries of the Registrant.

                  23    Consent of Independent Auditors.

      (b)   No  Reports on Form 8-K were  filed  during the last  quarter of the
            fiscal year covered by this Report.

-------------------
*     Incorporated  by reference  from the  Registrant's  1995 Annual  Report to
      Stockholders attached hereto as Exhibit 13.



                                      34


<PAGE>

                                  SIGNATURES

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

                                         FMS FINANCIAL CORPORATION

Date:    March  29, 1996                 By: /s/ Craig W. Yates
      --------------------------         -------------------
                                         Craig W. Yates, President and
                                         Chief Executive Officer
                                         (Duly Authorized Representative)

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

        Signatures                                              Dated

/s/ Charles B. Yates                                        March 29, 1996
-----------------------------                            --------------------
Charles B. Yates
Chairman of the Board

/s/ Craig W. Yates                                          March  29 , 1996
----------------------------                             --------------------
Craig W. Yates
President, Chief Executive Officer and Director
(Principal Executive Officer)

/s/ George J. Barber                                        March 29, 1996
----------------------------                             --------------------
George J. Barber, Director

/s/ Channing L. Smith                                       March 29, 1996
----------------------------                             --------------------
Channing L. Smith
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

Robert N. Garrison, Director

/s/ Wayne H. Page                                           March 29, 1996
----------------------------                             --------------------
Wayne H. Page, Director

/s/ James C. Lignana                                        March 29, 1996
----------------------------                             --------------------
James C. Lignana, Director

/s/ Dominic W. Flamini                                      March 29, 1996
----------------------------                             --------------------
Dominic W. Flamini, Director


<PAGE>




                               INDEX TO EXHIBITS

EXHIBIT

 3.1      Certificate of Incorporation (Incorporated
          by reference to the Registrant's Form S-1
          Registration Statement No. 33-24340).

 3.2      Bylaws (Incorporated by reference to the

          Registrant's Form S-1 Registration Statement
          No. 33-24340).

4         Agreement to furnish copy to Securities and Exchange  Commission  upon
          request of Indenture dated July 28, 1994, relating to 10% Subordinated
          Debentures  due 2004 in  aggregate  principal  amount of $10  million.
          (Incorporated by reference to Registrant's  Annual Report on Form 10-K
          for the fiscal year ended December 31, 1994).

10.1      Stock Option and Incentive Plan (Incorporated
          by reference to the Registrant's Form S-8
          Registration Statement No. 33-24340).

11        Statement regarding computation of per share earnings.

13        Annual Report to Stockholders for the Fiscal
          Year Ended December 31, 1995.

21        Subsidiaries of the Registrant.

23        Consent of Independent Auditors