ABOUT OUR  COVER-  Farmers &  Mechanics  Bank was  established  in 1871  serving
Burlington and now Camden County.  The Mt. Holly branch was  constructed  during
the year and opened in September 2001.

<PAGE>

To Our Shareholders:

         We are  pleased to report that during  2001,  Farmers & Mechanics  Bank
continued to make  progress in expanding  our branch  system and  improving  our
customer  service  while  also  improving  profitability.  Deposits  and  assets
continued  to increase  while  earnings  grew over the prior year.  Earnings per
share  increased  by 9.4% to 81  cents.  The bank  benefited  from  eleven  rate
decreases  by the Federal  Reserve  Bank during the year as they  reacted to the
economic downturn. The recession has not yet had a major impact on the Bank, but
we continue to monitor our loan portfolio for any signs of deterioration.

         In June of 2001,  we completed  the  previously  announced  merger with
CloverBank,  bringing two branches  located in Pennsauken  and Audubon in Camden
County into our network. In the merger, we acquired approximately $28 million in
deposits  and $25 million in loans.  The merger was a good fit with our existing
branch  network and allowed us to expand  outside of  Burlington  County for the
first time.

         During 2001,  we also  completed  the  relocation  of our Medford Lakes
branch  to 700  Stokes  Road  and  opened  a  newly  constructed  branch  in the
Fairgrounds  shopping center in Mt. Holly.  For the first time, we also closed a
branch, a small office located in Medford that was  underperforming.  During the
year we also entered into an agreement with Wal*Mart to open additional branches
in their stores.  In early January 2002, we opened our second Wal*Mart branch in
Burlington  and  expect to open  three more  during  the year,  in the  existing
Marlton store as well as new Wal*Mart  stores to be  constructed  in Cinnaminson
and Hamilton Township. The Hamilton location will be our first branch located in
Mercer County.

         Customer service continues to be a focal point of the bank. We continue
to  offer  our  customers  a wide  variety  of  deposit  and loan  products  and
additional  branch locations to better serve them. The Bank unveiled its website
"fmsbank.net" which includes our new online banking product.

         Once  again,  I would  like to thank our  customers,  our staff and our
shareholders for their continued support.

                                                Sincerely,

                                                /s/Craig W. Yates
                                                --------------------------------
                                                Craig W. Yates
                                                President


                                      -1-

<PAGE>

                               CORPORATE PROFILE

         FMS  Financial  Corporation  is  the  holding  company  for  Farmers  &
Mechanics Bank. Farmers & Mechanics Bank, with total assets of $967 million,  is
the  largest  community  bank  headquartered  in  its  primary  market  area  of
Burlington County, New Jersey.

         Founded  in  Burlington  City in 1871  under the name of  Farmers'  and
Mechanics' Building and Loan Association,  the Bank operates thirty-four banking
offices in Burlington and Camden Counties, New Jersey.

         The daily stock  quotation for FMS Financial  Corporation  is listed in
the Nasdaq  National  Market System  published in The Wall Street  Journal,  the
Philadelphia  Inquirer and other leading  newspapers under the trading symbol of
FMCO.

                                      -2-
<PAGE>

FINANCIAL HIGHLIGHTS
Financial Condition: (In Thousands)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
December 31,                                            2001        2000        1999         1998        1997
-------------------------------------------------------------------------------------------------------------
<S>                                               <C>         <C>         <C>          <C>         <C>
Assets                                              $966,537    $839,076    $772,501    $ 691,812    $628,403
Loans receivable and loans
 held for sale, net                                  336,544     290,179     299,695      298,603     302,831
Deposits                                             729,506     648,539     603,892      536,310     489,440
Stockholders' equity                                  52,203      47,410      46,097       43,469      38,916




Operations: (In Thousands, except per share data)
-------------------------------------------------------------------------------------------------------------
Year Ended December 31,                                 2001        2000        1999         1998        1997
-------------------------------------------------------------------------------------------------------------

Interest income                                     $ 55,300    $ 52,349    $ 47,863    $  46,563    $ 40,813

Interest expense                                      28,752      27,398      24,742       24,869      20,879

Net interest income                                   26,548      24,951      23,120       21,694      19,934

Net income                                             5,459       5,112       5,114        5,271       5,491

Basic earnings per common share                         0.81        0.74        0.71         0.73        0.77

Diluted earnings per common share                       0.81        0.74        0.70         0.72        0.75

Dividends declared per common share                     0.12        0.12        0.12         0.11        0.08 (a)

Weighted average common shares outstanding             6,701       6,888       7,210        7,204       7,165

Weighted average common shares and common
stock equivalents outstanding                          6,714       6,947       7,292        7,314       7,346


Other Selected Data:
-------------------------------------------------------------------------------------------------------------
Year Ended December 31,                                 2001        2000        1999         1998        1997
-------------------------------------------------------------------------------------------------------------

Net interest rate spread                                3.24%       3.40%       3.28%        3.50%       3.60%

Net interest margin                                     3.22        3.42        3.36         3.48        3.72

Return on average assets                                0.56        0.66        0.61         0.79        0.98

Return on average equity                               10.02       11.16       10.93        12.86       15.11

Dividend payout ratio                                  14.81       16.22       17.14        15.28       10.67

Equity-to-asset ratio                                   5.40        5.65        5.97         6.28        6.19
</TABLE>

(a)     Adjusted for stock split in 1998.

                                      -3-
<PAGE>

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

General
         The Private  Securities  Litigation  Reform Act of 1995  contains  safe
harbor  provisions  regarding  forward-looking  statements.  When  used  in this
discussion, the words "believes", "anticipates",  "contemplates", "expects", and
similar expressions are intended to identify  forward-looking  statements.  Such
statements  are  subject to certain  risks and  uncertainties  which could cause
actual  results to differ  materially  from  those  projected.  Those  risks and
uncertainties  include  changes in interest  rates,  risks  associated  with the
effect of opening a new branch,  the ability to control costs and expenses,  and
general economic conditions.  FMS Financial Corporation undertakes no obligation
to  publicly  release  the  results of any  revisions  to those  forward-looking
statements which may be made to reflect events or  circumstances  after the date
hereof or to reflect the occurrence of unanticipated events.

         FMS Financial  Corporation (the "Corporation") is the parent company of
Farmers & Mechanics  Bank (the  "Bank"),  its only  subsidiary.  Earnings of the
Corporation  are  primarily  dependent  on  the  earnings  of  the  Bank  as the
Corporation  has engaged in no significant  operations of its own.  Accordingly,
the earnings of the Corporation are largely dependent on the receipt of earnings
from the Bank in the form of dividends.

         The earnings of the Bank depend  primarily on its net interest  income.
Net interest  income is affected by: (i) the volume of  interest-earning  assets
and  interest-bearing  liabilities (see "Rate Volume  Analysis"),  (ii) rates of
interest earned on  interest-earning  assets and rates paid on  interest-bearing
liabilities and (iii) the difference  ("interest  rate spread")  between average
rates of interest  earned on  interest-earning  assets and average rates paid on
interest-bearing liabilities. When interest-earning assets approximate or exceed
interest-bearing  liabilities,  any positive  interest rate spread will generate
net interest income.

         The Bank also derives income from service  charges on customer  deposit
accounts  and fees on loans.  In addition to interest  expense,  the Bank incurs
operating  expenses  such as  salaries,  employee  benefits,  deposit  insurance
premiums, depreciation, property maintenance and advertising.

Market Risk
     Market risk is the risk of loss from adverse  changes in market  prices and
rates.  The Bank's market risk arises primarily from interest rate risk inherent
in  its  lending,   investment  and  deposit  taking   activities.   The  Bank's
profitability  is  affected by  fluctuations  in  interest  rates.  A sudden and
substantial  increase in interest rates may adversely impact the Bank's earnings
to the extent that the  interest  rates borne by assets and  liabilities  do not
change at the same speed,  to the same extent or on the same basis. To that end,
management  actively  monitors and manages its interest rate risk exposure.  The
Bank does not  participate  in hedging  programs,  interest  rate swaps or other
activities   involving  the  use  of  off-balance  sheet  derivative   financial
instruments.The  Bank's policy allows investment only in securities which have a
rating of AA or better. The Bank holds a substantial component of its investment
portfolio in mortgage-backed  securities and collateralized mortgage obligations
(collectively,  "MBS and CMO"). At the end of 2001, the total  investment in MBS
and CMO amounted to $416.1  million,  or 74.3% of total  investments.  These are
instruments  collateralized  by pools of residential  and  commercial  mortgages
which return interest and principal  payments to the investor when performing in
accordance with their terms.  Approximately 65.5% of the Bank's MBS holdings are
U.S.  Government Agency  securities  (GNMA, FNMA and FHLMC),  which carry either
direct government or  quasi-government  guarantees and are rated AAA in terms of
credit quality.  The Bank also owns non-agency  CMOs,  issued by major financial
institutions,  which are rated AAA or AA. CMOs are generally  very liquid issues
with major brokerage houses providing ready markets.  However,  CMOs are subject
to  prepayment  and extension  risk which can adversely  affect their yields and
expected maturities. MBS and CMOs of $5.1 million and $15.1 million were used to
secure public funds on deposit at December 31, 2001 and 2000, respectively.

         Interest  rate  risk is the risk of loss in  value  due to  changes  in
interest rates. This risk is addressed by the Bank's Asset Liability  Management
Committee  ("ALCO"),  which includes  senior  management.  The ALCO monitors and
considers  methods of managing  interest rate risk by monitoring  changes in the
interest rate  repricing GAP ("GAP"),  the net portfolio  values ("NPV") and net
interest  income under  various  interest rate  scenarios.  The ALCO attempts to
manage the various components of the Bank's balance sheet to minimize the impact
of sudden and  sustained  changes in interest  rates  through  GAP,  NPV and net
interest income scenarios.

         The Bank's  exposure  to  interest  rate risk is reviewed on a periodic
basis by the Board of Directors  and the ALCO.  Interest rate  sensitivity  is a
measure  of the  difference  between  amounts  of  interest-earning  assets  and
interest-bearing  liabilities  which  either  reprice  or mature  within a given
period of time.

                                      -4-
<PAGE>

         The  difference,  or the interest  rate  repricing  "GAP",  provides an
indication of the extent to which an institution's  interest rate spread will be
affected by changes in interest rates over a period of time. A GAP is considered
positive when the amount of interest-rate sensitive assets maturing or repricing
over a specified  period of time exceeds the amount of  interest-rate  sensitive
liabilities  maturing or repricing within that period and is considered negative
when the amount of  interest-rate  sensitive  liabilities  maturing or repricing
over a specified  period of time exceeds the amount of  interest-rate  sensitive
assets maturing or repricing within that period.  Generally,  during a period of
rising  interest  rates,  a  negative  GAP  within a given  period of time would
adversely affect net interest income, while a positive GAP within such period of
time may  result  in an  increase  in net  interest  income;  during a period of
falling  interest rates, a negative GAP within a given period of time may result
in an increase in net interest income while a positive GAP within such period of
time may have the opposite effect.  At December 31, 2001 the Bank's GAP position
for net  assets  repricing  for one  year  cumulative  totaled  negative  $158.7
million.

         Interest  rate risk  exposure  is also  measured  using  interest  rate
sensitivity  analysis  to  determine  the  Bank's  change in NPV in the event of
hypothetical  changes in interest rates and interest  liabilities.  The Board of
Directors  may direct  management to adjust its asset and liability mix to bring
interest rate risk within Board approved limits if potential  changes to NPV and
net interest income  resulting from  hypothetical  interest rate changes are not
within the limits established.

         The Bank has developed strategies to manage its liquidity,  shorten the
effective  maturities  of  certain  interest-earning  assets  and  increase  the
effective  maturities of certain  liabilities to reduce the exposure to interest
rate fluctuations.  These strategies include focusing its investment  activities
on short and medium-term securities,  maintaining and increasing the transaction
deposit accounts, as these accounts are considered to be relatively resistant to
changes  in  interest  rates,  and  utilizing  Federal  Home  Loan  Bank  (FHLB)
borrowings and deposit marketing programs to adjust the term or repricing of its
liabilities.

         The Bank  measures  its  interest  rate risk using the Office of Thrift
Supervision's (OTS) NPV method. NPV is calculated based on the net present value
of estimated cash flows utilizing market prepayment assumptions and market rates
of interest provided by independent  broker quotations and other public sources.
An  institution's  interest  rate risk is measured as the change to its NPV as a
result of a  hypothetical  immediate  200 basis point change in market  interest
rates.  Based on this analysis at December 31, 2001, the Bank would experience a
511 basis point  decrease in its NPV as a percent of assets if rates rise by 200
basis points in comparison to a flat rate  scenario.  Due to the  abnormally low
interest rate environment decreases of 200 points or more have been omitted.

Changes in
Market                          Net Portfolio Value
Interest Rates    ------------------------------------------------
(basis points)    $ Amount   $ Change   % Change     NPV Ratio (a)
--------------    --------   --------   --------     -------------

         +300     $ 23,727   (81,610)      (77%)        2.56%
         +200       49,662   (55,675)      (53%)        5.18%
         +100       77,776   (27,562)      (26%)        7.85%
            0     $105,337         -         -         10.29%
         (100)     110,735     5,398         5%        10.69%

(a)  Calculated as the estimated NPV divided by present value of total assets.

         Although  the NPV  calculation  provides  an  indication  of the Bank's
interest  rate risk at a particular  point in time,  such  measurements  are not
intended  to and do not  provide a precise  forecast of the effect of changes in
market  interest  rates on the Bank's net  interest  income and will differ from
actual results.

Merger
         On January 25, 2001, the Corporation  announced that it entered into an
Agreement  and Plan of Merger  Conversion  with  CloverBank of  Pennsauken,  New
Jersey. The merger became effective on June 1, 2001 whereby CloverBank converted
to the  stock  form of  organization  and  simultaneously  merged  with and into
Farmers & Mechanics  Bank.  The  acquistion was accounted for using the purchase
method of  accounting  and  included  $28.3 milion in assets,  $28.1  million of
deposits and $25.0 million in loans.

     Financial  Condition
     Total assets of the Corporation increased $127.4 million or 15.2% to $966.5
million  at  December  31,  2001  from  $839.1  milion  at  December  31,  2000.
Mortgage-backed securities increased $128.7 million to $272.5 million during the
year ended December 31, 2001, as a result of purchases of $172.0 million in FNMA
securities,  $42.2  million  in  GNMA  securities  and  $3.0  million  in  FHLMC
securities,  partially  offset by  principal  paydowns of $90.4  million.  Loans
receivable  increased  $46.3 million or 16.0% to $336.5  million at December 31,
2001 from $290.2 million at December 31, 2000. The increase in loans  receivable
during the year was due to $25.0 million  acquired in the merger with CloverBank
and $71.4  million  of loans  orginated,  partially  offset by $49.6  million of
principal collected on loans. Short-term funds increased $17.7 million or 134.0%
to $30.9  million at December  31, 2001 from $13.2  million at December 31, 2000
primarily  due to an  increase  in funds  invested in  short-term  money  market
accounts of $17.8  million.  Investment  securities  held to maturity  decreased
$79.5  million  or 28.8% to $196.6  million at  December  31,  2001 from  $276.1
million

                                      -5-

<PAGE>

at December 31, 2000.  The decrease in  investment  securities  held to maturity
during the year is due to investment  calls and maturities of $255.4 million and
principal  paydowns of $51.9  million,  partially  offset by purchases of $227.8
million.

         Total  liabilities  increased $122.6 million or 15.5% to $914.3 million
at  December  31,  2001 from  $791.7  million at  December  31,  2000.  Deposits
increased  $81.0  million or 12.5% to $729.5  million at December  31, 2001 from
$648.5  million at December 31, 2000.  The increase in deposits  during the year
was due to $28.1 million of deposits  acquired in the merger with  CloverBank as
well as increases in savings accounts of $22.7 million, money market accounts of
$16.3  million and checking  accounts of $13.6  million.  Securities  sold under
agreements to repurchase  increased  $45.0 million or 37.5% to $165.0 million at
December  31, 2001 from $120.0  million at December  31,  2000.  The increase in
Securities  sold  under  agreements  to  repurchase  is a result  of the  Bank's
opportunity  this past year to borrow at rates that were well  below  comparable
certficate of deposit market rates.  These monies were used to fund asset growth
and will be  repaid  when  called  or at  maturity  with  deposit  growth or new
borrowings,  if needed.  Securities  sold under  agreements  to  repurchase  are
collateralized  by U.S. Agency Notes,  MBSs and CMOs and have a weighted average
rate of 4.86%.

         Stockholders'  Equity increased $4.8 million or 10.11% to $52.2 million
at December 31, 2001 from $47.4  million at December 31, 2000.  The increase was
due to net income of $5.5 million and an increase in the net unrealized  gain on
securities of $505 thousand, offset by $805 thousand of dividends paid on common
stock and $432 thousand of treasury stock  purchased.  The Equity to asset ratio
has been trending lower for the past years as the Bank has become more efficient
with its  assets.  This trend will not  continue  at this time as FMS  Financial
Corporation  will shortly  issue Trust  Preferred  Securities  and will fund the
Bank, as needed, to improve the Bank's capital position.

Results of Operations
Net Interest Income
         The earnings of the Corporation  depend primarily upon the level of net
interest  income,  which  is  the  difference  between  interest  earned  on its
interest-earning assets, such as loans and investments, and the interest paid on
interest-bearing  liabilities,  such as deposits including non-interest checking
accounts and borrowings.  Net interest income is a function of the interest rate
spread,  which is the  difference  between the weighted  average yield earned on
interest-earning  assets and the weighted average rate paid on  interest-bearing
liabilities,  as well as the  average  balance  of  interest-earning  assets  as
compared  to  interest-bearing  liabilities.  Net  income  is also  affected  by
non-interest   income,  such  as  gains  (losses)  on  the  sale  of  loans  and
investments,  provision for loan losses and real estate owned,  service  charges
and other fees, and operating expenses.

         The  following  table sets forth  certain  information  relating to the
Corporation's average balance sheet and reflects the average yield on assets and
average rates paid on  liabilities  for the periods  indicated.  Such yields and
rates are  derived  by  dividing  income or expense  by the  average  balance of
interest-earning assets or interest-bearing liabilities,  respectively,  for the
periods presented.

Average Balances, Interest and Yields/Rates

<TABLE>
<CAPTION>
                                                                         Years Ended December 31,
                                       ---------------------------------------------------------------------------------------------
                                                   2001                            2000                            1999
                                       -----------------------------   -----------------------------   -----------------------------
                                       Average             Average     Average              Average                        Average
                                       Balance   Interest Yield/Rate   Balance   Interest Yield/Rate   Balance   Interest Yield/Rate
                                       -------   -------------------   -------   -------------------   -------   -------------------
                                                                               (Dollars in Thousands)
<S>                                 <C>         <C>       <C>      <C>        <C>         <C>       <C>      <C>          <C>
Interest-earning assets:
         Loans receivable .........   $315,189    $23,920    7.59%    $301,199   $ 23,445    7.78%     $301,257 $  23,408    7.77%
         Mortgage-backed securities    213,301     13,728    6.44%     118,435      8,063    6.81%       97,899     6,568    6.71%
         Investment securities ....    296,081     17,652    5.96%     310,558     20,841    6.71%      289,359    17,887    6.18%
                                      --------   --------    ----     --------     ------    ----      --------    ------    ----
Total interest-earning assets .....    824,571     55,300    6.71%     730,192     52,349    7.17%      688,515    47,863    6.95%
                                      --------   --------   -----     --------     ------   -----      --------    ------   -----

Interest-bearing liabilities:
         Deposits .................    672,423     20,073    2.99%     621,227     20,892    3.36%      567,001    18,172    3.20%
         Borrowings ...............    146,752      7,622    5.19%      95,774      5,449    5.69%       96,531     5,513    5.71%
         Subordinated debentures ..     10,000      1,057   10.57%      10,000      1,057   10.57%       10,000     1,057   10.57%
                                      --------   --------   -----     --------     ------   -----      --------    ------   -----
Total interest-bearing liabilities    $829,175     28,752    3.47%    $727,001     27,398    3.77%     $673,532    24,742    3.67%
                                      ========   --------   -----     ========     ------   -----      ========    ------   -----
Net interest income ...............              $ 26,548                         $24,951                         $23,121
                                                 ========                         =======                         =======
Interest rate spread                                         3.24%                           3.40%                           3.28%
                                                            =====                           =====                           =====
Net yield on average interest-earning assets                 3.22%                           3.42%                           3.36%
                                                            =====                           =====                           =====
Ratio of average interest-
earning assets to average interest -bearing
liabilities                                                 99.44%                         100.44%                         102.22%
                                                            =====                          ======                          ======
</TABLE>

                                      -6-
<PAGE>

Rate Volume Analysis
         The following table sets forth certain information regarding changes in
interest  income  and  interest  expense  of the  Corporation  for  the  periods
indicated.  For each category of  interest-earning  assets and  interest-bearing
liabilities,  information is provided on changes  attributable to (i) changes in
rates;  (ii)  changes  in volume;  (iii)  total  change in rate and volume  (the
combined  effect of changes in both volume and rate, not separately  identified,
has  been  allocated  to  rate).  Because  average  balances  on  loans  include
non-performing  loans  which  reduce  the  computed  yield,  a  higher  level of
non-performing loans affects both the changes due to volume and rate.

<TABLE>
<CAPTION>
                                                         Years Ended December 31,
                                        ----------------------------------------------------------
                                                2001  vs. 2000                 2000  vs. 1999
                                        --------------------------       --------------------------
                                             Increase (Decrease)            Increase (Decrease)
                                               Due to change in                Due to change in
                                        --------------------------       --------------------------
                                        Rate     Volume      Total       Rate     Volume      Total
                                        ----     ------      -----       ----     ------      -----
                                                              (In Thousands)
<S>                                <C>        <C>        <C>        <C>        <C>        <C>
Interest income:
  Loans                              $  (614)   $ 1,089    $   475    $    42    $    (5)   $    37
  Mortgage-backed securities            (793)     6,458      5,665        117      1,378      1,495
  Investment securities               (2,217)      (972)    (3,189)     1,644      1,310      2,954
                                     -------    -------    -------     ------     ------    -------
  Total change - interest income      (3,624)     6,575      2,951      1,803      2,683      4,486
                                     -------    -------    -------     ------     ------    -------
Interest expense:
  Deposits                            (2,541)     1,722       (819)       982      1,738      2,720
  Borrowings                            (727)     2,900      2,173        (21)       (43)       (64)
  Subordinated debentures                 --         --         --         --         --         --
                                     -------    -------    -------     ------     ------    -------
  Total change - interest
      expense                         (3,268)     4,622      1,354        961      1,695      2,656
                                     -------    -------    -------     ------     ------    -------
Net change in net interest
 income                              $  (356)   $ 1,953    $ 1,597     $  842     $  988    $ 1,830
                                     =======    =======    =======     ======     ======    =======
</TABLE>

Comparisons of Years Ended December 31, 2001 and 2000.
Net Income
         The Corporation and its subsidiary  recorded net income of $5.5 million
for the year ended  December  31, 2001,  or $.81  diluted  earnings per share as
compared to net income of $5.1 million,  or $.74 diluted  earnings per share for
the year ended December 31, 2000. Net interest  income was $26.5 million in 2001
compared to $25.0 million in 2000. Provisions for loan losses were $221 thousand
in 2001 and $240  thousand in 2000.  Other  income  totaled $4.2 million in 2001
compared to $3.0 million for the same period in 2000.  Total operating  expenses
for the year ended  December  31,  2001 were  $22.1  million  compared  to $19.7
million in the previous year.  During 2001, the Corporation  declared  dividends
which  totaled  $.12 per share  which  resulted  in a dividend  payout  ratio of
14.81%.

Interest Income
     Total interest income  increased $3.0 million to $55.3 million in 2001 from
$52.3  million in 2000.  The increase is  attributable  to increases in interest
income on mortgage-backed securities of $5.7 million and loans of $475 thousand,
partially  offset by a decrease in interest  income on investment  securities of
$3.2 million.

         Interest income on mortgage-backed securities increased $5.7 million in
2001 primarily due to volume increases in the portfolio.  The average balance of
the  portfolio  increased  $94.9  million to $213.3  million in 2001 from $118.4
million in 2000,  resulting in an increase in interest  income of $6.5  million.
The increase in the average balance was due to the purchase of $217.1 million in
FHLMC, FNMA and GNMA securities in 2001,  partially offset by principal paydowns
of $90.2 million.  The average yield on the portfolio decreased to 6.44% in 2001
from 6.81% in 2000,  which  resulted in a decrease  in  interest  income of $793
thousand.

         The average  balance of the loan portfolio  increased  $14.0 million to
$315.2  million in 2001 from $301.2  million in 2000.  The  increase in the loan
volume during 2001  resulted in an increase in interest  income of $1.1 million.
The  increase  in the  average  balance  is  primarily  due to $25.0  million of
CloverBank  loans acquired through the merger.  Loans  originated  totaled $71.4
million and principal  collected on loans  totaled  $49.6  million in 2001.  The
average  yield on the loan  portfolio  decreased  to 7.59% in 2001 from 7.78% in
2000 which resulted in a decrease in interest income of $614 thousand.

         The decrease in interest  income on investment  securities was due to a
$14.5 million decrease in the average balance of investment securities to $296.1
million in 2001 from $310.6 million in 2000. The investment  portfolio decreased
primarily due to calls of $49.1  million of U.S.  Government  Agency notes,  and
$71.9 million in principal  paydowns of CMO's,  partially offset by increases of
$19.4  million of CMO's and $18.1  million of short term funds.  The decrease in
the average balance of investment  securities resulted in a decrease in interest
income of $972  thousand  in 2001 from the  previous  year.  Average  investment
yields  decreased  to 5.96% in 2001  from  6.71% in 2000,  which  resulted  in a
decrease in interest income of $2.2 million on investment securities.

                                      -7-
<PAGE>

Interest Expense

         Total interest expense  increased $1.4 million to $28.8 million in 2001
from $27.4  million in 2000.  The  increase  was due to an  increase in interest
expense on  borrowings,  partially  offset by a decrease in interest  expense on
deposits.

         Interest  expense on borrowings  increased $2.2 million to $7.6 million
in 2001 from $5.4 million in 2000. The average  balance of borrowings  increased
$51.0 million to $146.8 million in 2001 from $95.8 million in 2000, resulting in
a $2.9 million increase in interest  expense due to volume.  The average rate on
borrowings  decreased  to 5.19% in 2001 from 5.69% in 2000,  resulting in a $727
thousand decrease in interest expense due to changes in rate.

     Interest  expense on deposits  decreased  $819 thousand to $20.1 million in
2001 from $20.9 million in 2000. The average balance of deposits increased $51.2
million to $672.4 million in 2001 from $621.2  million in 2000,  resulting in an
increase in interest expense of $1.7 million. A portion of this increase was due
to the inclusion of  CloverBank's  deposit  balances of $28.1  million  acquired
through the merger.  The average  balance of checking  accounts  increased $30.2
million,  savings  accounts  increased  $6.4  million,  certificates  of deposit
increased $6.6 million and money market accounts increased $8.0 million in 2001.
The rate paid on deposits  decreased 37 basis points to 2.99% in 2001 from 3.36%
in 2000, which resulted in a decrease in interest  expense of $2.5 million.  The
decrease  of the  average  rate on  deposits  was due to overall  lower  average
interest rates on deposit products in 2001.

Most  Siginificant  Accounting  Estimate-Provision  For Loan Losses
         The Bank's most  significant  accounting  estimate is the provision for
loan  losses.  The  provision  for loan losses  decreased  $19  thousand to $221
thousand in 2001 from $240  thousand in 2000.  The amount of the  allowance  for
loan losses is based on management's analysis of risk characteristics of various
classifications of loans, previous loan loss experience, estimated fair value of
the underlying collateral and current economic conditions.  The Corporation will
continue to monitor its allowance for loan losses and make future adjustments to
the  allowance  through the  provision  for loan  losses as economic  conditions
dictate.  Management continues to offer a wider variety of loan products coupled
with  the  continued  change  in the mix of the  products  offered  in the  loan
portfolio from lower  yielding loans (i.e.,  one to four family loans) to higher
yielding loans (i.e., commercial real estate mortgage,  commercial construction,
consumer,  and commercial  business) which have a higher degree of risk than one
to four family loans.  Although the Bank maintains its allowance for loan losses
at a level that it considers to be adequate to provide for the inherent  risk of
loss in its loan  portfolio,  there can be no assurance  that future losses will
not exceed estimated amounts or that additional  provisions for loan losses will
not be required in future  periods due to the higher degree of credit risk which
might result from the change in the mix of the loan portfolio.

Other Income (Expense)
         Other income from operations  increased $1.2 million to $4.2 million in
2001 compared with $3.0 million in 2000.

         Gain on the sale of fixed assets of $51 thousand in 2001 relates to the
county condemnation of land in Chesterfield.

         Service charges on accounts  increased $673 thousand to $3.4 million in
2001 from $2.7 million in 2000. The increase is the result of higher transaction
volume on retail accounts during the year.

Operating Expenses
         Total  operating  expenses  increased  $2.4 million to $22.1 million in
2001 from $19.7 million in 2000.

         Salaries and benefits  increased $864 thousand to $12.5 million in 2001
from $11.6 million in 2000.  The increase was due to  additional  staff in three
new  branch  offices  opened  during  the year.  Average  full  time  equivalent
employees  during  2001  were 439 as  compared  to 427  during  2000.  Operating
expenses  are  expected to  continue  increasing  in future  periods as the Bank
pursues its branch expansion strategy.

         Occupancy and equipment expense increased $434 thousand to $4.5 million
in  2001  from  $4.1  million  in  2000.  This  increase  is due  to  additional
depreciation and occupancy  expenses on three new branch offices opened in 2001,
as well as other facility and equipment  additions and  improvements  during the
year.

         Purchased  services expense  increased $339 thousand to $2.2 million in
2001 from $1.8 million in 2000.  Check  processing  costs increased $90 thousand
and ATM charges  increased  $188  thousand due to higher  transaction  volume in
2001.

Comparisons of Years Ended December 31, 2000 and 1999.
Net Income
         The Corporation and its subsidiary  recorded net income of $5.1 million
for the year ended  December  31, 2000,  or $.74  diluted  earnings per share as
compared to net income of $5.1 million,  or $.70 diluted  earnings per share for
the year ended December 31, 1999. Net interest  income was $25.0 million in 2000
compared to $23.1 million in 1999. Provisions for loan losses were $240 thousand
in 2000 and $654  thousand in 1999.  Other  income  totaled $3.0 million in 2000
compared to $3.1 million for the same period in 1999.  Total operating  expenses
for the year ended  December  31,  2000 were  $19.7  million  compared  to $17.6
million in the previous year.  During 2000, the Corporation  declared  dividends
which  totaled  $.12 per share  which  resulted  in a dividend  payout  ratio of
16.22%.

                                      -8-
<PAGE>

Interest Income
         Total interest  income  increased $4.5 million to $52.3 million in 2000
from $47.9  million in 1999.  The  increase  is  attributable  to  increases  in
interest  income on investment  securities  of $3.0 million and  mortgage-backed
securities of $1.5 million.

         The increase in interest  income on investment  securities was due to a
$21.2 million increase in the average balance of investment securities to $310.6
million in 2000 from $289.4 million in 1999. The investment  portfolio increased
primarily due to an $8.1 million  increase in the average  balance of short term
repurchase  investment  agreements  and a $43.2 million  increase in the average
balance of U.S.  Government  Agency notes,  partially offset by $13.6 million in
principal  paydowns of CMO's. The increases in the average balance of investment
securities  resulted in an increase in interest  income of $1.3  million in 2000
from the previous year.  Average  investment  yields  increased to 6.71% in 2000
from 6.18% in 1999,  which  resulted in an  increase in interest  income of $1.6
million on investment securities.

         Interest income on mortgage-backed securities increased $1.5 million in
2000 primarily due to volume increases in the portfolio.  The average balance of
the  portfolio  increased  $20.5  million  to $118.4  million in 2000 from $97.9
million in 1999,  resulting in an increase in interest  income of $1.4  million.
The increase in the average  balance was due to the purchase of $49.0 million in
FHLMC, FNMA and GNMA securities in 2000,  partially offset by principal paydowns
of $26.7 million.  The average yield on the portfolio increased to 6.81% in 2000
from 6.71% in 1999,  which  resulted in an  increase in interest  income of $117
thousand.

         The average  balance of the loan  portfolio  decreased  $58 thousand to
$301.2  million in 2000 from $301.3  million in 1999. The decline in loan volume
during  2000  resulted  in a decrease in  interest  income of $5  thousand.  The
average  yield on the loan  portfolio  increased  to 7.78% in 2000 from 7.77% in
1999 which resulted in an increase in interest income of $42 thousand.

Interest Expense
         Total interest expense  increased $2.7 million to $27.4 million in 2000
from $24.7  million in 1999.  The  increase  was due to an  increase in interest
expense on deposits.

         Interest expense on deposits increased $2.7 million to $20.9 million in
2000 from $18.2 million in 1999. The average balance of deposits increased $54.2
million to $621.2 million in 2000 from $567.0  million in 1999,  resulting in an
increase in interest expense of $1.7 million.  Increases in deposits in 2000 are
primarily  due to an increase in the  average  balances of checking  accounts of
$21.7 million, savings accounts of $7.6 million, certificates of deposit of $7.7
million and money  market  accounts of $1.5  million.  The rate paid on deposits
increased 16 basis points to 3.36% in 2000 from 3.20% in 1999, which resulted in
an increase in interest  expense of $982  thousand.  The increase of the average
rate on deposits was due to overall  higher  average  interest  rates on deposit
products in 2000.

         Interest  expense on borrowings  decreased $64 thousand to $5.4 million
in 2000 from $5.5  million in 1999.  This  decrease was due to a decline in both
the  average  balance  of  borrowings  and the  rate.  The  average  balance  of
borrowings  decreased  $757 thousand to $95.8 million in 2000 from $96.5 million
in 1999, resulting in a $43 thousand decrease in interest expense due to volume.
The average  rate on  borrowings  decreased to 5.69% in 2000 from 5.71% in 1999,
resulting in a $21 thousand decrease in interest expense due to changes in rate.

Provision For Loan Losses
         The provision for loan losses  decreased $414 thousand to $240 thousand
in 2000 from $654 thousand in 1999.

Other Income (Expense)
         Other income from operations decreased $130 thousand to $3.0 million in
2000 compared with $3.1 million in 1999.

         Gain on sale of fixed  assets of $9  thousand  in 2000  relates  to the
disposal of a motor  vehicle.  The gain on sale of fixed assets of $245 thousand
in 1999 relates to the sale of a parcel of land located in Burlington Township.

         Real estate owned  operations,  net, in 2000  resulted in a loss of $42
thousand,  which was  comprised of $73  thousand in real estate owned  operating
expenses and of $31 thousand in gains  realized on the sale of real estate owned
properties.

         Service charges on accounts  increased $168 thousand to $2.7 million in
2000 from $2.5 million in 1999. The increase is the result of higher transaction
volume on retail accounts during the year.

Operating Expenses
         Total  operating  expenses  increased  $2.1 million to $19.7 million in
2000 from $17.6 million in 1999.

     Salaries and benefits  increased $1.4 million to $11.6 million in 2000 from
$10.2  million in 1999.  The  increase was due to  additional  staff in five new
branch offices opened during 2000. Average full time equivalent employees during
2000 were 427 as compared to 382 during 1999.

         Occupancy and equipment expense increased $614 thousand to $4.1 million
in  2000  from  $3.5  million  in  1999.  This  increase  is due  to  additional
depreciation  and occupancy  expenses on five new branch offices opened in 2000,
as well as other facility and equipment  additions and  improvements  during the
year.

         Purchased  services expense  increased $308 thousand to $1.8 million in
2000 from $1.5 million in 1999.  Check  processing  costs increased $85 thousand
and ATM charges  increased  $181  thousand due to higher  transaction  volume in
2000.

         Federal deposit insurance premiums decreased $187 thousand in 2000. The
FDIC lowered the premium rate for all savings institutions beginning in 2000.


                                      -9-
<PAGE>

Impact of Inflation and Changing Prices
         Unlike most industrial  companies,  substantially all the assets of the
Corporation  are monetary in nature.  As a result,  movements in interest  rates
have a greater impact on the  Corporation's  performance  than do the effects of
general levels of inflation.  Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.

Liquidity and Capital Resources
         The  Bank's  liquidity  is a  measure  of its  ability  to fund  loans,
withdrawals of deposits and other cash outflows in a cost effective manner.  The
Bank's  primary  sources of funds are deposits and  scheduled  amortization  and
prepayments  of loan  principal.  The Bank also obtains  funds from the sale and
maturity of investment  securities  and  short-term  investments  as well as the
maturity of mortgage-backed securities and funds provided by operations.  During
the past  several  years,  the Bank has used such  funds  primarily  to meet its
ongoing commitments to fund maturing time deposits and savings  withdrawals,  to
fund existing and continuing loan commitments and to maintain  liquidity.  While
the Bank has been able to fund its operations  internally during recent periods,
it has  periodically  supplemented  its funding needs with securities sold under
agreements to repurchase  (repurchase  agreements) and advances from the Federal
Home Loan Bank of New York  (FHLB).  At  December  31,  2001 the Bank had $165.0
million in repurchase  agreements  and $1.3 million in advances from the FHLB of
New  York.  While  loan  payments,   maturing  investments  and  mortgage-backed
securities are relatively  predictable sources of funds,  deposit flows and loan
prepayments  are  greatly   influenced  by  general  interest  rates,   economic
conditions and competition. The Bank's liquidity is also influenced by the level
of demand for funding loan originations.  Liquidity may be adversely affected by
unexpected  deposit  outflows,  excessive  interest  rates paid by  competitors,
adverse  publicity  relating  to  the  Banking  industry  and  similar  matters.
Management   monitors  projected   liquidity  needs  and  determines  the  level
desirable,  based  in  part  on the  Company's  commitment  to  make  loans  and
management's  assessment of the Company's ability to generate funds. The Company
is also  subject to federal  regulations  that impose  certain  minimum  capital
requirements.

         The amount of certificate accounts which are scheduled to mature during
the twelve months ending December 31, 2002 is approximately  $191.0 million.  To
the extent  these  deposits  do not remain at the Bank upon  maturity,  the Bank
believes it can  replace  these funds with  deposits,  FHLB  advances or outside
borrowings. It has been the Bank's experience that a substantial portion of such
maturing  deposits remain with the Bank.

         At December  31, 2001,  the Bank had loan  commitments  outstanding  of
$34.7  million,  of which  $11.8  million  were for  fixed-rate  loans and $22.9
million  were  for   adjustable-rate   loans.  Funds  required  to  fulfill  the
commitments are derived primarily from loan repayments,  net deposit inflows or,
when appropriate, borrowings.


                                      -10-
<PAGE>

Consolidated Summary of Quarterly Earnings (Unaudited)

The following table presents summarized quarterly data for 2001 and 2000:

<TABLE>
<CAPTION>
                                        1st      2nd        3rd      4th        Total
                 2001                 Quarter   Quarter   Quarter   Quarter     Year
                                      -------   -------   -------   -------   -------
                                          (In Thousands, except per share amounts)
<S>                                 <C>       <C>       <C>       <C>       <C>
Total interest income                 $13,462   $13,685   $14,165   $13,988   $55,300
Total interest expense                  7,188     7,297     7,393     6,874    28,752
                                      -------   -------   -------   -------   -------
Net interest income                     6,274     6,388     6,772     7,114    26,548
Provision for loan losses                  60        60        60        41       221
                                      -------   -------   -------   -------   -------
Net interest income after provision
  for loan losses                       6,214     6,328     6,712     7,073    26,327
Total other income                        851       925     1,004     1,446     4,226
Total operating expenses                5,212     5,355     5,634     5,916    22,117
                                      -------   -------   -------   -------   -------
Income before income taxes              1,853     1,898     2,082     2,603     8,436
Federal and state
income taxes                              660       672       725       920     2,977
                                      -------   -------   -------   -------   -------
Net income                            $ 1,193   $ 1,226   $ 1,357   $ 1,683   $ 5,459
                                      =======   =======   =======   =======   =======
Basic earnings per
common share                          $  0.18   $  0.18   $  0.20   $  0.25   $  0.81
                                      =======   ========  =======   =======   =======
Diluted earnings per
 common share                         $  0.18   $  0.18   $  0.20   $  0.25   $  0.81
                                      =======   =======   =======   =======   =======
</TABLE>


<TABLE>
<CAPTION>
                                        1st      2nd        3rd      4th        Total
                 2000                 Quarter   Quarter   Quarter   Quarter     Year
                                      -------   -------   -------   -------   -------
                                          (In Thousands, except per share amounts)

<S>                                 <C>       <C>       <C>      <C>       <C>
Total interest income                 $12,777   $12,992   $13,128   $13,452   $52,349
Total interest expense                  6,616     6,650     6,846     7,286    27,398
                                      -------   -------   -------   -------   -------
Net interest income                     6,161     6,342     6,282     6,166    24,951
Provision for loan losses                  60        60        60        60       240
                                      -------   -------   -------   -------   -------
Net interest income after provision
  for loan losses                       6,101     6,282     6,222     6,106    24,711
Total other income                        715       707       754       799     2,975
Total operating expenses                4,750     4,922     5,022     5,030    19,724
                                      -------   -------   -------   -------   -------
Income before income taxes              2,066     2,067     1,954     1,875     7,962
Federal and state
income taxes                              741       743       682       684     2,850
                                      -------   -------   -------   -------   -------
Net income                            $ 1,325   $ 1,324   $ 1,272   $ 1,191   $ 5,112
                                      =======   =======   =======   =======   =======
Basic earnings per
common share                          $  0.18   $  0.19   $  0.19   $  0.18   $  0.74
                                      =======   =======   =======   =======   =======
Diluted earnings per
common share                          $  0.18   $  0.19   $  0.19   $  0.18   $  0.74
                                      =======   =======   =======   =======   =======
</TABLE>

                                      -11-
<PAGE>

<TABLE>
<CAPTION>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
--------------------------------------------------------------------------------------------------------------------

December 31,                                                                               2001             2000
--------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>              <C>
ASSETS
--------------------------------------------------------------------------------------------------------------------

         Cash and amounts due from depository institutions                            $  32,336,279    $  30,089,526
         Interest-bearing deposits                                                          153,133          169,076
         Federal funds sold                                                                       0        1,500,000
         Short term funds                                                                30,869,712       13,192,697
                                                                                      -------------    -------------
                  Total cash and cash equivalents                                        63,359,124       44,951,299
         Investment securities held to maturity                                         196,571,299      276,107,634
         Investment securities available for sale                                        51,969,422       40,878,963
         Loans, net                                                                     336,544,004      290,178,635
         Mortgage-backed securities held to maturity                                    272,494,220      143,751,707
         Accrued interest receivable:
                  Loans                                                                   1,591,276        1,578,956
                  Mortgage-backed securities                                              1,757,572        1,043,113
                  Investments                                                             2,194,252        3,527,657
         Federal Home Loan Bank stock                                                     8,313,620        6,315,310
         Real estate held for development, net                                               87,926           87,926
         Real estate owned, net                                                             214,249          354,758
         Office properties and equipment, net                                            26,364,980       26,312,709
         Deferred income taxes                                                            3,158,402        2,360,701
         Excess cost over fair value of net assets acquired                                       0           27,664
         Prepaid expenses and other assets                                                1,767,694        1,392,671
         Subordinated debentures issue costs, net                                           149,069          206,417
                                                                                      -------------    -------------
TOTAL ASSETS                                                                          $ 966,537,109    $ 839,076,120
                                                                                      =============    =============

LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------------------------------------------

Liabilities:
         Deposits                                                                     $ 729,505,729    $ 648,539,355
         Securities sold under agreements to repurchase                                 165,000,000      120,000,000
         Advances from the Federal Home Loan Bank                                         1,270,313        6,305,644
         10% Subordinated debentures, due 2004                                           10,000,000       10,000,000
         Advances by borrowers for taxes and insurance                                    2,247,002        2,076,165
         Accrued interest payable                                                         1,782,508        1,950,205
         Dividends payable                                                                  201,531          201,831
         Other liabilities                                                                4,326,845        2,593,331
                                                                                      -------------    -------------
         Total liabilities                                                              914,333,928      791,666,531
                                                                                      -------------    -------------

Commitments and contingencies
Stockholders' Equity:
         Preferred  stock - $.10 par value 5,000,000    shares  authorized;  none issued
         Common stock - $.10 par value 10,000,000    shares  authorized; shares
                  issued 7,948,884 and 7,897,891 and shares outstanding 6,717,705
                  and 6,727,702 as of December 31, 2001 and 2000, respectively              794,888          789,789
         Paid-in capital in excess of par                                                 8,278,423        8,217,654
         Accumulated comprehensive income - net of deferred income taxes                    147,496         (358,352)
         Retained earnings                                                               51,055,818       46,401,102
         Less:  Treasury stock (1,231,179 and 1,170,189 shares, at cost, as of
                  December 31, 2001 and 2000, respectively)                              (8,073,444)      (7,640,604)
                                                                                      -------------    -------------
Total stockholders' equity                                                               52,203,181       47,409,589
                                                                                      -------------    -------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                            $ 966,537,109    $ 839,076,120
                                                                                      =============    =============
</TABLE>

See notes to consolidated financial statements.

                                      -12-
<PAGE>

<TABLE>
<CAPTION>

FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
----------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                         2001              2000              1999
----------------------------------------------------------------------------------------------------------------
<S>                                                       <C>             <C>                 <C>
INTEREST INCOME:
Interest income on:
  Loans                                                      $ 23,919,782    $ 23,445,624        $ 23,408,176
  Mortgage-backed securities                                   13,728,457       8,062,704           6,567,956
  Investments                                                  17,651,585      20,840,862          17,886,682
                                                             ------------    ------------        ------------
Total interest income                                          55,299,824      52,349,190          47,862,814
                                                             ------------    ------------        ------------
INTEREST EXPENSE:
Interest expense on:
  Deposits                                                     20,072,856      20,892,189          18,171,523
  Borrowings                                                    7,621,750       5,448,721           5,513,478
  Subordinated debentures                                       1,057,348       1,057,348           1,057,348
                                                             ------------    ------------        ------------
Total interest expense                                         28,751,954      27,398,258          24,742,349
                                                             ------------    ------------        ------------
NET INTEREST INCOME                                            26,547,870      24,950,932          23,120,465
PROVISION FOR LOAN LOSSES                                         221,000         240,000             653,579
                                                             ------------    ------------        ------------
NET INTEREST INCOME AFTER PROVISION
 FOR LOAN LOSSES                                               26,326,870      24,710,932          22,466,886
                                                             ------------    ------------        ------------
OTHER INCOME (EXPENSE):
  Loan service charges
   and other fees                                                 114,774         122,144             152,856
  Gain on sale of loans
    and real estate owned                                         418,939           2,480               3,849
  Gain on sale/disposal of
   fixed assets                                                    50,799           8,586             244,731
  Gain on sale of
   investment securities                                           35,916               0                   0
   Real estate owned
    operations, net                                               (53,469)        (41,904)            (11,802)
  Service charges
    on accounts                                                 3,361,668       2,688,914           2,520,929
  Other income                                                    297,780         194,520             194,041
                                                             ------------    ------------        ------------
Total other income                                              4,226,407       2,974,740           3,104,604
                                                             ------------    ------------        ------------
OPERATING EXPENSES:
  Salaries and employee
   benefits                                                    12,481,771      11,617,550          10,182,540
  Occupancy and equipment                                       4,545,863       4,111,393           3,497,537
  Purchased services                                            2,158,833       1,820,308           1,512,112
  Federal deposit
    insurance premiums                                            146,108         122,516             309,679
  Professional fees                                               572,199         468,798             461,378
  Advertising                                                     340,270         216,896             215,281
  Other                                                         1,872,190       1,366,533           1,388,071
                                                             ------------    ------------        ------------
Total operating expenses                                       22,117,234      19,723,994          17,566,598
                                                             ------------    ------------        ------------
INCOME BEFORE INCOME TAXES                                      8,436,043       7,961,678           8,004,892
INCOME TAXES:
  Current                                                       3,774,453       3,362,057           2,336,374
  Deferred                                                       (797,701)       (511,981)            555,012
                                                             ------------    ------------        ------------
Total income taxes                                              2,976,752       2,850,076           2,891,386

NET INCOME                                                   $  5,459,291    $  5,111,602        $  5,113,506
                                                             ============    ============        ============
BASIC EARNINGS PER COMMON SHARE                              $       0.81    $       0.74        $       0.71
                                                             ============    ============        ============
DILUTED EARNINGS PER COMMON SHARE                            $       0.81    $       0.74        $       0.70
                                                             ============    ============        ============
Weighted average common
shares outstanding                                              6,700,729       6,887,986           7,210,038
Potential dilutive effect of the exercise of stock options         13,498          58,544              81,554
                                                             ------------    ------------        ------------
Adjusted weighted average common shares outstanding             6,714,227       6,946,530           7,291,592
                                                             ============    ============        ============
</TABLE>

See notes to consolidated financial statements.

                                      -13-
<PAGE>

<TABLE>
<CAPTION>

FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                                                 2001             2000             1999
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>              <C>              <C>
OPERATING ACTIVITIES:
Net income                                                                          $   5,459,291    $   5,111,602    $   5,113,506
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses                                                                 221,000          240,000          653,579
Provision for real estate owned                                                          (325,000)               0                0
Depreciation and amortization                                                           3,357,408        2,082,103        2,016,259
Realized (gains) and losses on:
  Sale of loans and loans held for sale                                                    (1,455)          (2,480)          (3,849)
  Sale and Disposal of fixed assets                                                       (50,799)          (8,586)        (244,731)
  Investment securities                                                                   (35,916)               0                0
  Sale of real estate owned                                                              (417,484)         (31,416)         (25,097)
Decrease (Increase) in accrued interest receivable                                        767,782         (285,935)      (1,019,497)
(Increase) Decrease in prepaid expenses and other assets                                 (335,990)        (432,852)         196,754
(Decrease)  Increase  in accrued interest payable                                        (193,299)         512,857          132,606
Increase in other liabilities                                                             974,901          276,449          446,775
Provision for deferred income taxes                                                      (336,970)        (550,773)         395,258
Other                                                                                           0           48,680                0
                                                                                    -------------    -------------    -------------
  Net cash provided by operating activities                                             9,083,469        6,959,649        7,661,563
                                                                                    -------------    -------------    -------------
INVESTING ACTIVITIES:
Proceeds from sale of:
  Education loans                                                                         215,375          456,651          750,565
  Real estate held for development                                                              0                0          556,561
  Real estate owned                                                                       927,993          570,073          110,097
  Office property and equipment                                                            99,631           12,436          353,410
Principal collected and proceeds from maturities of investment
 securities held to maturity                                                          333,005,946      239,765,750       62,682,095
Proceeds from maturities of investment securities available for sale                   46,663,135        9,679,098      107,709,603
Principal collected and proceeds from maturities of mortgage-backed
 securities                                                                            90,396,808       26,691,733       26,545,021
Principal collected on loans, net                                                      49,577,838       56,262,434       54,487,510
Longer-term loans originated or acquired, net                                         (71,407,691)     (47,895,284)     (57,275,106)
Purchase of investment securities and mortgage-backed securities
 held to maturity                                                                    (472,938,992)    (344,856,122)    (256,292,451)
Purchase of investment securities available for sale                                  (57,020,968)               0       (4,056,041)
Purchase of Federal Home Loan Bank stock                                               (1,748,310)      (1,453,900)               0
Purchase of office property and equipment                                              (1,619,525)      (7,382,240)      (3,009,232)
Net cash received from branch purchase                                                  1,466,726                0                0
                                                                                    -------------    -------------    -------------
  Net cash used by investing activities                                               (82,382,034)     (68,149,371)     (67,437,968)
                                                                                    -------------    -------------    -------------
FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts                                   52,586,654       44,603,673       53,936,730
Net increase in time deposits                                                             277,028           43,565       13,645,764
Net decrease in FHLB advances                                                          (5,035,331)     (10,031,387)         (31,290)
Proceeds from securities sold under agreement to repurchase                            45,000,000       30,000,000       10,000,000
Increase (Decrease) in advances from borrowers for taxes and insurance                     49,886         (128,539)         (54,731)
Purchase of treasury stock                                                               (432,840)      (3,789,148)        (475,084)
Dividends paid on common stock                                                           (804,875)        (833,143)        (866,279)
Net proceeds from issuance of common stock                                                 65,868              129              775
                                                                                    -------------    -------------    -------------
  Net cash provided by financing activities                                            91,706,390       59,865,150       76,155,885
                                                                                    -------------    -------------    -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                       18,407,825       (1,324,572)      16,379,480

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                           44,951,299       46,275,871       29,896,391
                                                                                    -------------    -------------    -------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                              $  63,359,124    $  44,951,299    $  46,275,871
                                                                                    =============    =============    =============
Supplemental Disclosures:
  Cash paid for:
    Interest on deposits, advances, and other borrowings                            $  28,919,651    $  26,885,401    $  24,113,145
    Income taxes                                                                        3,647,733        2,919,839        2,689,262
  Non cash investing and financing activities:
    Dividends declared and not paid at year end                                           201,531          201,831          215,519
    Non-monetary transfers from loans to real estate acquired through foreclosure          45,000          493,554          366,000
    Deposits acquired in connection with merger                                        28,102,691                0                0
    Assets acquired in connection with merger                                          28,260,337                0                0

</TABLE>

See notes to consolidated financial statements.


                                      -14-
<PAGE>
xxx

FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                  Common                             Accumulated                                     Total
                                   shares        Common    Paid-in  comprehensive    Retained      Treasury       Stockholders'
                                 outstanding      stock    capital  income (loss)    earnings       stock            Equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                           <C>            <C>       <C>         <C>            <C>            <C>            <C>
Balances at
  December 31, 1998               7,231,767     $789,719  $8,216,820 $  (21,793)    $37,860,291    $(3,376,372)   $43,468,665
Net income                                                                            5,113,506                     5,113,506
Other comprehensive
  income, net of tax
  benefit of $648,072
  Unrealized gain (loss)
  on securities available
  for sale                                                           (1,146,017)                                   (1,146,017)
                                                                                                                   ----------
Total comprehensive
  income                                                                                                            3,967,489
Dividends declared                                                                     (864,842)                     (864,842)
Exercise of stock options               600           60         715                                                      775
Purchase of
  common stock                      (48,389)                                                          (475,084)      (475,084)
------------------------------------------------------------------------------------------------------------------------------------
Balances at
  December 31, 1999               7,183,978      789,779   8,217,535 (1,167,810)     42,108,955     (3,851,456)    46,097,003
Net income                                                                            5,111,602                     5,111,602
Other comprehensive
  income, net of tax
  benefit of $454,659
  Unrealized gain (loss)
  on securities available
  for sale                                                              809,458                                       809,458
                                                                                                                   ----------
Total comprehensive
  income                                                                                                            5,921,060
Dividends declared                                                                     (819,455)                     (819,455)
Exercise of stock options               100           10         119                                                      129
Purchase of
  common stock                     (456,376)                                                        (3,789,148)     (3,789,148)
------------------------------------------------------------------------------------------------------------------------------------
Balances at
  December 31, 2000               6,727,702      789,789   8,217,654   (358,352)     46,401,102     (7,640,604)     47,409,589
Net income                                                                            5,459,291                      5,459,291
Other comprehensive
  income, net of tax
  of $286,789
  Unrealized gain (loss)
  on securities available
  for sale                                                              505,848                                        505,848
                                                                                                                   -----------
Total comprehensive
  income                                                                                                             5,965,139
Dividends declared                                                                     (804,575)                      (804,575)
Exercise of stock options            50,993        5,099      60,769                                                    65,868
Purchase of
  common stock                      (60,990)                                                          (432,840)       (432,840)
------------------------------------------------------------------------------------------------------------------------------------
Balances at
  December 31, 2001               6,717,705     $794,888  $8,278,243   $147,496     $51,055,818    $(8,073,444)    $52,203,181
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

See notes to consolidated financial statements.

                                      -15-

<PAGE>

FMS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL SATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation
     The  consolidated  financial  statements  are prepared in  accordance  with
generally accepted  accounting  principles in the United States of America.  The
consolidated   financial  statements  include  the  accounts  of  FMS  Financial
Corporation  ("Corporation"),  Farmers & Mechanics  Bank,  and its  wholly-owned
subsidiaries ("Bank"). Material intercompany accounts and transactions have been
eliminated in consolidation.

Regulatory Authorities
     The regulatory  agency  overseeing  savings  institutions  is the Office of
Thrift  Supervision  ("OTS")  and the  deposits  of the Bank are  insured by the
Federal Deposit Insurance Corporation ("FDIC").

     At  periodic  intervals,  both the OTS and the FDIC  routinely  examine the
Corporation  as part of their  legally  prescribed  oversight of the savings and
loan industry.  Based on these examinations,  the regulators can direct that the
Corporation's   financial  statements  be  adjusted  in  accordance  with  their
findings.  In  addition,  the  Corporation  is  subject  to  regulations  of the
Securities and Exchange Commission ("SEC").

Cash and Cash Equivalents
     Cash and cash  equivalents  include  cash and amounts  due from  depository
institutions,  interest-bearing deposits with an original maturity of 90 days or
less,  money  market  funds and federal  funds sold.  Cash and cash  equivalents
exclude  reverse  repurchase   agreements  which  are  generally  classified  as
investments  held to maturity.  Generally,  federal funds are purchased and sold
for one-day  periods.  The Bank is required to maintain  certain average reserve
balances  as  established  by the  Federal  Reserve  Bank.  The  amount of those
balances for the reserve computation periods which include December 31, 2001 and
2000 were $11.8 million and $19.5 million, respectively. These requirements were
satisfied  through the  balance of vault cash and a balance at the Federal  Home
Loan Bank.

Investments and Mortgage-Backed Securities
     Investments  classified  as available  for sale are reported at the current
market value with net unrealized  gains and losses,  net of applicable  deferred
tax effects,  added to or deducted from the  Corporation's  total  stockholders'
equity and comprehensive income until realized.  Gains and losses on the sale of
investment  securities  are  recognized  utilizing  the specific  identification
method.

     Investment and  mortgage-backed  securities  classified as held to maturity
are  recorded at cost,  adjusted  for  amortization  of premiums or accretion of
discounts.  Premiums  are  amortized  over  the  average  life of the  security.
Discounts are amortized using a method which in total  approximates the interest
method over the remaining contractual life of the security.  The Corporation has
the intent and ability to hold these securities to maturity.

Securities Purchased under Agreements to Resell
     The Bank invests excess funds in securities  purchased under  agreements to
resell  (reverse  repurchase  agreements).  Generally,  the maturity date of the
reverse repurchase  agreement is less than 90 days. Due to the short-term nature
of the agreement, the Bank does not take possession of the securities;  instead,
the securities  are held in safekeeping by the Bank's agent.  The carrying value
of the agreements  approximates  fair market value because of the short maturity
of the investment.

Allowance for Loan Losses
     An  allowance  for loan  losses is  maintained  at a level that  management
considers  adequate to provide for losses based upon the  portfolio's  past loss
experience,  current  economic  conditions  and  other  relevant  factors.  When
collection  of a loan's  principal  balance  or portion  thereof  is  considered
doubtful,  management  charges the  allowance  for possible loan losses based on
their assessment of the loan's underlying  collateral,  if collateral dependent,
or present value of estimated future cash flows.  While management uses the best
information  available to make  evaluations  about the adequacy of the allowance
for loan  losses,  future  adjustments  to the  allowance  may be  necessary  if
conditions  differ  substantially  from  the  assumptions  used  in  making  the
evaluations.

Loans Held for Sale
     The Bank periodically sells selected fixed-rate residential mortgage loans,
without recourse, to provide additional funds for lending and to restructure the
loan  portfolio to improve  interest  rate risk.  These loans are carried at the
lower of cost or estimated market value, determined on a net aggregate basis.

Interest on Loans
     The Bank recognizes  interest income on loans when earned.  Generally,  the
Bank  does  not  recognize  interest  income  on  loans  three  months  or  more
delinquent.  Such  interest  ultimately  collected  is recorded as income in the
period of recovery.

Real Estate Owned
     Real  estate  owned  consists  of  properties  acquired  by or  in-lieu  of
foreclosure.  These  assets are carried at the lower of cost or  estimated  fair
value at the  time  the loan is  foreclosed  less  estimated  cost to sell.  The
amounts  recoverable  from real estate  owned could differ  materially  from the
amounts  used in arriving  at the net  carrying  value of the assets  because of
future  market  factors  beyond the  control of the Bank.  Costs to improve  the
property are  capitalized,  whereas costs of holding the property are charged to
expense.

                                      -16-
<PAGE>

Real Estate Held for Development
     Real  estate  held for  development  is  carried  at cost not to exceed net
realizable  value.  Net  realizable  value is  determined  based on a discounted
estimate of the fair market value.

Office Properties and Equipment
     Office  properties  and  equipment  are recorded at cost.  Depreciation  is
computed using the  straight-line  method over the expected  useful lives of the
assets.  The  expected  useful  lives of assets are as  follows:  buildings  and
improvements range from 10 to 30 years, furniture, fixtures, and equipment range
from 3 to 10 years,  computers are 3 years and leasehold  improvements  are over
the term of the lease. The costs of maintenance and repairs are expensed as they
are incurred. Renewal and improvement costs are capitalized.

Deferred Loan Fees
     All loan fees and  related  direct  loan  origination  costs are  deferred.
Deferred loan fees and costs are generally  capitalized and amortized as a yield
adjustment over the life of the loan using the interest method.

Loans Serviced for Others
     Servicing  loans for  others  generally  consists  of  collecting  mortgage
payments,  disbursing  payments to investors and processing  foreclosures.  Loan
servicing  income is recorded  upon  receipt and  includes  servicing  fees from
investors and certain  charges  collected from  borrowers,  such as late payment
fees.  The total  amount of loans being  serviced  for the benefit of others was
$12.8  million and $14.6  million at December  31, 2001 and 2000,  respectively.
Loan servicing fee income was approximately  $44 thousand,  $48 thousand and $56
thousand for the years ended December 31, 2001, 2000 and 1999, respectively.

Excess Cost over Fair Value of Net Assets Acquired
     The excess costs over the fair value of assets acquired are being amortized
over a five year period using the straight-line method.

Income Taxes
     The  Corporation  computes its taxable income for both financial  reporting
and federal tax purposes on the accrual basis.  The Corporation  reports certain
items of income and expense in its consolidated  financial statements in periods
different from those in which such items enter into the determination of taxable
income.  In  conformity  with  generally  accepted  accounting  principles,  the
Corporation  provides  for the tax  effects of such  timing  differences  in its
consolidated   financial   statements,   subject  to  the   deferred  tax  asset
realizability  provisions of Statement of Financial Accounting Standards No. 109
(SFAS No. 109),  "Accounting for Income Taxes". These differences between pretax
accounting  income and taxable income for return purposes  consist  primarily of
the  calculations  for loan loss  allowance,  real estate losses,  depreciation,
recognition  of income and expenses  associated  with loan  origination,  profit
recognition on discounted mortgages and securities income.

Reclassifications
     Certain items in the 2000 and 1999 consolidated  financial  statements have
been  reclassified  to conform with the  presentation  in the 2001  consolidated
financial statements.

Earnings Per Share
     Statement  of  Financial  Accounting  Standards  No.  128 (SFAS  No.  128),
"Earnings per Share", requires the dual presentation of basic and diluted EPS on
the  face  of the  income  statement  for  all  entities  with  complex  capital
structures and requires a reconciliation of the numerator and denominator of the
basic EPS  computation  to the  numerator  and  denominator  of the  diluted EPS
computation.  Basic EPS  excludes  dilution  and is computed by dividing  income
available to common stockholders by the weighted-average number of common shares
outstanding  for the period.  Diluted EPS reflects the  potential  dilution that
could  occur  if  securities  or other  contracts  to issue  common  stock  were
exercised or  converted  into common stock or resulted in the issuance of common
stock that then  shared in the  earnings  of the  entity.  The  Corporation  has
presented   both  basic  and  diluted   earnings   per  share  as  well  as  the
reconciliation of the denominator in the consolidated statement of operations.

                                      -17-
<PAGE>


2.      INVESTMENT SECURITIES HELD TO MATURITY

     A comparison  of amortized  cost and  estimated  market value of investment
securities held to maturity at December 31, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>
                                                December 31, 2001
                          -----------------------------------------------------------------
                                             Gross              Gross           Estimated
                           Amortized        Unrealized        Unrealized         Market
                             Cost             Gains             Losses           Value
                          ------------     ---------         ----------        ------------
<S>                     <C>              <C>               <C>               <C>
U.S. Gov't Agencies       $ 82,190,157     $ 870,045         $ (232,878)       $ 82,827,324
Municipal bonds              7,721,374         7,040                  0           7,728,414
CMOs                       106,659,768       758,413         (1,068,177)        106,350,004
                          ------------     ----------        -----------       ------------
Total                     $196,571,299     $1,635,498       $(1,301,055)       $196,905,742
                          ============     ==========        ===========       ============
</TABLE>


<TABLE>
<CAPTION>
                                            December 31, 2000
                          -----------------------------------------------------------------
                                              Gross             Gross           Estimated
                           Amortized        Unrealized        Unrealized         Market
                             Cost             Gains             Losses           Value
                          ------------     --------          -----------       ------------
<S>                     <C>              <C>               <C>               <C>
Reverse Repos              $60,341,969     $      0          $         0       $ 60,341,969
U.S. Gov't Agencies        167,923,406      105,364           (1,650,157)       166,378,613
Municipal bonds              3,887,840        8,540                    0          3,896,380
CMOs                        43,954,419       10,760             (504,451)        43,460,728
                          ------------     --------          -----------       ------------
         Total            $276,107,634     $124,664          $(2,154,608)      $274,077,690
                          ============     ========          ===========       ============
</TABLE>

     The Bank has the intent and ability to hold these  securities  to maturity.
The amortized cost and estimated market value of investments held to maturity at
December 31, 2001,  by  contractual  maturity  period are shown in the following
table.  Expected  maturities  may  differ  as  borrowers  have the right to call
certain  obligations.  CMOs are shown  separately  due to the  amortization  and
prepayment of principal occurring throughout the life of these instruments.

                                               December 31, 2001
                                         ---------------------------
                                            Amortized    Estimated
                                              Cost      Market Value
                                         ------------   ------------
Due one year or less                     $  7,721,374   $  7,728,414
Due one to five years                               0              0
Due five to ten years                      36,625,466     37,093,779
Due after ten years                        45,564,691     45,733,545
CMOs                                      106,659,768    106,350,004
                                         ------------   ------------
Total                                    $196,571,299   $196,905,742
                                         ============   ============

         During  2001,  there was a required  recall on CMO's  held to  maturity
which resulted in a realized gain of $53 thousand.


3.       INVESTMENT SECURITIES AVAILABLE FOR SALE

         The amortized cost and estimated market value of investment  securities
available for sale at December 31, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>
                                                  December 31, 2001
                           ----------------------------------------------------------------
                                              Gross             Gross           Estimated
                           Amortized        Unrealized        Unrealized         Market
                           Cost               Gains             Losses           Value
                           -----------      --------          --------          -----------
<S>                      <C>              <C>               <C>               <C>
U.S. Gov't Agencies       $14,990,181       $124,780          $ (63,111)        $15,051,850
CMOs                       12,377,010        247,318            (58,924)         12,565,404
MBSs                       24,371,904         65,175            (84,911)         24,352,168
                           -----------      --------          ----------        -----------
Total                     $51,739,095       $437,273          $(206,946)        $51,969,422
                           ===========      ========          ==========        ===========
</TABLE>



                                         December 31, 2000
                      ------------------------------------------------------
                                         Gross       Gross         Estimated
                      Amortized        Unrealized  Unrealized        Market
                        Cost             Gains       Losses           Value
                      -----------   -----------   -----------    -----------
U.S. Gov't Agencies   $10,292,370   $         0   $   (85,906)   $10,206,464
CMOs                   28,657,931        23,332      (525,463)    28,155,800
MBSs                    2,490,974        25,725             0      2,516,699
                      -----------   -----------   -----------    -----------
Total                 $41,441,275   $    49,057   $  (611,369)   $40,878,963
                      ===========   ===========   ===========    ===========


         The amortized cost and estimated market value of investments  available
for sale at December 31, 2001, by contractual  maturity  period are shown in the
following table.  Expected  maturities may differ as borrowers have the right to
call or  prepay  certain  obligations.  CMOs  are  shown  separately  due to the
amortization and prepayment of principal occurring  throughout the life of these
instruments.

                                       December 31, 2001
                                ---------------------------------
                                  Amortized           Estimated
                                    Cost             Market Value
                                -----------           -----------
Due one to five years           $         0           $         0
Due five to ten years             4,996,993             5,078,000
Due after ten years              34,365,092            34,326,018
CMOs                             12,377,010            12,565,404
                                -----------           -----------
Total                           $51,739,095           $51,969,422
                                ===========           ===========

         During  2001,  CMOs  available  for sale were sold which  resulted in a
realized  loss of $17  thousand.  There were no sales of  investment  securities
during 2000 or 1999.

                                      -18-
<PAGE>

4.       LOANS, NET

     Loans, net at December 31, 2001 and 2000 consist of the following:

                                        2001           2000
--------------------------------------------------------------

Mortgage Loans                     $259,970,571   $228,427,960
Construction Loans                    1,254,191        163,493
Commercial Construction               4,605,752      1,061,799
Consumer Loans                        4,582,734      3,899,549
Commercial Real Estate               60,626,659     52,763,358
Commercial Business                  10,520,704      8,521,769
--------------------------------------------------------------
Subtotal                            341,560,611    294,837,928
Less:
         Deferred loan fees             786,044        678,946
         Allowance for
            possible loan losses      4,230,563      3,980,347
--------------------------------------------------------------
Total loans, net                   $336,544,004   $290,178,635
==============================================================

         At December  31,  2001 and 2000 the  recorded  investment  in loans for
which  impairment had been  recognized in accordance  with SFAS Nos. 114 and 118
totaled  $2.8  million and $2.2  million,  respectively.  At December  31, 2001,
impaired loans of $1.1 million related to loans that were individually  measured
for impairment  with a valuation  allowance of $424 thousand and $1.7 million of
loans that were collectively  measured for impairment with a valuation allowance
of $87 thousand.  At December 31, 2000 impaired loans of $1.1 million related to
loans that were individually  measured for impairment with a valuation allowance
of $425 thousand and $1.1 million of loans that were  collectively  measured for
impairment  with a  valuation  allowance  of $56  thousand.  For the years ended
December 31, 2001 and 2000,  the average  recorded  investment in impaired loans
was approximately $2.9 million and $2.6 million, respectively.  During the years
ended December 31, 2001 and 2000 the  Corporation  recognized  $322 thousand and
$190 thousand, respectively, of interest on impaired loans.

         Loans which are 90 days delinquent as to principal  and/or interest are
placed on a non-accrual  status and all previously accrued interest is reversed.
The principal amount of non-accrual loans at December 31, 2001 and 2000 was $2.8
million and $2.0 million,  respectively.  Interest  income on non-accrual  loans
that would have been recorded in 2001 under the original terms of such loans was
$96 thousand, and the interest income actually recognized in 2001 for such loans
was $62  thousand.  Interest  income on  non-accrual  loans that would have been
recorded in 2000 under the original terms of such loans was $156  thousand,  and
the actual interest income recognized in 2000 for such loans was $122 thousand.

         The Bank  originates and purchases  both  adjustable and fixed interest
rate loans. At December 31, 2001, the composition of these loans is as follows:

                          Maturing   Maturing
                           during    from 2003     Maturing
(In Thousands)              2002    through 2006  after 2006         Total
                          --------  ------------  ----------         -----


Mortgage Loans
   (1-4 dwelling)         $  1,958   $ 15,661       $242,352       $259,971
Construction Loans             559         50            645          1,254
Commercial Construction      4,606          0              0          4,606
Consumer Loans               1,084      2,461          1,038          4,583
Commercial Real Estate       6,119     10,656         43,851         60,626
Commercial Business          4,428      4,722          1,371         10,521
---------------------------------------------------------------------------
Total                     $ 18,754   $ 33,550       $289,257       $341,561
===========================================================================

Interest sensitivity on the above loans:
Loans with
   predetermined rates    $ 11,871   $ 31,729       $227,128       $270,728
Loans with adjustable or
   floating rates            6,883      1,821         62,129         70,833
                          -------------------------------------------------
Total                     $ 18,754   $ 33,550       $289,257       $341,561
                          =================================================


         Construction,  commercial  and land loans are generally  indexed to the
prime rate plus a percentage  (generally 1% to 2%). The adjustable rate mortgage
loans have interest rate adjustment limitations and are generally indexed to the
one year U.S. Treasury constant maturity yield. Future market factors may affect
the  correlation of the interest rate adjustment with the rates the Bank pays on
the short-term  deposits that have been primarily  utilized to fund these loans.
Loans  pledged as  collateral  for advances and lines of credit from the Federal
Home Loan Bank  totaled  $37.0  million at  December  31,  2001.

     Changes in the allowance for possible loan losses are as follows:

                                  Years ended December 31,
                         -----------------------------------------
                              2001           2000           1999
                         -----------------------------------------
Balance at beginning
         of year         $ 3,980,347    $ 3,840,967    $ 3,342,274
Provision charged to
         operations          221,000        240,000        653,579
Charge-offs                  (45,304)      (131,740)      (232,828)
Recoveries                    12,914         31,120         77,942
Increase due to merger        61,606              0              0
                         -----------------------------------------
Balance at end of year   $ 4,230,563    $ 3,980,347    $ 3,840,967
                         =========================================


                                      -19-
<PAGE>

5.       MORTGAGE-BACKED SECURITIES

         Mortgage-backed  securities  held to maturity at December  31, 2001 and
2000 are summarized as follows:

                              December 31, 2001
        ----------------------------------------------------------
                           Gross            Gross
          Amortized      Unrealized       Unrealized   Estimated
            Cost           Gains            Losses    Market Value
        ----------------------------------------------------------
GNMA    $ 54,266,773   $  1,127,735   $     (3,463)   $ 55,391,045
FNMA     196,556,532      1,740,513     (1,178,253)    197,118,792
FHLMC     21,670,915        659,776            (10)     22,330,681
        ----------------------------------------------------------
Total   $272,494,220   $  3,528,024   $ (1,181,726)   $274,840,518
        ==========================================================

                              December 31, 2000
        ----------------------------------------------------------
                           Gross            Gross
          Amortized      Unrealized       Unrealized   Estimated
            Cost           Gains            Losses    Market Value
        ----------------------------------------------------------
GNMA    $ 35,868,102   $    413,790   $   (152,184)   $ 36,129,708
FNMA      67,927,876        651,806       (136,510)     68,443,172
FHLMC     39,955,729        685,962        (10,155)     40,631,536
        ----------------------------------------------------------
Total   $143,751,707   $  1,751,558   $   (298,849)   $145,204,416
        ==========================================================


         The Bank  has the  intent  and  ability  to hold  these  securities  to
maturity.  At December 31, 2001, neither a disposal,  nor a condition that could
lead to a decision  not to hold these  securities  to maturity  were  reasonably
foreseen.

6.       OFFICE PROPERTIES AND EQUIPMENT, NET

         Office  properties  and  equipment  at  December  31, 2001 and 2000 are
summarized by major classification, as follows:

                                                December 31,
-------------------------------------------------------------------
                                            2001            2000
-------------------------------------------------------------------
Land, buildings and improvements       $ 28,166,126    $ 26,961,157
Furniture and equipment                   5,830,584       5,498,144
Computers                                 4,749,041       4,424,183
-------------------------------------------------------------------
Total                                    38,745,751      36,883,484

Less accumulated depreciation           (12,380,771)    (10,570,775)
-------------------------------------------------------------------
Office properties and equipment, net   $ 26,364,980    $ 26,312,709
===================================================================


7.       REAL ESTATE HELD FOR DEVELOPMENT, NET

         The Bank, through its wholly-owned subsidiary, Land Financial Services,
Inc.,  had entered into several  real estate  investments.  Real estate held for
development is carried at the lower of cost or estimated net  realizable  value.
Intercompany  loans from the Bank are the  primary  sources of funding  and have
been eliminated in  consolidation.  Such  investments in real estate at December
31, 2001 and 2000, are summarized as follows:

                                           December 31,
                                 --------------------------------
                                    2001                   2000
-----------------------------------------------------------------
Real estate held for
         development             $ 376,694              $ 376,694
Valuation allowance               (288,768)              (288,768)
-----------------------------------------------------------------
Net                              $  87,926              $  87,926
=================================================================


8.       REAL ESTATE OWNED, NET

         Real estate owned, which was acquired through  foreclosure and deeds in
lieu of  foreclosure,  totaled $214 thousand and $355 thousand,  net at December
31, 2001 and 2000, respectively.  Changes in the allowance for real estate owned
is as follows:

                                    Years ended December 31,
----------------------------------------------------------------
                                2001         2000         1999
----------------------------------------------------------------
Balance at beginning
  of year                    $ 716,919    $ 668,239    $ 668,239
Valuation Allowance           (325,000)           0            0
Charge-offs                    (10,243)      (9,962)           0
Recoveries                           0       58,642            0
----------------------------------------------------------------
Balance at end of year       $ 381,676    $ 716,919    $ 668,239
================================================================


                                      -20-
<PAGE>


9.       DEPOSITS
         Deposits at December 31, 2001 and 2000 consisted of the following major
classifications and weighted average interest rates:

                                        December 31, 2001
                        ----------------------------------------------
                           Weighted                           Percent
                        Average Rate         Amount           of Total
                        ----------------------------------------------

Non-interest checking      0.00%          $120,954,278         16.57%
Checking accounts          2.16            134,601,630         18.45
Savings accounts           2.23            131,524,016         18.04
Money market accounts      2.55             86,854,749         11.91
Certificates               5.12            255,571,056         35.03
----------------------------------------------------------------------
Total                      2.99%          $729,505,729        100.00%
======================================================================


                                        December 31, 2000
                        ----------------------------------------------
                           Weighted                           Percent
                        Average Rate         Amount           of Total
                        ----------------------------------------------

Non-interest checking      0.00%          $103,544,519         15.97%
Checking accounts          3.17            131,054,687         20.20
Savings accounts           2.72            103,072,351         15.90
Money market accounts      2.75             68,768,257         10.60
Certificates               5.14            242,099,541         37.33
----------------------------------------------------------------------
Total                      3.35%          $648,539,355        100.00%
======================================================================


         A summary of  certificates  by  maturity  at  December  31,  2001 is as
follows:

                  Years ended December 31,            Amount
                  ---------------------------------------------
                  2002                            $191,012,002
                  2003                              43,546,277
                  2004                               8,020,892
                  Thereafter                        12,991,885
                  ---------------------------------------------
                  Total                           $255,571,056
                  =============================================


     A summary of interest expense on deposits is as follows:

                                    Years ended December 31,
                           ----------------------------------------------
                               2001             2000              1999
-------------------------------------------------------------------------
Checking accounts          $ 2,711,539      $ 3,508,791      $ 2,029,980
Savings accounts             2,644,185        3,045,369        2,787,185
Money market accounts        1,926,269        1,864,489        1,817,465
Certificates                12,790,863       12,473,540       11,536,893
-------------------------------------------------------------------------
Total interest expense     $20,072,856      $20,892,189      $18,171,523
=========================================================================

10.      ADVANCES FROM FEDERAL HOME LOAN BANK
         At December 31, 2001,  the Bank had advances from the Federal Home Loan
Bank of New York (FHLB) in the amount of $1.3  million  with a weighted  average
interest rate of 5.00%.  Advances are  collateralized  by certain first mortgage
loans.

                         Years ended December 31,
-------------------------------------------------------------------------
                2001                               2000
-------------------------------------------------------------------------
              Weighted                           Weighted
              Average    Maturity                Average      Maturity
   Amount      Rate        Date        Amount      Rate         Date
-------------------------------------------------------------------------

$        0        -           -     $5,000,000     5.62%       2/15/01
 1,270,313     5.00%    10/9/07      1,305,644     5.00%       10/9/07
-------------------------------------------------------------------------
$1,270,313     5.00%                $6,305,644     5.49%
=========================================================================


11.  SECURITIES  SOLD UNDER  AGREEMENTS  TO  REPURCHASE
     At December 31, 2001, the Bank had securities  sold under the agreements to
repurchase  (repurchase  agreements) in the aggregate  amount of $165.0 million.
The repurchase  agreements are collateralized by U.S. Agency Notes, MBS and CMOs
with a market value of $169.3  million.  Accrued  interest  payable totaled $909
thousand at December 31, 2001.


                    Year ended December 31, 2001
--------------------------------------------------------------------------
                                Weighted         Maturity         Call
Counterparty     Amount        Average Rate         Date         Feature
--------------------------------------------------------------------------
FHLB          $20,000,000        5.72%            12/19/07      12/19/02
FHLB           20,000,000        5.13%             1/14/08       1/14/02
FHLB           20,000,000        5.95%             8/30/10       8/28/02
FHLB           20,000,000        5.54%            10/18/10       1/18/02
FHLB           20,000,000        5.22%            12/20/10      12/19/03
FHLB           20,000,000        4.85%            12/20/10       3/19/02
FHLB           10,000,000        4.18%             2/28/11       2/28/02
FHLB           15,000,000        3.84%              4/6/11        4/6/02
FHLB           10,000,000        3.49%             8/10/11       8/10/02
FHLB           10,000,000        1.98%            11/14/11      11/14/02
--------------------------------------------------------------------------
Total        $165,000,000        4.86%
==========================================================================


                    Year ended December 31, 2000
--------------------------------------------------------------------------
                                Weighted         Maturity         Call
Counterparty     Amount        Average Rate         Date         Feature
--------------------------------------------------------------------------
FHLB        $20,000,000          5.72%            12/19/07      12/19/02
FHLB         20,000,000          5.13%             1/14/08       1/14/01
FHLB         20,000,000          5.95%             8/30/10       8/30/02
FHLB         20,000,000          5.54%            10/18/10      10/18/01
FHLB         20,000,000          5.22%            12/20/10      12/20/03
FHLB         20,000,000          4.85%            12/20/10      12/20/01
--------------------------------------------------------------------------
Total      $120,000,000          5.40%
==========================================================================


                                      -21-

<PAGE>


12. INCOME TAXES
     The Corporation's  provision for income taxes differs from that computed by
applying the statutory  federal income tax rate to income before income taxes as
follows:

<TABLE>
<CAPTION>
                                                2001                   2000                    1999
                                       ---------------------   ---------------------   ---------------------
                                         Amount      Percent     Amount      Percent     Amount      Percent
                                       ----------    -------   ----------    -------   ----------    -------
<S>                                 <C>            <C>      <C>           <C>       <C>           <C>
Tax at Federal tax rate:               $2,868,255     34.00%   $2,706,971    34.00%    $2,721,663    34.00%
Increase (Decrease) from:
   State income taxes, net
    of federal income tax benefit         174,772      2.07       163,163     2.05        165,583     2.07
   Tax exempt interest income             (70,599)    (0.84)            0        0              0     0.00
   Other                                    4,324      0.05       (20,058)   (0.25)         4,140     0.05
                                       ----------    ------    ----------    -----     ----------    -----
Total                                  $2,976,752     35.28%   $2,850,076    35.80%    $2,891,386    36.12%
                                       ==========    ======    ==========    =====     ==========    =====
</TABLE>

         In accordance with the provisions of Statement of Financial  Accounting
Standards No. 109,  "Accounting  for Income Taxes" (SFAS No. 109),  deferred tax
assets and liabilities are  established  for the temporary  differences  between
accounting  bases and tax bases of the  Corporation's  assets and liabilities at
the tax  rates  expected  to be in effect  when the  temporary  differences  are
realized or settled.  Management believes the existing net deductible  temporary
differences which give rise to the net deferred income tax assets are realizable
on a more likely than not basis.

         The temporary  differences  that give rise to  significant  portions of
deferred tax assets and deferred tax liabilities are as follows:

                                                           December 31
                                                  -----------------------------
                                                      2001              2000
-------------------------------------------------------------------------------
Deferred income tax assets:
     Allowance for possible loan losses           $1,649,358        $1,431,504
     Real estate losses                              381,720           265,260
     Compensation and pension                        237,093            57,556
     Amortization of deposit premium                 325,128           332,665
     Post retirement benefits                        185,000           185,000
     Capitalized interest                            697,632           668,063
     Accrued  expenses                               166,431            23,295
     Other                                            59,512            50,302
-------------------------------------------------------------------------------
Deferred tax assets                               $3,701,874        $3,013,645
-------------------------------------------------------------------------------
Deferred income tax liabilities:
     Prepaid Deposit Insurance premium                11,461            22,465
     Depreciation                                    337,945           491,666
     Deferred loan fees, - net                       194,066           138,813
-------------------------------------------------------------------------------
Gross deferred tax liabilities                       543,472           652,944
-------------------------------------------------------------------------------
Deferred income tax asset, net                    $3,158,402        $2,360,701
===============================================================================


         The following  represents  the components of income tax expense for the
years ended December 31, 2001, 2000 and 1999, respectively.


                                              2001        2000         1999
--------------------------------------------------------------------------------
Current Federal tax provision              $3,424,066   $3,072,152  $2,131,769
Current State tax provision                   350,387      289,905     204,605
--------------------------------------------------------------------------------
   Total Current provision                  3,774,453    3,362,057   2,336,374
--------------------------------------------------------------------------------
Deferred Federal tax provision (benefit)    ( 733,022)    (469,292)    508,734
Deferred State tax provision (benefit)        (64,679)     (42,689)     46,278
--------------------------------------------------------------------------------
   Total Deferred provision (benefit)        (797,701)    (511,981)    555,012
--------------------------------------------------------------------------------
   Total                                   $2,976,752   $2,850,076  $2,891,386
================================================================================


13.      LEASES
         The Bank leases five  buildings and land to operate six branches  under
noncancelable leases which expire over the next 18 years. These leases generally
provide for the payment of taxes and  maintenance  by the lessee.  Most of these
operating  leases  provide the Bank with the option to renew the lease after the
initial lease term.  Future minimum rental  payments under existing leases as of
December 31, 2001 are as follows:

          Fiscal Year                 Amount
          --------------------------------------
          2002                       $  186,538
          2003                          188,282
          2004                          201,285
          2005                          204,748
          2006 and beyond             2,205,728
          --------------------------------------
          Total                      $2,986,581
          ======================================



                                      -22-


<PAGE>


         The leases for the buildings  contain cost of living  adjustments based
on changes in the consumer  price index.  The minimum lease payments shown above
include base rentals exclusive of any future adjustments. Total rent expense for
all operating leases amounted to $201 thousand,  $197 thousand and $157 thousand
for fiscal years 2001, 2000 and 1999, respectively.

14.      STOCKHOLDERS' EQUITY
         On December 14, 1988,  the Bank  converted to a state  chartered  stock
Savings Bank and simultaneously formed FMS Financial Corporation. At the time of
conversion,  eligible  deposit  account  holders  were  granted  priority in the
unlikely event of a future liquidation of the Bank. The special reserve has been
decreased  to the extent  that the  balances of eligible  account  holders  were
reduced at annual determination dates. The Bank converted its charter to that of
a Federal  Savings Bank on October 15, 1993.

     The ability of the Corporation to pay dividends to stockholders is directly
dependent upon the ability of the Bank to pay dividends to the Corporation.  OTS
regulations restrict the ability of the Bank to pay dividends to the Corporation
if such dividends  reduce the net worth of the Bank below the amount required in
the  special  reserve  account  and based on the Bank's  net income and  capital
position.

     The Bank is considered "well capitalized" by OTS regulation at December 31,
2001. The Bank's  regulatory  tangible and core capital ratios are $60.4 million
or 6.25% of total  Bank  assets  and  $64.2  million  or 17.59%  for  risk-based
capital. The following is a reconciliation of the Bank's capital under generally
accepted  accounting  principles  ("GAAP") to regulatory capital at December 31,
2001:

                                     Tangible          Core       Risk-based
                                      Capital        Capital        Capital
------------------------------------------------------------------------------
Bank's GAAP Capital                $60,667,120     $60,667,120   $60,667,120
Add:
   Unrealized gain on
    investments AFS                   (147,496)       (147,496)     (147,496)
Less:
  Subsidiary investments not
    eligible                           (87,925)        (87,925)      (87,925)
Supplementary qualifying
 capital item:
  General valuation allowance                0               0     3,789,015
------------------------------------------------------------------------------
Regulatory capital computed         60,431,699      60,431,699    64,220,714
Minimum regulatory capital
 requirement                        19,308,102      38,616,204    29,146,104
------------------------------------------------------------------------------
Regulatory capital excess          $41,123,597     $21,815,495   $35,074,610
==============================================================================


15.  Pension Plan
     The Bank has a defined  benefit  pension  plan for  active  employees.  Net
pension  expense was $499  thousand,  $395  thousand and $462 thousand for years
ended  December 31, 2001,  2000 and 1999,  respectively.  The  components of net
pension cost are as follows:



                                     Years ended December 31,
                                --------------------------------------
                                    2001         2000         1999
----------------------------------------------------------------------
Service cost                     $(594,777)   $(578,116)   $(513,260)
Interest cost                     (395,140)    (362,856)    (336,799)
Return on assets                   508,187      527,031      418,356
Net amortization and deferral      (17,459)      18,563      (30,675)
----------------------------------------------------------------------
Net periodic pension cost        $(499,189)   $(395,378)   $(462,378)
======================================================================

         The following table presents a  reconciliation  of the funded status of
the defined benefit pension plan at December 31, 2001 and 2000:

                                           December 31,
-----------------------------------------------------------------
                                       2001            2000
-----------------------------------------------------------------
Projected benefit obligation        $7,488,903      $6,813,938
Fair value of plan assets            6,714,753       7,310,672
-----------------------------------------------------------------
Unfunded (Excess) of plan assets over
  projected benefit obligation         774,150        (496,734)
Unrecognized net gain                   72,150         879,573
Unrecognized prior service cost        (60,796)        (65,618)
Unrecognized net transition
  obligation                           (69,851)       (100,757)
-----------------------------------------------------------------
Accrued pension cost included in
  the consolidated balance sheet       $715,653        $216,464
=================================================================

         The following table presents a  reconciliation  of beginning and ending
balances of benefit obligations and plan assets:


                                                        December 31,
                                                -----------------------------
Change in Projected Benefit Obligation             2001              2000
-----------------------------------------------------------------------------
Projected benefit obligation
  at beginning of year                        $6,813,938         $6,406,113
Service cost                                     594,777            578,116
Interest cost                                    395,140            362,856
Actuarial gain                                  (178,366)          (307,401)
Benefits paid                                   (136,586)          (225,746)
-----------------------------------------------------------------------------
Projected benefit obligation
  at end of year                              $7,488,903         $6,813,938
=============================================================================
Change in Plan Assets
-----------------------------------------------------------------------------
Fair value of plan assets
  at beginning of year                        $7,310,672         $7,520,267
Actual return of plan assets                    (459,333)          (269,993)
Employer contribution                                  0            286,144
Benefits paid                                   (136,586)          (225,746)
-----------------------------------------------------------------------------
Fair value of plan assets
  at end of year                              $6,714,753         $7,310,672
=============================================================================



                                      -23-
<PAGE>


         Actuarial assumptions used in determining pension cost are as follows:

                                  Years ended December 31,
                               ------------------------------
                                  2001       2000     1999
-------------------------------------------------------------
Discount rate for benefit
 obligation                      6.00%      6.00%     6.00%
Rate of increase in
 compensation levels
 and social security
 wage base                       4.00%      4.00%     4.00%
Expected long-term rate
 of return on plan assets        7.00%      7.00%     7.00%
-------------------------------------------------------------

         In addition to  providing  pension  plan  benefits,  the Bank  provides
certain health care and life insurance benefits to certain retired employees. In
accordance  with the provisions of Statement of Financial  Accounting  Standards
No. 106, "Employer  Accounting for Post Retirement Benefits other than Pensions"
(SFAS No. 106) the expected cost of such benefits must be actuarially determined
and  accrued  ratably  from the date of hire to the date the  employee  is fully
eligible to receive benefits. The accumulated post-retirement benefit obligation
is not funded but is  reflected in the  statement  of  financial  condition as a
liability.

         The net periodic  post-retirement  benefit cost  includes the following
components:

                                              December 31,
                                   ----------------------------------
                                      2001        2000       1999
---------------------------------------------------------------------
Interest cost                       $47,737     $34,748     $29,149
Amortization of prior
  service cost                      (14,499)    (14,499)    (14,499)
Amortization of loss (gain)          12,077           0        (934)
---------------------------------------------------------------------
Net periodic post-retirement
  benefit cost                      $45,315     $20,249     $13,716
=====================================================================


         The assumed  discount  rate used in the  calculation  for net  periodic
post-retirement  benefit  cost was 7.50% for 2001 and  2000,  respectively.  The
assumed health care cost trend rate for 2001 was 8.5% and was graded down in .5%
increments  per year to an  ultimate  rate of 5.0% per year.  The impact of a 1%
increase in the assumed  health care cost trend for each future year would be as
follows:

                                                     December 31, 2001
-----------------------------------------------------------------------
Accumulated post-retirement obligation at year end       $47,539
Service and interest Cost                                 $3,214
=======================================================================


         The following  table  summarizes  the amounts  recognized in the Bank's
balance sheet:


                                               December 31,
                                     -----------------------------
                                           2001           2000
------------------------------------------------------------------
Accumulated post-retirement
 benefit obligation                    $(662,507)       $(687,352)
Unrecognized prior service cost          (55,579)         (70,078)
Unrecognized net loss                    186,104          206,089
------------------------------------------------------------------
Accrued post-retirement benefit cost   $(531,982)       $(551,341)
==================================================================

         The assumed  discount rate used in the  calculation for the accumulated
post-retirement  benefit  obligation  as of December 31, 2001 and 2000 was 7.25%
and 7.50%, respectively.

16.      SUBORDINATED DEBENTURES

         The  Corporation  issued $10.0  million of  subordinated  debentures in
1994. The debentures are unsecured, bear interest at a rate of 10% per annum and
mature on July 28, 2004.  Interest  payments are due  semiannually on February 1
and August 1 commencing  February 1, 1995.  The debentures  are  redeemable,  in
whole or in part,  at any time at the option of the  Corporation  at  redemption
prices  ranging from 103% down to 100%.  The net  proceeds  from the sale of the
debentures  totaled $9.4  million and were used for the  expansion of the Bank's
operations  through branch  acquisitions  and general  corporate  purposes.  The
Corporation  is  required  to retain  at all times  cash,  cash  equivalents  or
marketable  securities  in an amount not less than the  aggregate  amount of two
consecutive  semi-annual  interest  payments that will be due and payable on the
debentures following such declaration date or redemption date.

                                      -24-


<PAGE>

17.      FAIR VALUE OF FINANCIAL INSTRUMENTS
         The  disclosure  of the fair  value  of all  financial  instruments  is
required,  whether  or not  recognized  on the  balance  sheet,  for which it is
practical to estimate  fair value.  In cases where quoted  market prices are not
available,  fair values are based on assumptions including future cash flows and
discount rates.  Accordingly,  the fair value estimates cannot be substantiated,
may  not  be  realized,  and  do  not  represent  the  underlying  value  of the
Corporation.

         The Corporation uses the following  methods and assumptions to estimate
the  fair  value  of  each  class  of  financial  instruments  for  which  it is
practicable  to estimate  that value:

Cash and cash equivalents:  The carrying value is a reasonable  estimate of fair
value.

Investment  securities  held to  maturity,  securities  available  for  sale and
mortgage-backed securties: Fair value is equal to quoted market prices.

FHLB Stock: The stock of FHLB is issued only to FHLB member  institutions and is
redeemable only by another member  institution or the FHLB at its $100 per share
par value.

Loans: For variable-rate  loans that reprice  frequently and with no significant
change in credit risk, fair value is the carrying value. For other categories of
loans such as residential  mortgages,  commercial and consumer loans, fair value
is estimated  based on  discounting  the  estimated  future cash flows using the
current  rates at which  similar  loans would be made to borrowers  with similar
collateral and credit ratings and for similar remaining maturities.

Deposit liabilities: For checking, savings and money market accounts, fair value
is the amount  payable on demand at the  reporting  date.  For  certificates  of
deposits, fair value is estimated using the rates currently offered for deposits
with  similar  remaining   maturities.

Securities sold under agreements to repurchase: For investment securities with a
quoted market price,  fair value is equal to quoted market  prices.  If a quoted
market  price is not  available,  fair value is estimated  using  quoted  market
prices for similar securities.

Subordinated debentures: Fair value is estimated using the quoted average of the
broker bid and ask prices at year end.

Advances from FHLB:  The carrying  value is a reasonable  estimate of fair value
due to the short term nature of these obligations.

Commitments to extend credit and standby letters of credit:  For commitments and
standby  letters of credit  expiring within 90 days or with a variable rate, the
settlement  amount is a reasonable  estimate of fair value.  For commitments and
standby letters of credit expiring beyond 90 days or with a fixed rate, the fair
value is the  present  value of the  obligations  based on current  loan  rates.

     At December 31, 2001 and December  31,  2000,  the carrying  amount and the
estimated  market  value  of  the  Corporation's  financial  instruments  are as
follows:

<TABLE>
<CAPTION>

                                                                December 31, 2001               December 31, 2000
                                                           ----------------------------    ---------------------------
                                                             Carrying        Estimated      Carrying        Estimated
                                                              Amount       Market Value       Amount      Market Value
                                                           ------------    ------------    ------------   -------------
<S>                                                     <C>             <C>             <C>             <C>
Financial assets:
  Cash and cash equivalents                                $ 63,359,124    $ 63,359,124    $ 44,951,299    $ 44,951,299
  Investment securities held to maturity
    and investment securities available
    for sale                                               $248,540,721    $248,875,164    $316,986,597    $314,956,653
  Mortgage-backed securities                               $272,494,220    $274,840,518    $143,751,707    $145,204,416
  FHLB Stock                                               $  8,313,620    $  8,313,620    $  6,315,310    $  6,315,310
  Loans, net of unearned income                            $340,774,567    $347,846,348    $294,158,982    $298,838,000
    Less: Allowance for possible loan losses               $ (4,230,563)   $ (4,230,563)   $ (3,980,347)   $ (3,980,347)
  Loans, net                                               $336,544,004    $343,615,785    $290,178,635    $294,857,653

Financial liabilities:
   Deposits
     Checking, passbook, and money market accounts         $473,934,673    $473,934,673    $406,439,814    $406,439,814
     Certificates                                          $255,571,050    $256,997,077    $242,099,541    $241,693,000
   Securities sold under agreements to repurchase          $165,000,000    $173,890,500    $120,000,000    $122,368,000
   Subordinated debentures                                 $ 10,000,000    $ 10,274,000    $ 10,000,000    $ 10,250,000
   Advances from the Federal Home Loan Bank                $  1,270,313    $  1,278,908    $  6,305,644    $  6,305,620

Off-balance sheet financial instruments:
   Commitments to extend credit                            $ 34,732,382    $ 34,732,382    $ 22,526,356    $ 22,526,356
   Standby letters of credit                               $  2,204,465    $  2,204,465    $  1,351,712    $  1,351,712

</TABLE>


                                      -25-

<PAGE>


18.      COMMITMENTS AND CONTINGENCIES

         The Bank has  outstanding  loan  commitments  of  $34.7  million  as of
December 31, 2001. Of these commitments outstanding, the breakdown between fixed
and variable rate loans is as follows:

                                               December 31, 2001
                                   -------------------------------------------
                                      Fixed         Variable
                                       Rate           Rate          Total
------------------------------------------------------------------------------
Commitments to fund loans           $11,841,692    $ 6,377,400    $18,219,092
Unused lines:
   Construction                               0      2,547,632      2,547,632
   Equity line of credit loans                0     13,965,658     13,965,658
------------------------------------------------------------------------------
Total                               $11,841,692    $22,890,690    $34,732,382
==============================================================================


         In addition to outstanding  loan  commitments,  the Bank as of December
31,  2001,  issued  $1.4  million  in  standby  letters  of credit to  guarantee
performance of a customer to a third party.

         Commitments and standby letters of credit are issued in accordance with
the same loan policies and underwriting  standards as settled loans.  Since some
commitments  and standby  letters of credit are expected to expire without being
drawn down, these amounts do not necessarily represent future cash requirements.

19.      LITIGATION
         There are no significant pending legal proceedings at December 31, 2001
which will have a material  impact on the  Corporation's  financial  position or
results of operations.

20.      LOANS TO EXECUTIVE OFFICERS AND DIRECTORS
         Regulation  O  provides  that  all  loans  to  executive  officers  and
directors  be made  on  substantially  the  same  terms  and  conditions  as are
available to the general public.  However,  executive  officers are permitted to
participate  in rate  discount  programs  available  to all  employees.The  rate
discounts  are  available to employees as long as they are employed at the Bank.
If  employment  is  terminated,  the  rate  discount  ceases  from  the  date of
termination.  At  December  31,  2001 and  2000,  loans  made to  directors  and
executive  officers whose  indebtedness  exceeded $60 thousand  amounted to $3.1
million  and  $2.0  million,  respectively.  During  2001  new  loans  to  these
individuals totaled $1.4 million and repayments totaled $249 thousand.

21.      STOCK OPTIONS
         The Corporation has established a stock  compensation plan (the "Plan")
for executive officers and other selected employees of the Corporation. The Plan
consists of incentive  stock  options  intended to qualify under Section 422A of
the Internal  Revenue Code of 1986.  These stock options may be surrendered  and
stock  appreciation  rights may be granted in their place,  with the approval of
the Corporation.

         A total of 121,925  shares of authorized  but unissued  common stock of
the Corporation has been reserved for future issuance under the Plan. The option
price per share for options  granted may not be less than the fair market  value
of the common  stock on the date of grant.  At  December  31,  2001,  the option
exercise prices were $1.292, $5.333 and $10.00.  Options are fully vested at the
date of grant and must be  exercised  within  ten  years.

         The  following  table  summarizes   information   about  stock  options
outstanding at December 31, 2001.


                 Exercise   Outstanding    Average    Exercisable
                  Price       Options      Life(1)      Options
               ----------------------------------------------------
                  $ 1.29          925       0.2            925

                  $ 5.33       36,000       3.9         36,000

                  $10.00       85,000       6.8              0
               ----------------------------------------------------
                  $ 8.56      121,925       5.9         36,925
               ====================================================

(1) Average contractual life in years


         A summary of the status of the  Corporation's  Stock  Option Plan as of
December  31, 2001,  2000 and 1999 and changes  during the years ending on those
dates is presented below.

                                      Years Ended December 31,
                           -----------------------------------------------------
                                 2001              2000             1999
--------------------------------------------------------------------------------
Outstanding at the
  Beginning of the year    175,418   $6.34   205,518   $5.94   210,618   $5.83
Options granted                  0       0         0       0         0       0
Options exercised          (50,993)   1.29      (100)   1.29      (600)   1.29
Options surrendered         (2,500)   1.29   (30,000)   3.61    (4,500)   1.29
--------------------------------------------------------------------------------
Outstanding at the
  End of the year          121,925   $8.56   175,418   $6.34   205,518   $5.94
================================================================================


         On January 1, 1996,  the  Corporation  adopted  Statement  of Financial
Accounting Standard No. 123, "Accounting for Stock Based Compensation" (SFAS No.
123).  As permitted by SFAS No. 123, the  Corporation  has chosen to continue to
apply APB Opinion No. 25,  "Accounting  for Stock Issued to Employees"  (APB No.
25) and related  interpretations  in accounting  for its Plan.  Accordingly,  no
compensation cost has been recognized for options granted under the Plan.


                                      -26-


<PAGE>


22.      RISKS AND UNCERTAINTIES
         The earnings of the Corporation depend on the earnings of the Bank. The
earnings of the Bank depend  primarily  upon the level of net  interest  income,
which is the difference between interest earned on its interest-earning  assets,
such as loans and  investments  and the  interest  paid on its  interest-bearing
liabilities, such as deposits and borrowings. Accordingly, the operations of the
Bank are subject to risks and uncertainties  surrounding its exposure to changes
in the interest rate environment.

         Most of the Bank's lending  activity is with  customers  located within
southern New Jersey.  Generally, the loans are secured by real estate consisting
of single family residential  properties.  While this represents a concentration
of credit risk,  the credit  losses  arising  from this type of lending  compare
favorably  with the Bank's  credit loss  experience on its portfolio as a whole.
The ultimate  repayment  of these loans is dependent to a certain  degree on the
local  economy  and  real  estate  market.

         The financial  statements of the Corporation are prepared in conformity
with generally  accepted  accounting  principles that require management to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities and disclosures of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reported  period.  Actual results could differ from these  estimates.

         Significant  estimates  are  made  by  management  in  determining  the
allowance for possible loan losses and carrying  values of real estate owned and
real estate held for development. Consideration is given to a variety of factors
in  establishing   these  estimates   including  current  economic   conditions,
diversification of the loan portfolio,  delinquency statistics,  results of loan
reviews,  borrowers' perceived financial and managerial strengths,  the adequacy
of underlying  collateral,  if collateral dependent,  or present value of future
cash flows and other  relevant  factors.  Since the  allowance for possible loan
losses  and  carrying  value of real  estate  assets  and real  estate  held for
development is dependent,  to a great extent,  on the general  economy and other
conditions  that may be beyond the  Bank's  control,  it is at least  reasonably
possible  that the  estimates of the  allowance for possible loan losses and the
carrying  values of the real estate  assets could differ  materially in the near
term.

23.      SUBSEQUENT EVENTS
         On March 22, 2002, the  Corporation  formed a wholly-owned  subsidiary,
FMS Statutory Trust I, a Connecticut business trust (the "Trust").  The Trust is
expected  to  issue  and  sell  up  to  $25.0  million  in  aggregate  principal
liquidation   amount  of  floating   rate  capital   securities   (the  "Capital
Securities")  to Preferred Term Securities V, Ltd. around the last week of March
2002. The  obligations of the Trust under the Capital  Securities  will be fully
and  unconditionally  guaranteed by the Corporation,  and the Trust will have no
independent  operations.  The  entire  proceeds  from  the  sale of the  Capital
Securities  will be  used  by the  Trust  to  invest  in  floating  rate  junior
subordinated deferrable interest debt securities of the Corporation (the "Junior
Subordinated  Debt").  The Junior  Subordinated  Debt will be unsecured and rank
subordinate and junior in right of payment to all indebtedness,  liabilities and
obligatons of the  Corporation.  The Junior  Subordinated  Debt will be the sole
asset of the Trust.  Interest on the Capital  Securities  will be cumulative and
payable  quarterly in arrears.  The Capital  Securities will mature in 2032. The
Corporation  will have the right to  optionally  redeem the Junior  Subordinated
Debt  prior to the  maturity  date,  but no  sooner  than five  years  after the
issuance,  at 100% of the stated  liquidation  amount,  plus  accrued and unpaid
distributions,  if any, on the  redemption  date.  Upon the occurence of certain
events,  the Corporation  will have the right to redeem the Junior  Subordinated
Debt in whole, but not in part, at a special  redemption price before five years
have elapsed. Proceeds from any redemption of the Junior Subordinated Debt would
cause  a  mandatory   redemption  of  Capital  Securities  having  an  aggregate
liquidation amount equal to the principal amount of the Junior Subordinated Debt
redeemed.

         Under the terms of the Junior  Subordinated  Debt, the Corporation will
have the right,  with certain  limitations,  to defer the payment of interest on
the  Junior  Subordinated  Debt at any time for a period  not  exceeding  twenty
consecutive  quarterly  periods.  Consequently,  distributions  on  the  Capital
Securities would be deferred and accumulate interest, compounded quarterly.

                                      -27-

<PAGE>


24.      PARENT COMPANY FINANCIAL INFORMATION

         The financial statements for FMS Financial Corporation are as follows:

<TABLE>
<CAPTION>

                                                                                                           December 31,
                                                                                                 -----------------------------
FMS Financial Corporation Statements of Financial Condition                                            2001            2000
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                          <C>             <C>
Assets:
         Cash                                                                                    $  1,901,529    $  1,037,560
         Investment in subsidiary                                                                  60,667,120      56,708,355
         Investment securities                                                                      1,000,000       1,000,000
         Subordinated debentures issue costs, net                                                     149,069         206,417
         Other                                                                                        168,840         168,843
                                                                                                 ------------    ------------
Total Assets                                                                                     $ 63,886,558    $ 59,121,175
                                                                                                 ============    ============
Liabilities:
         10% Subordinated debentures due 2004                                                    $ 10,000,000    $ 10,000,000
         Intercompany payable, net                                                                  1,065,179       1,093,088
         Dividends payable                                                                            201,531         201,831
         Accrued interest payable                                                                     416,667         416,667
                                                                                                 ------------    ------------
Total liabilities                                                                                  11,683,377      11,711,586
                                                                                                 ------------    ------------
Stockholders' Equity:
         Preferred  stock - $.10 par value 5,000,000 shares  authorized; none issued
         Common  stock - $.10 par value 10,000,000 shares  authorized; shares
            issued 7,948,884 and 7,897,891 and shares outstanding 6,717,705 and 6,727,702
            as of December 31, 2001 and 2000, respectively                                            794,888         789,789
         Paid-in capital in excess of par                                                           8,278,423       8,217,654
         Accumulated comprehensive loss - net of deferred income taxes                                147,496        (358,352)
         Retained earnings                                                                         51,055,818      46,401,102
         Less:Treasury Stock (1,231,179 and 1,170,189 shares, at cost at December 31, 2001
            and 2000, respectively)                                                                (8,073,444)     (7,640,604)
                                                                                                 ------------    ------------
Total stockholders' equity                                                                         52,203,181      47,409,589
                                                                                                 ------------    ------------
Total Liabilities and Stockholders' Equity                                                       $ 63,886,558    $ 59,121,175
                                                                                                 ============    ============
</TABLE>


<TABLE>
<CAPTION>

                                                                  Years Ended December 31,
                                                     ----------------------------------------------
FMS Financial Corporation Statements of Operations          2001          2000           1999
---------------------------------------------------------------------------------------------------
<S>                                                 <C>            <C>            <C>
Intercompany interest income                           $   560,750    $   560,750    $    560,750
Interest expense                                        (1,057,348)    (1,057,348)     (1,057,348)
Dividends from subsidiary                                2,400,000      2,150,000       1,600,000
Equity in undistributed income of subsidiary             3,387,046      3,289,357       3,841,261
---------------------------------------------------------------------------------------------------
Income before taxes                                      5,290,448      4,942,759       4,944,663
Income tax benefit                                         168,843        168,843         168,843
---------------------------------------------------------------------------------------------------
Net Income                                             $ 5,459,291    $ 5,111,602    $  5,113,506
===================================================================================================

</TABLE>


         These  statements  should be read in  conjunction  with the other notes
related to the consolidated financial statements.


                                      -28-


<PAGE>

<TABLE>
<CAPTION>


                                                                   For Years Ended December 31,
                                                           -------------------------------------------
FMS Financial Corporation Statements of Cash Flows              2001           2000          1999
------------------------------------------------------------------------------------------------------
<S>                                                      <C>            <C>            <C>
Operating Activities
Net income                                                  $ 5,459,291    $ 5,111,602    $ 5,113,506
Adjustments to reconcile net income to net cash provided
   by operating activities:
Equity in undistributed earnings of the subsidiary           (3,387,046)    (3,289,357)    (3,841,261)
Amortization of bond issue costs                                 57,348         57,348         57,348
(Decrease) Increase in intercompany payable, net                (27,909)     3,278,397         14,337
                                                            -----------    -----------    -----------
         Net cash  provided by operating activities           2,101,684      5,157,990      1,343,930

Financing Activities
Purchase of treasury stock                                     (432,840)    (3,789,148)      (475,084)
Investment in subsidiary                                        (65,868)          (129)          (775)
Cash dividends paid on common stock                            (804,875)      (833,143)      (866,278)
Proceeds from issuance of stock                                  65,868            129            775
                                                            -----------    -----------    -----------
         Net cash used by financing activities               (1,237,715)    (4,622,291)    (1,341,362)
                                                            -----------    -----------    -----------
INCREASE IN CASH AND CASH EQUIVALENTS                           863,969        535,699          2,568
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                  1,037,560        501,861        499,293
                                                            -----------    -----------    -----------
CASH AND CASH EQUIVALENTS, END OF YEAR                      $ 1,901,529    $ 1,037,560    $   501,861
======================================================================================================
</TABLE>


         These  statements  should be read in  conjunction  with the other notes
related to the consolidated financial statements.


                                      -29-


<PAGE>

                               MANAGEMENT REPORT

To  the  Federal  Deposit  Insurance   Corporation  and  the  Office  of  Thrift
Supervision:

FINANCIAL STATEMENTS

         Management  of  FMS  Financial   Corporation   and   Subsidiary   ("the
Corporation")   is  responsible  for  the  preparation,   integrity,   and  fair
presentation  of its published  consolidated  financial  statements,  and Thrift
Financial  Report  (TFR)  filed  with the  Office of Thrift  Supervision,  as of
December  31,  2001,  and for the year then ended.  The  published  consolidated
financial  statements have been prepared in accordance  with generally  accepted
accounting  principles,  and the Thrift  Financial  Report has been  prepared in
accordance with the Office of Thrift Supervision reporting instructions, and, as
such,  include  some  amounts  that are based upon  judgments  and  estimates of
management.

INTERNAL CONTROL STRUCTURE OVER FINANCIAL REPORTING
         Management is responsible for establishing and maintaining an effective
internal  control  structure  over  financial  reporting.  The  system  contains
monitoring mechanisms and actions are taken to correct deficiencies identified.

         There are inherent  limitations in the  effectiveness  of any system of
internal control, including the possibility of human error and the circumvention
or  overriding  of controls.  Accordingly,  even an effective  internal  control
system can  provide  only  reasonable  assurance  with  respect to  consolidated
financial statement preparation.  Further, because of changes in conditions, the
effectiveness of an internal control system may vary over time.

         Management  assessed  its internal  control  structure  over  financial
reporting  as of December 31, 2001.  This  assessment  was based on criteria for
effective  internal  control  over  financial  reporting  described in "Internal
Control-Integrated Framework" issued by the Committee of Sponsoring Organization
of the Treadway Commission.  Based on this assessment,  management believes that
the  Corporation   maintained  an  effective  internal  control  structure  over
financial reporting as of December 31, 2001.

COMPLIANCE WITH LAWS AND REGULATIONS
         Management is also  responsible  for compliance  with federal and state
laws and  regulations  concerning  dividend  restrictions  and federal  laws and
regulations  concerning  loans to insiders  designated  by the  Federal  Deposit
Insurance Corporation as safety and soundness laws and regulations.

         Management  assessed  its  compliance  with  the  designated  laws  and
regulations  relating  to  safety  and  soundness.  Based  on  this  assessment,
management  believes  that the  Corporation  has  complied,  in all  significant
respects,  with the  designated  laws and  regulations  related  to  safety  and
soundness for the year ended December 31, 2001.



/s/ Craig W. Yates                           /s/ Channing L. Smith
-------------------------------------        -----------------------------------
Craig W. Yates                               Channing L. Smith
President and Chief Executive Officer        Vice President and Chief Financial
                                               Officer


FMS Financial Corporation
Burlington, New Jersey
February 11, 2002


                                      -30-


<PAGE>


                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of FMS Financial Corporation:

         In our opinion, the accompanying  consolidated  statements of financial
condition  and the related  consolidated  statements of  operations,  changes in
stockholders'  equity,  and cash flows present fairly, in all material respects,
the  financial  position  of FMS  Financial  Corporation  and  Subsidiary  ("the
Company") at December 31, 2001 and 2000, and the results of their operations and
their cash flows for each of the three years in the period  ended  December  31,
2001, in conformity with accounting  principles generally accepted in the United
States of America.  These  financial  statements are the  responsibility  of the
Company's  management;  our  responsibility  is to  express  an opinion on these
financial  statements  based on our  audits.  We  conducted  our audits of these
statements  in  accordance  with auditing  standards  generally  accepted in the
United  States of America,  which  require that we plan and perform the audit to
obtain reasonable  assurance about whether the financial  statements are free of
material  misstatement.  An audit includes examining,  on a test basis, evidence
supporting the amounts and  disclosures in the financial  statements,  assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.



/s/ PricewaterhouseCoopers LLP
-----------------------------------


Philadelphia, PA
February 11, 2002



                                      -31-


<PAGE>

                             CORPORATE INFORMATION


ANNUAL MEETING

         The 2002 Annual Shareholders' Meeting of FMS Financial Corporation will
be held at 10:00 a.m.,  on the 25th day of April,  2002 at the Riverton  Country
Club, Highland Avenue off of Route 130, Riverton, New Jersey.

STOCK MARKET INFORMATION

         The   common   stock   of   FMS   Financial   Corporation   is   traded
over-the-counter  and is listed on the Nasdaq  National  Market System under the
symbol "FMCO". Daily quotations are included in the Nasdaq National Market stock
tables published in the Wall Street Journal and other leading newspapers.

         The number of record  holders of common stock of the  Corporation as of
March 1, 2002 was  approximately  741, not including those shares  registered in
names of various investment brokers held in account for their customers.

         The following table sets forth the range of closing prices, as reported
by Nasdaq, for the periods ended December 31, 2001 and 2000:

                                                   2001
                                             -----------------
                           QUARTER ENDED       HIGH     LOW
                           -----------------------------------
                           March 31,          $9.000   $7.500
                           June 30,           $8.700   $5.500
                           September 30,      $9.000   $7.100
                           December 31,       $9.000   $7.150
                           -----------------------------------

                                                   2000
                                             -----------------
                           QUARTER ENDED       HIGH     LOW
                           -----------------------------------
                           March 31,          $9.375   $6.750
                           June 30,           $8.250   $7.000
                           September 30,      $9.500   $7.345
                           December 31,       $9.750   $8.375
                           ===================================



         The   Corporation's   sole  operating   assets  are  derived  from  its
subsidiary,   Farmers  &  Mechanics  Bank.  Consequently,  the  ability  of  the
Corporation to accumulate  cash for payment of cash dividends to stockholders is
directly  dependent  upon  the  ability  of the  Bank  to pay  dividends  to the
Corporation. The Bank may not declare or pay a cash dividend on any of its stock
if the effect of the  declaration  or payment of  dividends  would  cause  their
regulatory  capital  to be  reduced  below  (1)  the  amount  required  for  the
liquidation  account  established in connection with the mutual stock conversion
or (2) the regulatory capital requirements imposed by the OTS. Additionally, the
Corporation  must pay interest to holders of its  debentures  before  payment of
cash dividends to its stockholders.

         As of  December  31,  2001 the Bank  was a Tier 1  institution  and had
available   $16.7  million  for  dividends  to  the   Corporation,   subject  to
nonobjection by the OTS. It is not likely that the  Corporation  would request a
dividend of that  magnitude.  The  Corporation  is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders,  but is subject to
the  requirements  of New Jersey  law,  which  permits  the  Corporation  to pay
dividends  in cash or shares out of the  Corporation's  surplus,  defined as the
excess of net assets of the Corporation over stated capital.


                                      -32-


<PAGE>


BOARD OF DIRECTORS                 BANK OFFICERS
EDWARD J. STAATS, JR.              CRAIG W. YATES*
Chairman of the Board              President

WAYNE H. PAGE                      JAMES E. IGO*
Vice Chairman                      Sr. Vice President and Chief Lending Officer

GEORGE J. BARBER                   KEVIN L. KUTCHER
                                   Sr. Vice President, Business Development

JOSEPH W. CLARKE, JR               CHANNING L. SMITH*
                                   Vice President and Chief Financial Officer

DOMINIC W. FLAMINI                 THOMAS M. TOPLEY*
                                   Sr. Vice President of Operations and
VINCENT R. FARIAS                  Corporate Secretary

JAMES C. LIGNANA                   MERLE A. BROWN
                                   Vice President, Branch Administration and
MARY WELLS                         Security Officer

CRAIG W. YATES                     DOUGLAS B. HALEY
                                   Vice President, Consumer Lending

ROY D. YATES                       AMY J. HANNIGAN
                                   Vice President and Controller

DIRECTORS EMERITUS                 URSULA YATES NISONOFF
ADOLPH N. BRIGHT                   Vice President, Administration

KAREN S. OLEKSA                    ARTHUR J. OLSON
                                   Vice President, Commercial Lending

HILYARD S. SIMPKINS                PETER S. SCHOENFELD
                                   Vice President, Investments

                                   KAREN D. SHINN
                                   Vice President, Operations

                                   FRANK E. SMITH
                                   Vice President, Facilities and Design

                                   MARCELLA F. HATCHER*
                                   Assistant Secretary


                                   * Officers of Bank and Holding Company

                                      -33-

<PAGE>


FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------


MARKET MAKERS
         The  following  companies  were  making a market  in the  Corporation's
common stock at December 31, 2001:


         Advest, Inc.                     Ryan Beck & Co.
         280 Trumbull Street              80 Main Street
         1 Commercial Plaza               W. Orange, NJ  07052
         Hartford, CT  06103              (973) 597-6000
         (203) 541-5441

         Robert W. Baird & Co., Inc.      Trident Securities
         4300 W. Cypress Street           1275 Peachtree Street, NE
         Tampa, FL 33607                  Suite 460
         (813) 877-4000                   Atlanta, GA  30309
                                          (404) 249-7700

FORM 10-K AND OTHER FINANCIAL INQUIRIES
         The Corporation's  Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, as filed with the Securities and Exchange  Commission will be
furnished  to  shareholders  of the  Corporation  upon written  request  without
charge.  Shareholders,  analysts and others  seeking this and other requests for
information relating to stock, annual shareholders'  meeting and related matters
on FMS Financial  Corporation,  should  contact the  Corporate  Secretary at the
Executive Offices.

         Transfer Agent and Registrar       Auditors
         American Stock Transfer and        PricewaterhouseCoopers LLP
           Trust Company                    Two Commerce Square, Suite 1700
         40 Wall Street                     2001 Market St.
         New York, NY  10005                Philadelphia, PA 19103

         Special Counsel
         Malizia Spidi & Fisch, PC
         1100 New York Avenue, N.W.
         Suite 340 West
         Washington, D.C. 20005





                                      -34-


<PAGE>

<TABLE>
<CAPTION>

                                                       FMS FINANCIAL CORPORATION
-----------------------------------------------------------------------------------------------------------------------

<C>                                     <C>                                    <C>
FARMERS & MECHANICS BANK                                                           MT. LAUREL - FELLOWSHIP RD.
EXECUTIVE AND ADMNISTRATIVE OFFICES                                                301 Fellowship Rd.
3 Sunset Road and 811 Sunset Road                                                  Mt. Laurel, NJ  08054
Burlington, NJ  08016                                                              (856) 222-9364
(609) 386-2400

MAIN BRANCH                                EASTAMPTON                              PEMBERTON
3 Sunset Road & Route 541                  1191 Woodlane Road                      25 Fort Dix Road
Burlington, NJ  08016                      Eastampton, NJ 08060                    Pemberton, NJ  08068
(609) 387-2728                             (609) 261-6400                          (609) 726-9111

AUDUBON                                    EDGEWATER PARK                           PENNSAUKEN
157 S. White Horse Pike                    1149 Cooper Street                       Route 130 & Merchantville Avenue
Audubon, NJ  08106                         Edgewater Park, NJ 08010                 Pennsauken, NJ  08110
(856) 672-9070                             (609) 387-0046                           (856) 663-9200

BEVERLY                                     LARCHMONT                               RIVERSIDE
414 Cooper Street                           3220 Route 38                           2 Scott Street & Pavilion Avenue
Beverly, NJ 08010                           Mount Laurel, NJ 08054                  Riverside, NJ 08075
(609) 239-4066                              (856) 235-6666                          (856) 461-4333

BORDENTOWN                                  LUMBERTON                               RIVERTON
335 Farnsworth Ave.                         1636-61 Route 38 & Eayrestown Road      604 Main Street
Bordentown, NJ  08505                       Lumberton, NJ 08048                     Riverton, NJ 08077
(609) 291-8200                              (609) 267-6811                          (856) 786-5333

BROWNS MILLS                                 MARLTON                                SOUTHAMPTON
93 Pemberton-Browns Mills Road               42 Main Street                         1841 Route 70
Browns Mills, NJ 08015                       Marlton, NJ 08053                      Southampton, NJ 08088
(609) 893-5540                               (856) 596-6555                         (609) 859-2700

BURLINGTON CITY                              MEDFORD                                TABERNACLE
352 High Street                              200 Tuckerton Road                     1507 Route 206
Burlington, NJ 08016                         Medford, NJ 08055                      Tabernacle, NJ 08088
(609) 386-4643                               (856) 596-4300                         (609) 268-5993

BURLINGTON TOWNSHIP                          MEDFORD LAKES                           WAL*MART BURLINGTON
809 Sunset Road                              700 Stokes Road                         2106 Burlington-Mt. Holly Rd.
Burlington, NJ 08016                         Medford, NJ 08055                       Burlington, NJ  08016
(609) 387-1150                               (609) 654-6373                          (609) 386-5960

BURLINGTON-NECK ROAD                         MEDFORD VILLAGE                         WAL*MART LUMBERTON
1029 Neck Road                               1 S. Main Street at Bank Street         1740 Rt. 38
Burlington, NJ 08016                         Medford, NJ 08055                       Mt. Holly, NJ 08060
(609) 239-4500                               (609) 714-1115                          (609) 702-9800

CHESTERFIELD                                 MOORESTOWN                              WILLINGBORO
305 Bordentown-Chesterfield Road             53 East Main Street                     399 Charleston Road
Chesterfield, NJ 08620                       Moorestown, NJ 08057                    Willingboro, NJ 08046
(609) 324-1256                               (856) 235-0544                          (609) 877-2888

CINNAMINSON                                  MOUNT HOLLY                             WILLINGBORO EAST
1703 Highland Avenue                         555 High Street                         611 Beverly-Rancocas Road
Cinnaminson, NJ 08077                        Mount Holly, NJ                         Willingboro, NJ 08046
(856) 303-1870                               (609) 261-0975                          (609) 871-4900

DELRAN                                       MOUNT LAUREL                            WILLINGBORO WEST
3002 Route 130 North                         4522 Church Road                        1 Rose Street &
Delran, NJ 08075                             Mount Laurel, NJ 08054                    Beverly-Rancocas Rd.
(856) 764-3740                               (856) 235-4445                          Willingboro, NJ 08046
                                                                                     (609) 835-4700

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