CORPORATE PROFILE

Originally  founded in 1871 under the name of Farmers' and  Mechanics'  Building
and Loan  Association,  Farmers & Mechanics Bank is a wholly owned subsidiary of
FMS Financial  Corporation.  The  Corporation  is listed on the Nasdaq  National
Market  System  under the  trading  symbol of FMCO.  With  total  assets of $1.2
billion,  the Corporation  employs 341 full-time and 225 part-time employees who
service over 158 thousand deposit accounts.  The Bank, which currently  operates
40 branches in Burlington,  Camden and Mercer County,  is open seven days a week
and offers free  on-line  bill paying and  banking,  telephone  banking and coin
counting. We continue to strive for convenient,  personal,  full service banking
so as to remain your "Hometown Bank."


<PAGE>

         ABOUT OUR COVER-
         Our branch locations in Medford,  Mount Holly,  Riverton,  Beverly and
         Burlington Main office.



To Our Shareholders:

         Farmers & Mechanics Bank had  satisfactory  financial  results for 2003
and  continued to make  progress in expanding  our branch  system and  improving
customer service.

         Deposits and assets continued to increase but earnings  declined due to
the low interest rate environment and higher  operating costs.  During the year,
interest  income was  significantly  reduced  by  increased  prepayments  on the
investment portfolio, which required faster than normal amortization of premiums
previously paid.

         We continue to progress in the expansion and  improvement of our branch
system.  During 2003,  we opened a new office on Route 130 in  Willingboro,  and
completed our new Browns Mills  office,  replacing a very  successful  temporary
office which had grown rapidly for several years.

         Part  of our  growth  in  deposits  was due to the  acquisition  of two
existing  bank  branches.  In March we  purchased  an existing  bank in downtown
Florence with about $16 million of deposits.  We also  purchased a 10-acre tract
on the highway in Florence to build a second branch in that area. In Tabernacle,
we bought a branch with $24  million of  deposits at a superior  location to our
existing  Tabernacle  branch,  and have  combined  the two  branches  at the new
location.  These branch  acquisitions  are profitable on an operating basis, but
will not  contribute  significantly  to reported  earnings until after the rapid
5-year writeoff of the deposit premium paid. The most important thing is that we
have strengthened our competitive position and ability to give better service to
our customers.

         We opened new Wal-Mart branches in Cinnaminson,  Hamilton, and Marlton,
New Jersey in the past year,  bringing  our total to five.  We have an agreement
for three additional Wal-Mart branches in the coming year. Our Wal-Mart branches
provide  even  more  convenience  to  our  existing  customers,  as  well  as an
opportunity to market ourselves to shoppers who don't bank with us.

         We continue to believe  that a local  community  bank can compete  very
successfully against the larger financial institutions. Farmers & Mechanics Bank
has grown on the teamwork of more than 500 of our friends and neighbors who work
at the bank,  providing  the good local  service  that  people  expect.  We have
numerous  convenient  branches  open seven days a week,  with long  hours.  Most
importantly,  we know that  every  transaction  is part of  building a long term
relationship.

         Finally,  we extend  congratulations and appreciation to Wayne Page who
has  completed  50 years as a Director of the Bank.  No one around here is young
enough to ever expect to match that achievement.

                                                 Sincerely,

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

                                       1
<PAGE>

FINANCIAL HIGHLIGHTS
Financial Condition: (In Thousands)

<TABLE>
<CAPTION>
----------------------------------------------------------------------------
December 31,               2003         2002          2001        2000
----------------------------------------------------------------------------
<S>                     <C>          <C>          <C>          <C>
Assets                  $1,225,557   $1,126,557   $  966,537   $  839,076
Loans receivable, net      402,606      361,674      336,544      290,179
Deposits                   893,006      800,340      729,506      648,539
Stockholders' equity        62,830       57,638       52,203       47,410


<CAPTION>
---------------------------------------------------------------------------------------------------
December 31,               1999          1998         1997        1996         1995          1994
---------------------------------------------------------------------------------------------------

<S>                     <C>          <C>          <C>          <C>          <C>          <C>
Assets                  $  772,501   $  691,812   $  628,403   $  541,710   $  501,550   $  483,776
Loans receivable, net      299,695      298,603      302,831      306,871      288,400      283,260
Deposits                   603,892      536,310      489,440      453,277      428,809      429,431
Stockholders' equity        46,097       43,469       38,916       33,826       33,053       29,159
</TABLE>


Operations: (In Thousands, except per share data)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Year Ended December 31,                        2003      2002      2001      2000
-------------------------------------------------------------------------------------
<S>                                        <C>       <C>       <C>       <C>
Interest income                              $50,814   $57,749   $55,300   $52,349
Interest expense                              19,362    24,756    28,752    27,398
Net interest income                           31,452    32,992    26,548    24,951
Net income                                     6,201     7,961     5,459     5,112
Basic earnings per common share                 0.96      1.22      0.81      0.74
Diluted earnings per common share               0.95      1.21      0.81      0.74
Dividends declared per common share             0.12      0.12      0.12      0.12
Weighted average common shares outstanding     6,477     6,548     6,701     6,888
Weighted average common shares and common
stock equivalents outstanding                  6,515     6,577     6,714     6,947
</TABLE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Year Ended December 31,                      1999       1998      1997     1996       1995      1994
------------------------------------------------------------------------------------------------------

<S>                                         <C>       <C>       <C>       <C>       <C>       <C>
Interest income                             $47,863   $46,563   $40,813   $36,841   $35,201   $32,270
Interest expense                             24,742    24,869    20,879    18,978    18,041    15,336
Net interest income                          23,120    21,694    19,934    17,863    17,160    16,934
Net income                                    5,114     5,271     5,491   3,026 (a)   4,343     4,455
Basic earnings per common share                0.71      0.73      0.77      0.41      0.58      0.58
Diluted earnings per common share              0.70      0.72      0.75      0.40      0.56      0.56
Dividends declared per common share            0.12      0.11   0.08 (b)  0.07 (b)     0.07      0.00
Weighted average common shares outstanding    7,210     7,204     7,165     7,411     7,512     7,728
Weighted average common shares and common
stock equivalents outstanding                 7,292     7,314     7,346     7,573     7,695     7,952
</TABLE>

Other Selected Data:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Year Ended December 31,                            2003      2002      2001      2000
-----------------------------------------------------------------------------------------
<S>                                                <C>       <C>       <C>       <C>
Net interest rate spread                           2.98%     3.44%     3.24%     3.40%
Net interest margin                                2.92      3.40      3.22      3.42
Return on average assets                           0.49      0.77      0.56      0.66
Return on average equity                           9.52     14.61     10.02     11.16
Dividend payout ratio                             12.63      9.92     14.81     16.22
Equity-to-asset ratio                              5.13      5.12      5.40      5.65
Number of employees (full-time equivalents)         522       480       439       427
</TABLE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Year Ended December 31,                             1999      1998      1997      1996      1995      1994
-----------------------------------------------------------------------------------------------------------
<S>                                                 <C>       <C>       <C>       <C>       <C>       <C>
Net interest rate spread                            3.28%     3.50%     3.60%     3.50%     3.49%     3.64%
Net interest margin                                 3.36      3.48      3.72      3.66      3.66      3.72
Return on average assets                            0.61      0.79      0.98      0.60      0.89      0.94
Return on average equity                           10.93     12.86     15.11      8.99     14.00     16.01
Dividend payout ratio                              17.14     15.28     10.67     17.50     12.43      0.00
Equity-to-asset ratio                               5.97      6.28      6.19      6.24      6.59      6.03
Number of employees (full-time equivalents)          382       335       299       236       209       196

</TABLE>

(a) Includes $2.7 milion for the one-time special assessment to recapitalize the
    SAIF.
(b) Adjusted for stock splits in 1998 and 1996, as applicable.

<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 and Liquidity 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 2003, the total  investment in MBS
and CMO amounted to $606.7  million,  or 82.2% 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 77.1% 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  average life.  MBS and CMOs of $3.2 million and $5.8 million were used
to secure public funds on deposit at December 31, 2003 and 2002, respectively.

Interest Rate Risk
     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, 2003 the Bank's GAP position
for net  assets  repricing  for one year  cumulative  totaled a  positive  $60.1
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 repricing  intervals 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, 2003, the Bank would experience a
390 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  basis  points  or more have been
omitted.

                                2003
Changes in        -------------------------------------------------
Market            Net Portfolio Value
 Interest Rates   -------------------------------------------------
(basis points)   $ Amount     $ Change    % Change   NPV Ratio (a)

  +300           $36,320      (84,385)       (70%)       3.08%
  +200            66,957      (53,749)       (45%)       5.51%
  +100            97,597      (23,109)       (19%)       7.79%
     0          $120,706            -          -         9.41%
  (100)          122,488        1,782          1%        9.47%
------------------------------------------------------------------

                                 2002
Changes in        ------------------------------------------------
Market            Net Portfolio Value
 Interest Rates   ------------------------------------------------
(basis points)   $ Amount     $ Change    % Change   NPV Ratio (a)
  +300            $31,186     (59,184)       (65%)       2.83%
  +200             58,513     (31,857)       (35%)       5.15%
  +100             81,135      (9,235)       (10%)       6.97%
     0            $90,370           -          -         7.65%
  (100)            80,256     (10,115)       (11%)       6.79%


(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.

Financial Condition
     Total assets of the  Corporation  increased  $99.0  million or 8.8% to $1.2
billion at December 31, 2003 from $1.1 billion at December 31, 2002.  Investment
securities  held to maturity  increased $86.2 million or 52.5% to $250.4 million
at December 31, 2003 from $164.2  million at December 31, 2002.  The increase in
investment  securities  held to maturity  during the year is due to purchases of
$294.0  million,  partially  offset by principal  paydowns of $158.5 million and
investment  calls  and  maturities  of  $48.5  million.   Investment  securities
available for sale increased $30.6 million or 25.8% to $149.2 million during the
year ended  December 31, 2003 from $118.6  million at December  31,  2002,  as a
result of purchases of $71.0 million in CMO's,  $69.4 million in MBS's available
for sale and $14.4 million in U.S. Agency Notes,  partially  offset by principal
paydowns  of $89.8  million and calls and  maturities  of $33.4  million.  Loans
receivable  increased  $40.9 million or 11.3% to $402.6  million at December 31,
2003 from $361.7 million at December 31, 2002. The increase in loans  receivable

                                       5
<PAGE>
     during the year ended  December 31, 2003 was due to $179.4 million of loans
originated,  partially offset by $137.6 million of principal collected on loans.
Mortgage-backed  securities held to maturity decreased $47.2 million or 13.8% to
$294.9  million  during the year ended  December 31, 2003 from $342.1 million at
December 31, 2002, as a result of principal paydowns on MBS's of $203.0 million,
partially  offset by purchases  of $99.9  million in FNMA  securities  and $57.1
million in FHLMC  securities.  Short-term funds decreased $15.7 million or 33.5%
to $31.2  million at December  31, 2003 from $46.9  million at December 31, 2002
primarily due to a decrease in short-term money market accounts.

     Total  liabilities  increased  $93.8  million  or 8.8% to $1.2  billion  at
December 31, 2003 from $1.1 billion at December  31,  2002.  Deposits  increased
$92.7  million  or 11.6% to $893.0  million at  December  31,  2003 from  $800.3
million at December 31, 2002.  The increase in deposits  during the year was due
to increases in checking  accounts of $53.5 million,  savings  accounts of $26.8
million, money market accounts of $7.9 million and certificates of $4.4 million.
Deposits  acquired in 2003 with the purchase of branch locations in Florence and
Tabernacle,  New Jersey totaled $16.1 million and $24.1  million,  respectively.
Securities  sold under  agreements  to  repurchase  remained  constant at $225.0
million at December 31, 2003 and 2002 with a weighted  average rate of 4.08% and
are  collateralized  by U.S. Agency Notes,  MBSs and CMOs. FMS Statutory Trust 1
debentures  of $25.8  million were issued in 2002 with a variable  rate of LIBOR
plus 360 basis points.

         Stockholders' equity increased $5.2 million or 9.0% to $62.8 million at
December 31, 2003 from $57.6 million at December 31, 2002.  The increase was due
to net  income  of $6.2  million  and the  exercise  of  stock  options  of $230
thousand, partially offset by a decrease in the net unrealized gain on available
for sale  securities of $414  thousand,  $778 thousand of dividends  declared on
common stock and $48 thousand of treasury stock purchased.

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 bearing
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  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   interest   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,
                               -------------------------------------------------------------------------------------------------
                                               2003                             2002                           2001
                               -------------------------------------------------------------------------------------------------
                                 Average                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            $   388,201 $   24,363     6.28%  $ 361,734  $  25,659     7.09%  $315,189   $ 23,920    7.59%
    Interest-bearing deposits        33,529        462     1.38%     48,169        932     1.93%    41,298      1,695    4.10%
    Mortgage-backed securities      385,199     15,867     4.12%    332,892     18,526     5.57%   213,301     13,728    6.44%
    Investment securities           268,704     10,122     3.77%    226,161     12,632     5.59%   254,783     15,957    6.26%
                                ------------------------------------------------------- ---------------------------------------
Total interest-earning
        assets                    1,075,633     50,814     4.72%    968,956     57,749     5.96%   824,571     55,300    6.71%
                                --------------------------------- --------------------- ---------  ----------------------------

Interest-bearing liabilities:
    Checking deposits               313,492        915     0.29%    262,153      1,621     0.62%   229,597      2,712    1.18%
    Savings deposits                179,673      1,249     0.70%    143,476      1,921     1.34%   118,698      2,644    2.23%
    Money market deposits           130,822      1,020     0.78%    109,124      2,033     1.86%    75,490      1,926    2.55%
    Time deposits                   225,240      5,401     2.40%    233,975      8,370     3.58%   248,637     12,791    5.14%
    Borrowings                      236,199      9,481     4.01%    207,351      9,069     4.37%   146,753      7,622    5.19%
    Long-term debt                   25,774      1,296     5.03%     25,510      1,743     6.83%    10,000      1,057   10.57%
                                ------------------------------------------------------- ---------------------------------------
Total interest-bearing
        liabilities             $ 1,111,200 $   19,362     1.74%  $ 981,589     24,757     2.52%  $829,175     28,752    3.47%
                                ============--------------------- ==========----------- --------- =========--------------------

Net interest income                             31,452                       $  32,992                       $ 26,548
                                            ===========                     ===========                    ===========
Interest rate spread                                       2.98%                           3.44%                         3.24%
                                                       ==========                       =========                     =========
Net yield on average
  interest-earning assets                                  2.92%                           3.40%                         3.22%
                                                       ==========                       =========                     =========
Ratio of average interest-
    earning assets to average
    interest -bearing liabilities                         96.80%                          98.71%                        99.44%
                                                       ==========                       =========                     =========
</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,
                                      --------------------------------------------------------------------
                                               2003  vs. 2002                      2002  vs. 2001
                                      --------------------------------    --------------------------------
                                               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                             $ (3,173)   $  1,877    $ (1,296)   $ (1,793)   $  3,532    $  1,739
    Interest-bearing deposits             (187)       (283)       (470)     (1,044)        282        (762)
    Mortgage-backed securities          (5,570)      2,911      (2,659)     (2,900)      7,697       4,797
    Investment securities               (4,886)      2,376      (2,510)     (1,532)     (1,793)     (3,325)
                                      --------    --------    --------    --------    --------    --------

    Total change - interest income     (13,816)      6,881      (6,935)     (7,269)      9,718       2,449
                                      --------    --------    --------    --------    --------    --------
Interest expense:
    Checking deposits                   (1,023)        317        (706)     (1,476)        385      (1,091)
    Savings deposits                    (1,157)        485        (672)     (1,275)        552        (723)
    Money market accounts               (1,417)        404      (1,013)       (751)        858         107
    Time deposits                       (2,657)       (312)     (2,969)     (3,667)       (754)     (4,421)
    Borrowings                            (850)      1,262         412      (1,700)      3,147       1,447
    Long-term debt                        (465)         18        (447)       (953)      1,639         686
                                      --------    --------    --------    --------    --------    --------

    Total change - interest expense     (7,569)      2,174      (5,395)     (9,822)      5,827      (3,995)
                                      --------    --------    --------    --------    --------    --------

Net change in net interest income     $ (6,247)   $  4,707    $ (1,540)   $  2,553    $  3,891    $  6,444
                                      ========    ========    ========    ========    ========    ========
</TABLE>

Comparisons of Years Ended December 31, 2003 and 2002.

Net Income
     The Corporation and its subsidiary  recorded net income of $6.2 million for
the year ended  December  31,  2003,  or $.95  diluted  earnings  per share,  as
compared to net income of $8.0 million,  or $1.21 diluted earnings per share for
the year ended December 31, 2002. Net interest  income was $31.5 million in 2003
compared to $33.0 million in 2002. In 2003,  interest  income was  significantly
reduced by increased  prepayments  on the investment  portfolio,  which required
faster than normal  amortization  of premiums  previously  paid on  investments.
Provisions for loan losses were $270 thousand in 2003 and $149 thousand in 2002.
Other income  totaled $6.1 million in 2003 compared to $4.5 million for the same
period in 2002.  Total  operating  expenses for the year ended December 31, 2003
were $27.0 million compared to $24.6 million in the previous year.  During 2003,
the  Corporation  declared  cash  dividends  which  totaled $.12 per share which
resulted in a dividend payout ratio of 12.63%.

Interest Income
     Total interest income  decreased $6.9 million to $50.8 million in 2003 from
$57.7  million in 2002.  The decrease is  attributable  to decreases in interest
income on mortgage-backed securities of $2.7 million,  investments securities of
$2.5  million,  loans of $1.3  million  and  interest-bearing  deposits  of $470
thousand.

     Interest  income on  mortgage-backed  securities  decreased $2.7 million in
2003 due to rate decreases in the portfolio.  The average yield on the portfolio
decreased 145 basis points to 4.12% in 2003 from 5.57% in 2002,  which  resulted
in a decrease in interest  income of $5.6  million.  The average  balance of the
portfolio  increased $52.3 million to $385.2 million in 2003 from $332.9 million
in 2002,  resulting  in an  increase  in interest  income of $2.9  million.  The
increase in the average  balance was due to the  purchases of $226.5  million in
FHLMC and FNMA securities in 2003.

     Interest  income on investment  securities  decreased $2.5 million in 2003.
The decrease in interest  income on the  investment  securities  was due to rate
decreases in the  portfolio.  The average yield on the  portfolio  decreased 182
basis points to 3.77% in 2003 from 5.59% in 2002,  which  resulted in a decrease
in  interest  income of $4.9  million.  The  average  balance  of the  portfolio
increased  $42.5 million to $268.7  million in 2003 from $226.2 million in 2002.
The investment  portfolio increased primarily due to purchases of $282.0 million
of CMO's and $93.6 million of U. S.  Government  Agency Notes.  These  increases
were partially offset by principal paydowns of CMO's of $202.5 million and calls
of $58.8 million of U.S.  Government  Agency Notes.  The increase in the average
balance of investment  securities  resulted in an increase in interest income of
$2.4 million in 2003.

                                        7
<PAGE>

      Interest  income on loans  decreased  $1.3  million  to $24.4  million  at
December 31, 2003 from $25.7 million at December 31, 2002.  The average yield on
the loan portfolio decreased to 6.28% in 2003 from 7.09% in 2002, which resulted
in a decrease in interest  income of $3.2  million.  The average  balance of the
loan  portfolio  increased  $26.5 million to $388.2  million in 2003 from $361.7
million in 2002. Loans originated totaled $179.4 million and principal collected
on loans totaled  $137.6 million in 2003. The increase in the loan volume during
2003 resulted in an increase in interest income of $1.9 million.

Interest Expense
     Total interest expense decreased $5.4 million to $19.4 million in 2003 from
$24.8 million in 2002. The decrease in interest expense on time deposits,  money
market deposits,  checking,  savings and long term debt, was partially offset by
increases in interest expense on borrowings.

     Interest expense on time deposits decreased $3.0 million to $5.4 million in
2003 from $8.4 million in 2002. The average rate on time deposits  decreased 118
basis points to 2.40% in 2003 from 3.58% in 2002,  which  resulted in a decrease
in interest  expense of $2.7 million from lower  rates.  The average  balance of
time  deposits  decreased  $8.8  million to $225.2  million in 2003 from  $234.0
million in 2002,  which  resulted  in a  decrease  in  interest  expense of $312
thousand.

     Interest  expense on money market  deposits  decreased $1.0 million to $1.0
million in 2003 from $2.0  million in 2002.  The  average  rate on money  market
deposits  decreased 108 basis points to 0.78% in 2003 from 1.86% in 2002,  which
resulted in a decrease in interest expense of $1.4 million.  The average balance
of money market deposits  increased $21.7 million to $130.8 million in 2003 from
$109.1  million in 2002,  which  resulted in an increase in interest  expense of
$404 thousand.

     Interest  expense on  checking  deposits  decreased  $706  thousand to $915
thousand  in 2003  from $1.6  million  in 2002.  The  average  rate on  checking
deposits  decreased 33 basis  points to 0.29% in 2003 from 0.62% in 2002,  which
resulted in a decrease in interest expense of $1.0 million.  The average balance
of checking  deposits  increased  $51.3  million to $313.5  million in 2003 from
$262.2  million in 2002,  which  resulted in an increase in interest  expense of
$317 thousand.

     Interest  expense on long-term debt decreased $447 thousand to $1.3 million
in 2003 from $1.7 million in 2002.  The average rate on long-term debt decreased
180  basis  points  to 5.03% in 2003  from  6.83% in 2002,  resulting  in a $465
thousand  decrease in interest expense due to rate changes.  The average balance
of long-term  debt  increased  $264 thousand to $25.8 million in 2003 from $25.5
million in 2002.  The volume  increase  resulted in a $18  thousand  increase in
interest expense in 2003.

     Interest  expense on borrowings  increased $412 thousand to $9.5 million in
2003 from $9.1  million in 2002.  The average  balance of  borrowings  increased
$28.8 million to $236.2 million in 2003 from $207.4  million in 2002,  resulting
in a $1.3 million increase in interest  expense due to volume.  The average rate
on borrowings  decreased 36 basis to 4.01% in 2003 from 4.37% in 2002, resulting
in a $850 thousand decrease in interest expense due to changes in rate.

Critical Acounting Estimate-Provision For Loan Losses
     A  critical  accounting  estimate  of the  Bank is the  provision  for loan
losses.  The provision for loan losses  increased $121 thousand to $270 thousand
in 2003 from $149  thousand in 2002.  The increase in the  provision  was due to
increases in the total loan portfolio and  particularly  increases in commercial
construction and commercial real estate loans,  which have a higher risk of loss
than residential mortgages. 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 net  charge-offs for 2003 and
2002  totaled  $180  thousand  and $63  thousand,  respectively.  The Bank  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 probable existing
loss in the 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.

     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.

Other Income (Expense)
     Other income from operations increased $1.6 million to $6.1 million in 2003
compared with $4.5 million in 2002.

     During 2003,  various real estate owned was sold and resulted in a net gain
of $496 thousand.

     Loss on sale of fixed assets of $116 thousand primarily relates to the sale
of the Lake Pine branch office which was closed in 2002.

                                       8
<PAGE>

     During 2003,  the remaining real estate held for  development  was sold and
resulted in a net gain of $601 thousand.

     Service charges on accounts increased $600 thousand to $4.6 million in 2003
from $4.0  million in 2002.  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 $27.0 million in 2003
from $24.6 million in 2002.

     Occupancy and equipment  expense increased $800 thousand to $5.4 million in
2003 from $4.6 million in 2002.  The incease is due to additional  depreciation,
rent and occupancy  expenses on the five new branch  offices  opened in 2003, as
well as other facility and equipment additions and improvements during the year.

     Salaries and benefits  increased $1.3 million to $15.5 million in 2003 from
$14.2  million in 2002.  The  increase was due to  additional  staff in five new
branch  offices  opened  during the year and an  increase  of $257  thousand  in
retirement  and health  insurance  costs in 2003.  Average full time  equivalent
employees  during  2003  were 522 as  compared  to 480  during  2002.  Operating
expenses  are  expected to  continue  increasing  in future  periods as the Bank
pursues its branch expansion strategy.

     Purchased  services expense increased $253 thousand to $2.8 million in 2003
from $2.6  million  in 2002.  ATM  charges  increased  $161  thousand  and check
processing costs increased $5 thousand due to higher transaction volume in 2003.

Comparisons of Years Ended December 31, 2002 and 2001.

Net Income
     The Corporation and its subsidiary  recorded net income of $8.0 million for
the year ended  December  31, 2002,  or $1.21  diluted  earnings  per share,  as
compared to net income of $5.5 million,  or $.81 diluted  earnings per share for
the year ended December 31, 2001. Net interest  income was $33.0 million in 2002
compared to $26.5 million in 2001. Provisions for loan losses were $149 thousand
in 2002 and $221  thousand in 2001.  Other  income  totaled $4.5 million in 2002
compared to $4.2 million for the same period in 2001.  Total operating  expenses
for the year ended  December  31,  2002 were  $24.6  million  compared  to $22.1
million in the  previous  year.  During  2002,  the  Corporation  declared  cash
dividends which totaled $.12 per share which resulted in a dividend payout ratio
of 9.92%.

Interest Income
     Total interest income  increased $2.4 million to $57.7 million in 2002 from
$55.3  million in 2001.  The increase is  attributable  to increases in interest
income on mortgage-backed  securities of $4.8 million and loans of $1.7 million,
partially  offset by decreases in interest  income on  investment  securities of
$3.3 million and interest-bearing deposits of $762 thousand.

     Interest  income on  mortgage-backed  securities  increased $4.8 million in
2002 primarily due to volume increases in the portfolio.  The average balance of
the portfolio  increased  $119.6  million to $332.9  million in 2002 from $213.3
million in 2001,  resulting in an increase in interest  income of $7.7  million.
The increase in the average balance was due to the purchase of $192.6 million in
FHLMC, FNMA and GNMA securities in 2002,  partially offset by principal paydowns
of $125.4 million. The average yield on the portfolio decreased to 5.57% in 2002
from 6.44% in 2001,  which  resulted in a decrease  in  interest  income of $2.9
million.

     The average balance of the loan portfolio increased $46.5 million to $361.7
million in 2002 from  $315.2  million in 2001.  The  increase in the loan volume
during 2002 resulted in an increase in interest  income of $3.5  million.  Loans
originated totaled $115.1 million and principal collected on loans totaled $89.5
million in 2002. The average yield on the loan  portfolio  decreased to 7.09% in
2002 from 7.59% in 2001, which resulted in a decrease in interest income of $1.8
million.

     The decrease in interest income on investment securities was due to a $28.6
million  decrease  in the average  balance of  investment  securities  to $226.2
million in 2002 from $254.8 million in 2001. The investment  portfolio decreased
prmiarily  due to  principal  paydowns of CMO's and MBS's of $143.6  million and
calls of $136.5 million of U.S.  Government  Agency Notes,  partially  offset by
purchases of $150.6 million of CMO's and $89.8 million of U.S. Government Agency
Notes. The decrease in the average balance of investment  securities resulted in
a decrease in interest  income of $1.8 million in 2002 from the  previous  year.
Average  investment  yields decreased to 5.59% in 2002 from 6.26% in 2001, which
resulted  in a  decrease  in  interest  income  of $1.5  million  on  investment
securities.

Interest Expense
     Total interest expense decreased $4.0 million to $24.8 million in 2002 from
$28.8  million in 2001.  The  decrease  in  interest  expense on time  deposits,
checking,  and savings was partially  offset by increases in interest expense on
borrowings, long-term debt and money market deposits.

     Interest expense on time deposit  decreased $4.4 million to $8.4 million in
2002 from $12.8 million in 2001. The average rate on time deposits decreased 156
basis points to 3.58% in 2002 from 5.14% in 2001,  which  resulted in a decrease
in  interest  expense of $3.7  million.  The  average  balance of time  deposits
decreased  $14.6 million to $234.0  million in 2002 from $248.6 million in 2001,
which resulted in a decrease in interest expense of $754 thousand.

     Interest  expense  on  checking  deposits  decreased  $1.1  million to $1.6
million in 2002 from $2.7 million in 2001. The average rate on checking deposits
decreased 56 basis points to 0.62% in 2002 from 1.18% in 2001, which resulted in
a decrease in interest expense of $1.5 million.  The average balance of checking
deposits  increased  $32.6 million to $262.2 million in 2002 from $229.6 million
in 2001, which resulted in an increase in interest expense of $385 thousand.

                                       9
<PAGE>

     Interest  expense on borrowings  increased  $1.4 million to $9.0 million in
2002 from $7.6  million in 2001.  The average  balance of  borrowings  increased
$60.6 million to $207.4 million in 2002 from $146.8  million in 2001,  resulting
in a $3.1 million increase in interest  expense due to volume.  The average rate
on borrowings decreased to 4.37% in 2002 from 5.19% in 2001, resulting in a $1.7
million decrease in interest expense due to changes in rate.

     Interest  expense on long-term debt increased $686 thousand to $1.7 million
in 2002 from $1.1  million  in 2001.  The  average  balance  of  long-term  debt
increased $15.5 million to $25.5 million in 2002 from $10.0 million in 2001. The
increase was due to the issuance of $25.0  million of trust  capital  securities
during  2002 with a variable  rate of LIBOR plus 360 basis  points at an initial
rate of 5.59%.  In 2002, the  Corporation  also redeemed its $10.0 million 10.0%
subordinated  debentures.  As a result  of the  early  redemption  of the  10.0%
subordinated debentures,  the average rate on long-term debt decreased 374 basis
points  to 6.83% in 2002  from  10.57%  in 2001,  resulting  in a $953  thousand
decrease in interest expense due to rate changes.

Critical Accounting Estimate-Provision For Loan Losses

     A  critical  accounting  estimate  of the  Bank is the  provision  for loan
losses. The provision for loan losses decreased $72 thousand to $149 thousand in
2002 from $221 thousand in 2001.  Based on current  economic  conditions and the
decrease in  non-performing  loans, the Bank reduced the loan loss provision for
2002.  The net  charge-offs  for 2002  and 2001  totaled  $63  thousand  and $32
thousand, respectively.

Other Income (Expense)
     Other income from  operations  increased  $278  thousand to $4.5 million in
2002 compared with $4.2 million in 2001.

     Gain on sale of fixed assets of $101  thousand in 2002 is primarily  due to
the  sale of the old  Medford  branch  building.  The  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 $631 thousand to $4.0 million in 2002
from $3.4  million in 2001.  The  increase  is the result of higher  transaction
volume on retail accounts during the year.

Operating Expenses
     Total  operating  expenses  increased $2.5 million to $24.6 million in 2002
from $22.1 million in 2001.

     Salaries and benefits  increased $1.7 million to $14.2 million in 2002 from
$12.5  million in 2001.  The  increase  was due to  additional  staff in two new
branch  offices  opened  during the year and an  increase  of $484  thousand  in
retirement  and health  insurance  costs in 2002.  Average full time  equivalent
employees during 2002 were 480 as compared to 439 during 2001.

     Purchased  services expense increased $430 thousand to $2.6 million in 2002
from $2.2  million  in 2001.  ATM  charges  increased  $339  thousand  and check
processing  costs  increased  $72 thousand due to higher  transaction  volume in
2002.

     On August 1, 2002, the Corporation  redeemed its $10.0 million subordinated
debentures.  The  early  redemption  was at a price  of  101%.  The  cost of the
redemption  and the remaining  unamortized  bond issuance costs were recorded in
2002 as a one-time  extraordinary charge to net income of $134 thousand,  net of
$81  thousand  in tax  benefits.  During  2003,  in  accordance  with  SFAS 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections", this amount was reclassified to other expenses.

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. The Bank 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,  2003 the Bank had $225.0
million in repurchase  agreements and $11.2 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.

                                       10
<PAGE>

     The amount of certificate accounts which are scheduled to mature during the
twelve months ending December 31, 2004 is approximately  $157.4 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.

CONTRACTUAL OBLIGATIONS

     The  Corporation is subject to certain  contracual  obligations at December
31, 2003 as shown in the table below:

<TABLE>
<CAPTION>
Contractual Obligations                                        Less than      1-3          3-5      More than
(In thousands)                                                  1 year       years        years      5 years        Total
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>        <C>           <C>          <C>         <C>
Securities sold under agreements to repurchase (a)              $     0    $      0      $ 50,000    $175,000      $225,000
Advances from Federal Home Loan Bank (a)                              0      10,000         1,191           0        11,191
FMS Statutory Trust 1 debentures                                      0           0             0      25,774        25,774
Operating leases                                                    203         434           446       2,191         3,277
Commitments to fund loans                                        15,884           0             0           0        15,884
Unused lines of credit                                                0           0                    32,286        32,386
Standby letters of credit                                         3,776                                               3,776
Software maintenance contracts                                   13,763                                              13,763

</TABLE>

(a)  Subject to prepayment  calls,  which may  accelerated  the payment of these
     obligations.


                                       11
<PAGE>

Consolidated Summary of Quarterly Earnings (Unaudited)

The following table presents summarized quarterly data for 2003 and 2002:

<TABLE>
<CAPTION>
                                                 1st                2nd               3rd              4th               Total
                 2003                          Quarter            Quarter           Quarter           Quarter            Year
-------------------------------------------------------------------------------------------------------------------------------
                                                              (In Thousands, except per share amounts)
<S>                                           <C>               <C>               <C>                <C>             <C>
Total interest income                           $13,432           $12,438           $11,668            $13,276         $50,814
Total interest expense                            5,275             4,929             4,618              4,540          19,362
                                                -------           -------           -------            -------         -------
Net interest income                               8,157             7,509             7,050              8,736          31,452
Provision for loan losses                            60                60                75                 75             270
                                                -------           -------           -------            -------         -------
Net interest income after provision
  for loan losses                                 8,097             7,449             6,975              8,661          31,182
Total other income                                1,572             1,501             1,271              1,712           6,056
Total operating expenses                          6,633             6,813             6,758              6,766          26,970
                                                -------           -------           -------            -------         -------
Income before income taxes                        3,036             2,137             1,488              3,607          10,268
Federal and state income taxes                    1,196               837               588              1,446           4,067
                                                -------           -------           -------            -------         -------
Net income                                      $ 1,840           $ 1,300           $   900            $ 2,161         $ 6,201
                                                =======           =======           =======            =======         =======
Basic earnings per common share                 $  0.28           $  0.20           $  0.14            $  0.34          $ 0.96
                                                =======           =======           =======            =======          ======
Diluted earnings per common share               $  0.28           $  0.20           $  0.14            $  0.33          $ 0.95
                                                =======           =======           =======            =======          ======
</TABLE>

<TABLE>
<CAPTION>
                                                 1st                2nd               3rd               4th
                 2002                           Quarter           Quarter           Quarter           Quarter
-------------------------------------------------------------------------------------------------------------------------------
                                                              (In Thousands, except per share amounts)

<S>                                           <C>               <C>               <C>                <C>             <C>
Total interest income                           $14,311           $14,839           $14,510            $14,088         $57,748
Total interest expense                            6,307             6,475             6,115              5,859          24,756
                                                -------           -------           -------            -------         -------
Net interest income                               8,004             8,364             8,395              8,229          32,992
Provision for loan losses                             3                26                60                 60             149
                                                -------           -------           -------            -------         -------
Net interest income after provision
  for loan losses                                 8,001             8,338             8,335              8,169          32,843
Total other income                                  970             1,181             1,131              1,223           4,505
Total operating expenses                          5,796             5,914             6,324              6,547          24,581
                                                -------           -------           -------            -------         -------
Income before income taxes                        3,175             3,605             3,142              2,845          12,767
Federal and state income taxes                    1,123             1,268             1,192              1,223           4,806
                                                -------           -------           -------            -------         -------
Net Income                                      $ 2,052           $ 2,337           $ 1,950            $ 1,622         $ 7,961
                                                =======           =======           =======            =======         =======
Basic earnings per common share                 $  0.31           $  0.36           $  0.30            $  0.25          $ 1.22
                                                =======           =======           =======            =======          ======
Diluted earnings per common share               $  0.30           $  0.36           $  0.30            $  0.25          $ 1.21
                                                =======           =======           =======            =======          ======

</TABLE>
                                       12
<PAGE>

<TABLE>
<CAPTION>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,                                                                                  2003                  2002
---------------------------------------------------------------------------------------------------------------------------
ASSETS
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>                  <C>
  Cash and amounts due from depository institutions                                     $   41,022,232       $   41,497,691
  Interest-bearing deposits                                                                    142,929               12,252
  Short term funds                                                                          31,169,476           46,900,403
                                                                                        --------------       --------------
    Total cash and cash equivalents                                                         72,334,637           88,410,346
  Investment securities held to maturity                                                   250,383,262          164,227,126
  Investment securities available for sale                                                 149,230,862          118,612,961
  Loans, net                                                                               402,606,056          361,674,400
  Mortgage-backed securities held to maturity                                              294,915,606          342,122,678
  Accrued interest receivable                                                                5,203,748            5,279,658
  Federal Home Loan Bank stock                                                              11,809,620           12,061,720
  Real estate held for development, net                                                              0               87,926
  Real estate owned, net                                                                        48,294              291,200
  Office properties and equipment, net                                                      31,429,069           29,092,970
  Deferred income taxes                                                                      2,043,909            2,972,572
  Core deposit intangible                                                                    3,308,238                    0
  Prepaid expenses and other assets                                                          1,603,294            1,005,822
  FMS Statutory Trust 1 issue costs, net                                                       640,154              717,999
                                                                                        --------------       --------------
TOTAL ASSETS                                                                            $1,225,556,749       $1,126,557,378
                                                                                        ==============       ==============

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
  Deposits                                                                              $  893,006,498         $800,340,222
  Securities sold under agreements to repurchase                                           225,000,000          225,000,000
  Advances from the Federal Home Loan Bank                                                  11,191,047           11,232,103
  FMS Statutory Trust 1 debentures                                                          25,774,000           25,000,000
  Advances by borrowers for taxes and insurance                                              2,142,499            2,049,813
  Accrued interest payable                                                                   1,319,501            1,383,054
  Dividends payable                                                                            194,576              193,914
  Other liabilities                                                                          4,098,885            3,720,453
                                                                                        --------------       --------------
  Total liabilities                                                                      1,162,727,006        1,068,919,559
                                                                                        --------------       --------------

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 7,975,059 and 7,949,809, and shares outstanding 6,485,877
    and 6,463,811 as of December 31, 2003 and 2002, respectively                               797,506              794,981
  Paid-in capital in excess of par                                                           8,507,333            8,279,525
  Accumulated comprehensive income- net of deferred income taxes                               802,239            1,216,053
  Retained earnings                                                                         63,657,664           58,233,840
  Less:  Treasury stock (1,489,182 and 1,485,998 shares, at cost, as of
    December 31, 2003 and 2001, respectively)                                              (10,934,999)         (10,886,580)
                                                                                        --------------       --------------
Total stockholders' equity                                                                  62,829,743           57,637,819
                                                                                        --------------       --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                              $1,225,556,749       $1,126,557,378
                                                                                        ==============       ==============
</TABLE>

See notes to consolidated financial statements.

                                       13
<PAGE>

<TABLE>
<CAPTION>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,                                                          2003            2002             2001
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>              <C>            <C>
INTEREST INCOME:
-------------------------------------------------------------------------------------------------------------------------
Interest income on:
  Loans                                                                       $24,362,749      $25,658,517    $23,919,782
  Mortgage-backed securities                                                   15,867,034       18,525,669     13,728,457
  Investments                                                                  10,584,214       13,564,483     17,651,585
                                                                              -----------      -----------    -----------
Total interest income                                                          50,813,997       57,748,669     55,299,824
                                                                              -----------      -----------    -----------
INTEREST EXPENSE:
Interest expense on:
  Deposits                                                                      8,585,202       13,944,396     20,072,856
  Borrowings                                                                    9,480,985        9,069,402      7,621,750
  Long-term debt                                                                1,295,928        1,742,660      1,057,348
                                                                              -----------      -----------    -----------
Total interest expense                                                         19,362,115       24,756,458     28,751,954
                                                                              -----------      -----------    -----------
NET INTEREST INCOME                                                            31,451,882       32,992,211     26,547,870
PROVISION FOR LOAN LOSSES                                                         270,000          149,000        221,000
                                                                              -----------      -----------    -----------
NET INTEREST INCOME AFTER PROVISION
 FOR LOAN LOSSES                                                               31,181,882       32,843,211     26,326,870
                                                                              -----------      -----------    -----------
OTHER INCOME (EXPENSE):
  Loan service charges and other fees                                              85,759          125,806        114,774
  Gain on sale real estate owned                                                  495,831           18,261        418,939
  (Loss) Gain on sale/disposal of fixed assets                                   (115,658)         100,767         50,799
  Gain on sale of investment securities                                           285,846                0         35,916
  Gain on sale of real estate held for development                                600,780                0              0
  Real estate owned operations, net                                               (20,365)         (40,156)       (53,469)
  Service charges on accounts                                                   4,592,540        3,992,890      3,361,668
  Other income                                                                    131,805          306,907        297,780
                                                                              -----------      -----------    -----------
Total other income                                                              6,056,538        4,504,475      4,226,407
                                                                              -----------      -----------    -----------
OPERATING EXPENSES:
  Salaries and employee benefits                                               15,512,202       14,161,356     12,481,771
  Occupancy and equipment                                                       5,399,414        4,599,750      4,545,863
  Purchased services                                                            2,841,868        2,589,186      2,158,833
  Federal deposit insurance premiums                                              127,387          123,493        146,108
  Professional fees                                                               654,197          846,880        572,199
  Advertising                                                                     469,070          459,183        340,270
  Amortization of core deposit intangible                                         272,802                0         27,662
  Other                                                                         1,693,350        1,800,868      1,844,528
                                                                              -----------      -----------    -----------
Total operating expenses                                                       26,970,290       24,580,716     22,117,234
                                                                              -----------      -----------    -----------
INCOME BEFORE INCOME TAXES                                                     10,268,130       12,766,970      8,436,043
INCOME TAXES                                                                    4,066,716        4,806,226      2,976,752
                                                                              -----------      -----------    -----------
NET INCOME                                                                     $6,201,414       $7,960,744     $5,459,291
                                                                               ==========       ==========     ==========
BASIC EARNINGS PER COMMON SHARE                                                      $.96            $1.22           $.81
                                                                               ==========       ==========     ==========
DILUTED EARNINGS PER COMMON SHARE                                                    $.95            $1.21           $.81
                                                                               ==========       ==========     ==========

DIVIDENDS PER COMMON SHARE                                                           $.12             $.12           $.12
                                                                               ==========       ==========     ==========

Weighted average common shares outstanding                                      6,476,938        6,548,313      6,700,729
Potential dilutive effect of the exercise of stock options                         37,996           28,956         13,498
                                                                              -----------      -----------    -----------
Adjusted weighted average common shares outstanding                             6,514,934        6,577,269      6,714,227
                                                                               ==========       ==========     ==========
</TABLE>

See notes to consolidated financial statements.

                                       14
<PAGE>

<TABLE>
<CAPTION>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                                          2003            2002            2001
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>              <C>            <C>
OPERATING ACTIVITIES:
Net income                                                                  $   6,201,414    $   7,960,744  $   5,459,291
Adjustments to reconcile net income to net cash provided
  by operating activities:
Provision for loan losses                                                         270,000          149,000        221,000
Provision for real estate owned                                                         0                0       (325,000)
Amortization and Depreciation                                                   7,596,574        5,163,734      3,357,408
Realized (gains) and losses on:
  Sale of loans and loans held for sale                                              (335)            (881)        (1,455)
  Sale and disposal of fixed assets                                               115,658         (100,767)       (50,799)
  Loss on retirement of debt                                                            0          133,682              0
  Investment securities                                                          (285,846)               0        (35,916)
  Sale of real estate owned                                                      (495,496)         (17,380)      (417,484)
  Sale of real estate held for development                                       (600,780)               0              0
Decrease in accrued interest receivable                                            75,910          263,442        767,782
Decrease (Increase) in prepaid expenses and other assets                          176,528          761,872       (335,990)
Decrease in accrued interest payable                                              (63,553)        (399,454)      (193,299)
Increase (Decrease) in other liabilities                                          653,619         (606,392)       974,901
Provision (Benefit) for deferred income taxes                                     928,663         (443,368)      (336,970)
                                                                            -------------    -------------  -------------
  Net cash provided by operating activities                                    14,572,356       12,864,232      9,083,469
                                                                            -------------    -------------  -------------
INVESTING ACTIVITIES:
Proceeds from sale of:
  Education loans                                                                 103,399          190,785        215,375
  Real estate held for development                                                688,706                0              0
  Real estate owned                                                             1,192,294          107,097        927,993
  Office property and equipment                                                   308,814          208,941         99,631
Principal collected and proceeds from maturities of
  investment securities held to maturity                                      206,997,534      214,877,925    333,005,946
Principal collected and proceeds from maturities of
  investment securities available for sale                                    123,532,241       73,690,189     46,663,135
Principal collected and proceeds from maturities of mortgage-backed
  securities                                                                  202,995,009      125,440,105     90,396,808
Principal collected on loans, net                                             137,639,469       89,481,147     49,577,838
Loans originated or acquired                                                 (179,403,933)    (115,141,777)   (71,407,691)
Purchase of investment securities and mortgage-backed securities
  held to maturity                                                           (455,768,535)    (380,298,789)  (472,938,992)
Purchase of investment securities and mortgage-backed securities
   available for sale                                                        (156,532,806)    (139,179,153)   (57,020,968)
Redemption (Purchase) of Federal Home Loan Bank stock                             252,100       (3,748,100)    (1,748,310)
Purchase of office property and equipment                                      (4,775,248)      (4,559,726)    (1,619,525)
Net cash received from deposit purchase                                        36,540,170                0      1,466,726
                                                                            -------------    -------------  -------------
  Net cash used by investing activities                                       (86,230,786)    (138,931,356)   (82,382,034)
                                                                            -------------    -------------  -------------
FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts                           67,749,707      103,019,001     52,586,654
Net (decrease) increase in time deposits                                      (11,623,601)     (32,184,508)       277,028
Net (decrease) increase in FHLB advances                                          (41,056)       9,961,790     (5,035,331)
Proceeds from securities sold under agreement to repurchase                             0       60,000,000     45,000,000
Net proceeds from issuance of trust capital debentures                                  0       24,221,532              0
Repayment of subordinated debentures                                                    0      (10,100,000)             0
Increase (Decrease) in advances from borrowers for taxes and insurance             92,686         (197,189)        49,886
Purchase of treasury stock                                                        (48,419)      (2,813,136)      (432,840)
Dividends paid on common stock                                                   (776,929)        (790,339)      (804,875)
Net proceeds from issuance of common stock                                        230,333            1,195         65,868
                                                                            -------------    -------------  -------------
  Net cash provided by financing activities                                    55,582,721      151,118,346     91,706,390
                                                                            -------------    -------------  -------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                              (16,075,709)      25,051,222     18,407,825
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                   88,410,346       63,359,124     44,951,299
                                                                            -------------    -------------  -------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                      $  72,334,637    $  88,410,346  $  63,359,124
                                                                            =============    =============  =============
Supplemental Disclosures:
  Cash paid for:
    Interest on deposits, advances, and other borrowings                    $  19,425,668    $  25,155,912  $  28,919,651
    Income taxes                                                                2,469,200        5,679,482      3,647,733
  Non cash investing and financing activities:
    Dividends declared and not paid at year end                                   194,576          193,914        201,531
      Non-monetary transfers from loans to real estate owned through
        foreclosure                                                               453,892          166,668         45,000
      Deposits acquired in connection with merger                                       0                0     28,102,691
      Assets acquired in connection with merger                                         0                0     28,260,337
</TABLE>

See notes to consolidated financial statements.

                                       15
<PAGE>

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, 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
   benefit of $286,789
   Unrealized gain
   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     8,278,423        147,496       51,055,818   (8,073,444)    52,203,181
 Net income                                                                            7,960,744                   7,960,744
 Other comprehensive
   income, net of tax
   benefit of $710,591
   Unrealized gain
   on securities available
   for sale                                                           1,068,557                                    1,068,557
                                                                                                                 -----------
 Total comprehensive
  income                                                                                                           9,029,301
 Dividends declared                                                                     (782,722)                   (782,722)
Exercise of stock options          925          93         1,102                                                       1,195
Purchase of
  common stock                (254,819)                                                            (2,813,136)    (2,813,136)
-------------------------------------------------------------------------------------------------------------------------------
Balances at
 December 31, 2002           6,463,811     794,981     8,279,525      1,216,053       58,233,840  (10,886,580)    57,637,819
Net income                                                                             6,201,414                   6,201,414
Other comprehensive
  income, net of tax
  benefit of $275,187
  Unrealized (loss)
  on securities available
  for sale                                                             (413,814)                                    (413,814)
                                                                                                                 -----------
Total comprehensive
  income                                                                                                           5,787,600
 Dividends declared                                                                     (777,590)                   (777,590)
Exercise of stock options       25,250       2,525       227,808                                                     230,333
Purchase of
  common stock                  (3,184)                                                               (48,419)       (48,419)
-------------------------------------------------------------------------------------------------------------------------------
Balances at
  December 31, 2003          6,485,877    $797,506    $8,507,333       $802,239      $63,657,664 $(10,934,999)   $62,829,743
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See notes to consolidated financial statements.

                                       16
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001

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.

     Generally  accepted  accounting   principles  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.

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, 2003 and
2002 were $19.5 million and $25.9 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 and discounts  are amortized  using a method which in total
approximates the interest method.  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 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.

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.

                                       17

<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.  In accordance with
SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets," long
lived assets are  evaluated for  impairment  by management on an ongoing  basis.
Impairment may occur whenever events or changes in  circumstances  indicate that
the carrying amount of an asset may not be recoverable.

Deferred Loan Fees
     All loan fees and  related  direct  loan  origination  costs are  deferred.
Deferred loan fees and costs are capitalized and amortized as a yield adjustment
over the life of the loan using the interest  method.  Amortization  of deferred
loan fees cease while a loan is on non-accrual status.

Core Deposit Intangible
     Core deposit  intangible are amortized over their useful life of five years
using the straight-line method.

Income Taxes
     The  Corporation  computes its taxable income for both financial  reporting
and  federal  and state tax  purposes on the  accrual  basis.  Income  taxes for
financial  reporting  purposes  are  recorded in  accordance  with SFAS No. 109,
"Accounting for Income Taxes". The asset and liability approach  underlying SFAS
No. 109 requires the  recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary  differences  between the carrying
amounts and tax basis of the Company's assets and liabilities. 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.

Securities  Sold   under  Agreement  to  Repurchase
     Securities sold under  agreements to repurchase are treated as debt and are
reflected as a liability in the Consoldiated  Statements of Financial Condition.
The book value of securities pledged to secure the repurchase  agreements remain
in the securities portfolio.

Reclassifications
     Certain items in the 2002 and 2001 consolidated  financial  statements have
been  reclassified  to conform with the  presentation  in the 2003  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 Statements of Operations.

Recently Issued Accounting Standards
     In 2003, the FASB issued the revised version of Interpretation  No. 46 (FIN
46R),   "Consolidation  of  Variable  Interest  Entities".  This  interpretation
provides  guidance on how to identify a variable  interest  entity and determine
when such an entity needs to be included in a Company's  consolidated  financial
statement.  Upon the  adoption  of FIN 46R in the fourth  quarter  of 2003,  the
Corporation deconsolidated FMS Statutory Trust 1 ("the Trust") that prior to FIN
46R was considered a consolidated subsidiary of the Corporation. The transaction
did not have a  material  effect  on the  Corporation's  consolidated  financial
statements. See footnote 16 to the consolidated financial statements for further
information on the Trust and the adoption of the provisions of FIN 46R.

     In April 2003,  the  Financial  Accounting  Standards  Board (FASB)  issued
Statement of Financial Accounting Standards SFAS No. 149 "Amendment of Statement
133 on Derivative  Instruments and Hedging Activities".  SFAS No. 149 amends and
clarifies  financial   accounting  and  reporting  for  derivative   instruments
including  derivative  instruments  embedded  in other  contracts  (collectively
referred  to as  derivatives)  and for  hedging  activities  under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 149 was
effective  for  contracts  entered  into or modified  after June 30,  2003.  The
adoption of this  standard  did not have a material  effect on the  Consolidated
Statements  of Financial  Condition or  Consolidated  Statements  of  Operations
because the Corporation generally does not engage in derivative activities.

     In May  2003,  the  FASB  issued  SFAS No.  150,  "Accounting  for  Certain
Instruments  with   Characteristics  of  Both  Liabilites  and  Equity",   which
establishes  standards  for  how  an  issuer  classifies  and  measures  certain
financial  instruments with characteristics of both liabilities and equity. SFAS
No 150 requires that an issuer  classify a financial  instrument  that is within
its scope, which may have previously been reported as equity, as a liability (or
an asset in some  circumstances).  This  statement  was  effective for financial
instruments  entered into or modified  after May 31,  2003,  and  otherwise  was
effective at the beginning of the first interim period  beginning after June 15,
2003.  In October 2003,  the FASB  deferred the  provision  related to mandatory
redeemable  non-controlling interests until further notice. The adoption of this
standard  did not have a  material  effect  on the  Consolidated  Statements  of
Financial Condition or Consoldiated Statements of Operations.

                                       18
<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, 2003 and 2002 are as follows:

<TABLE>
<CAPTION>
                                                   December 31, 2003
                         -------------------------------------------------------------------
                                                 Gross           Gross          Estimated
                               Amortized       Unrealized       Unrealized         Market
                                 Cost             Gains          Losses            Value
--------------------------------------------------------------------------------------------
<S>                       <C>                <C>           <C>               <C>
U.S. Gov't Agencies         $ 72,256,272       $  810,767    $   (72,852)      $ 72,994,187
Municipal bonds                2,399,540            5,023              0          2,404,563
CMOs                         175,727,450          611,064     (1,058,694)       175,279,820
--------------------------------------------------------------------------------------------
Total                       $250,383,262       $1,426,854    $(1,131,546)      $250,678,570
--------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                   December 31, 2002
                         -------------------------------------------------------------------
                                                 Gross           Gross          Estimated
                               Amortized       Unrealized       Unrealized         Market
                                 Cost             Gains          Losses            Value
--------------------------------------------------------------------------------------------
<S>                       <C>                <C>               <C>           <C>
U.S. Gov't Agencies         $ 25,914,918       $  632,444        $      0      $ 26,547,362
Municipal bonds               14,503,069            6,852               0        14,509,921
CMOs                         123,809,139          750,033         (13,945)      124,545,227
--------------------------------------------------------------------------------------------
Total                       $164,227,126       $1,389,329        $(13,945)     $165,602,510
--------------------------------------------------------------------------------------------
</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, 2003 are shown in the following table. The contractual  maturity is
used for U.S.  Government  Agencies and Municipal Bonds.  The estimated  average
life  based on  current  cash flows is used for CMOs.  Expected  maturities  may
differ as borrowers have the right to call certain obligations.

                                             December 31, 2003
                                 -----------------------------------------
                                     Amortized             Estimated
                                        Cost              Market Value
--------------------------------------------------------------------------
Due one year or less               $ 10,436,864           $ 10,455,280
Due one to five years               143,187,617            142,915,728
Due five to ten years                47,574,940             47,534,775
Due after ten years                  49,183,841             49,772,787
--------------------------------------------------------------------------
Total                              $250,383,262           $250,678,570
--------------------------------------------------------------------------


   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, 2003 and 2002 are as follows:

<TABLE>
<CAPTION>
                                                   December 31, 2003
                         -------------------------------------------------------------------
                                                 Gross           Gross          Estimated
                               Amortized       Unrealized       Unrealized         Market
                                 Cost             Gains          Losses            Value
--------------------------------------------------------------------------------------------
<S>                       <C>                <C>             <C>           <C>
U.S. Gov't Agencies         $ 13,100,525       $   88,000      $       0     $  13,188,525
CMOs                          48,250,773          302,789       (134,040)       48,419,522
MBSs                          86,559,090        1,208,607       (144,882)       87,622,815
-------------------------------------------------------------------------------------------
Total                       $147,910,388       $1,599,396      $(278,922)    $ 149,230,862
-------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                   December 31, 2002
                         -------------------------------------------------------------------
                                                 Gross           Gross          Estimated
                               Amortized       Unrealized       Unrealized         Market
                                 Cost             Gains          Losses            Value
--------------------------------------------------------------------------------------------
<S>                       <C>                <C>             <C>            <C>
U.S. Gov't Agencies         $ 24,993,110       $  364,890      $       0      $ 25,358,000
CMOs                          21,978,385          207,004        (77,868)       22,107,521
MBSs                          69,631,991        1,550,922        (35,473)       71,147,440
-------------------------------------------------------------------------------------------
Total                       $116,603,486       $2,122,816      $(113,341)     $118,612,961
-------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

     The amortized cost and estimated market value of investments  available for
sale at December  31, 2003 are shown in the  following  table.  The  contractual
maturity is used for U.S.  Government  Agencies and MBSs. The average life based
on  current  cash  flows is used for CMOs.  Expected  maturities  may  differ as
borrowers have the right to call or prepay certain obligations.

                                       December 31, 2003
                             -------------------------------------
                                 Amortized          Estimated
                                   Cost           Market Value
------------------------------------------------------------------
Due one year or less          $     76,582       $     76,560
Due one to five years           38,309,157         38,381,618
Due five to ten years           24,688,520         24,829,878
Due after ten years             84,836,129         85,942,806
------------------------------------------------------------------
Total                         $147,910,388       $149,230,862
------------------------------------------------------------------


     The Bank sold $7.2  million  of MBSs and CMOs  available  for sale in 2003,
which  resulted  in a  realized  gain of $286  thousand.  There were no sales of
investment  securities  during 2002.  During 2001,  CMOs available for sale were
sold which resulted in a realized loss of $17 thousand.

                                       19
<PAGE>

4.   LOANS, NET

     Loans, net at December 31, 2003 and 2002 consist of the following:

                                  2003               2002
---------------------------------------------------------------
Mortgage Loans                 $280,663,785       $272,777,144
Construction Loans                1,324,699            305,607
Commercial Construction           5,993,838          1,157,268
Consumer Loans                    3,186,549          3,521,889
Commercial Real Estate          104,352,118         76,354,155
Commercial Business              12,180,496         12,621,048
---------------------------------------------------------------
Subtotal                        407,701,485        366,737,111
Less:
    Deferred loan fees              687,877            745,236
    Allowance for
       loan losses                4,407,552          4,317,475
---------------------------------------------------------------
Total loans, net               $402,606,056       $361,674,400
---------------------------------------------------------------


     At December  31, 2003 and 2002 the recorded  investment  in loans for which
impairment had been recognized in accordance  with SFAS No. 114,  "Accounting by
Creditors for  Impairment of a Loan",  amended by SFAS No. 118,  "Accounting  by
Creditors  for  Impairment  of a Loan -  Income  Recognition  and  Disclosures",
totaled  $1.8  million and $2.8  million,  respectively.  Loans are measured for
impairment based on the loans underlying collateral, if collateral dependent, or
present  value of estimated  future cash flows.  At December 31, 2003,  impaired
loans of $984  thousand  related to loans that were  individually  measured  for
impairment  with a valuation  allowance of $414  thousand  and $804  thousand of
loans that were collectively  measured for impairment with a valuation allowance
of $22 thousand.  At December 31, 2002,  impaired loans of $998 thousand related
to loans  that  were  individually  measured  for  impairment  with a  valuation
allowance  of $426  thousand  and $1.8  million of loans that were  collectively
measured for  impairment  with a valuation  allowance of $60  thousand.  For the
years ended  December  31, 2003 and 2002,  the average  recorded  investment  in
impaired loans was  approximately  $1.8 million and $2.4 million,  respectively.
During the years ended December 31, 2003 and 2002 the Corporation recognized $71
thousand and $206 thousand, respectively, of interest on impaired loans.

     Loans classified as impaired or trouble debt  restructured  accrue interest
daily  under  their  original  or  modified  terms.  All 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,  2003 and  2002 was $1.8  million  and $2.8
million, respectively. Interest income on non-accrual loans that would have been
recorded in 2003 under the original terms of such loans was $121  thousand,  and
the interest income actually recognized in 2003 for such loans was $59 thousand.
Interest income on non-accrual loans that would have been recorded in 2002 under
the  original  terms of such loans was $221  thousand,  and the actual  interest
income recognized in 2002 for such loans was $338 thousand.


     The Bank  originates and purchases both  adjustable and fixed interest rate
loans. At December 31, 2003, the composition of these loans is as follows:

<TABLE>
<CAPTION>
                                               Maturing       Maturing
                                                during        from 2005          Maturing
(In Thousands)                                   2004        through 2008       after 2008        Total
-----------------------------------------------------------------------------------------------------------
<S>                                        <C>           <C>                <C>             <C>
Mortgage Loans
   (1-4 dwelling)                                $ 2,965            $18,321        $259,378       $280,664
Construction Loans                                 1,148                  0             176          1,324
Commercial Construction                            4,069                  0           1,925          5,994
Consumer Loans                                     1,224              1,055             908          3,187
Commercial Real Estate                             4,163             10,117          90,072        104,352
Commercial Business                                7,268              3,582           1,330         12,180
-----------------------------------------------------------------------------------------------------------
              Total                              $20,837            $33,075        $353,789       $407,701
-----------------------------------------------------------------------------------------------------------
Interest sensitivity on the above loans:
       Loans with predetermined rates            $ 7,005            $29,067        $250,647       $286,719
       Loans with adjustable or
           floating rates                         13,832              4,008         103,142        120,982
-----------------------------------------------------------------------------------------------------------
              Total                              $20,837            $33,075        $353,789       $407,701
-----------------------------------------------------------------------------------------------------------
</TABLE>

     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 $33.0 million at December 31, 2003.

     Changes in the allowance for loan losses are as follows:

                                          Years ended December 31,
                             ---------------------------------------------------
                                      2003              2002             2001
--------------------------------------------------------------------------------
Balance at beginning
    of year                       $4,317,475        $4,230,563       $3,980,347
Provision charged to
    operations                       270,000           149,000          221,000
Charge-offs                         (189,177)          (77,052)         (45,304)
Recoveries                             9,254            14,964           12,914
Increase due to merger                     0                 0           61,606
--------------------------------------------------------------------------------
Balance at end of year            $4,407,552        $4,317,475       $4,230,563
--------------------------------------------------------------------------------

                                       20
<PAGE>

5.   MORTGAGE-BACKED SECURITIES HELD TO MATURITY

     Mortgage-backed  securities  held to maturity at December 31, 2003 and 2002
are summarized as follows:

<TABLE>
<CAPTION>
              --------------------------------------------------------------------------------
                                             December 31, 2003
              --------------------------------------------------------------------------------
                                            Gross              Gross
                       Amortized          Unrealized         Unrealized           Estimated
                         Cost               Gains              Losses           Market Value
----------------------------------------------------------------------------------------------
<S>                <C>                  <C>                <C>                 <C>
GNMA                 $ 13,948,013         $  737,203         $    (676)          $ 14,684,540
FNMA                  194,437,708          3,758,600          (314,904)           197,881,404
FHLMC                  86,529,885          1,017,002          (470,799)            87,076,088
----------------------------------------------------------------------------------------------
Total                $294,915,606         $5,512,805         $(786,379)          $299,642,032
----------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
              --------------------------------------------------------------------------------
                                             December 31, 2002
              --------------------------------------------------------------------------------
                                            Gross              Gross
                       Amortized          Unrealized         Unrealized           Estimated
                         Cost               Gains              Losses           Market Value
----------------------------------------------------------------------------------------------
<S>                <C>                  <C>                 <C>                <C>
GNMA                 $ 33,862,839         $1,693,748          $   (274)          $ 35,556,313
FNMA                  233,608,680          6,414,133           (47,491)           239,975,322
FHLMC                  74,651,159          1,439,073              (139)            76,090,093
----------------------------------------------------------------------------------------------
Total                $342,122,678         $9,546,954          $(47,904)          $351,621,728
----------------------------------------------------------------------------------------------
</TABLE>

      The Bank has the intent and ability to hold these  securities to maturity.
At December 31, 2003,  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,  2003  and  2002  are
summarized by major classification, as follows:

                                                        December 31,
                                           -----------------------------------
                                                     2003           2002
------------------------------------------------------------------------------
Land, buildings and improvements                  $ 34,361,472   $ 31,025,488
Furniture and equipment                              7,028,117      6,473,211
Computers                                            5,808,166      5,416,997
------------------------------------------------------------------------------
Total                                               47,197,755     42,915,696

Less accumulated depreciation                      (15,768,686)   (13,822,726)
------------------------------------------------------------------------------
Office properties and equipment, net              $ 31,429,069   $ 29,092,970
------------------------------------------------------------------------------


Depreciation  expense totaled $1.7 million for the years ended December 31, 2003
and 2002 and $1.8 million for the year December 31, 2001.


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.  In January 2003,  the
remaining  land was sold which  resulted  in a net gain of $361  thousand.  Real
estate held for development totaled $0 and $89 thousand at December 31, 2003 and
2002,  respectively  and 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.

8.   REAL ESTATE OWNED, NET

     Real estate owned, which was acquired through foreclosure and deeds in-lieu
of foreclosure, totaled $48 thousand and $291 thousand, net at December 31, 2003
and 2002,  respectively.  Changes in the  allowance  for real estate owned is as
follows:

                                      Years ended December 31,
                        -----------------------------------------------------
                                   2003             2002             2001
-----------------------------------------------------------------------------
Balance at
    beginning of year           $ 379,596        $381,676         $ 716,919
Valuation allowance              (379,596)              0          (325,000)
Charge-offs                             0          (2,080)          (10,243)
Recoveries                              0               0                 0
-----------------------------------------------------------------------------
Balance at end
    of year                     $       0        $379,596         $ 381,676
-----------------------------------------------------------------------------

                                       21
<PAGE>

9.   DEPOSITS

     Deposits at December  31, 2003 and 2002  consisted of the  following  major
     classifications and weighted average interest rates:

                                                December 31, 2003
                             ---------------------------------------------------
                                   Weighted                          Percent
                                 Average Rate         Amount         of Total
--------------------------------------------------------------------------------
Non-interest checking               0.00%          $157,637,346       17.65%
Checking accounts                   0.55            186,572,464       20.89
Savings accounts                    0.69            188,235,776       21.08
Money market accounts               0.78            132,728,015       14.87
Certificates                        2.40            227,832,897       25.51
--------------------------------------------------------------------------------
Total                               1.01%          $893,006,498      100.00%
--------------------------------------------------------------------------------


                             ---------------------------------------------------
                                                December 31, 2002
                             ---------------------------------------------------
                                   Weighted                         Percent
                                 Average Rate         Amount        of Total
--------------------------------------------------------------------------------

Non-interest checking               0.00%          $134,969,939       16.85%
Checking accounts                   1.18            155,730,226       19.46
Savings accounts                    1.34            161,458,450       20.18
Money market accounts               1.86            124,795,059       15.59
Certificates                        3.58            223,386,548       27.92
--------------------------------------------------------------------------------
Total                               1.86%          $800,340,222      100.00%
--------------------------------------------------------------------------------


      The aggregate amount of certificates of deposit in excess of $100 thousand
totaled $30.8 million.  Deposits from related  parties  totaled $1.8 million and
$1.6  million  at  December  31,  2003 and  2002,  respectively.  A  summary  of
certificates by maturity at December 31, 2003 is as follows:

Years ended December 31,                                Amount
-----------------------------------------------------------------
2004                                                $157,374,316
2005                                                  32,937,299
2006                                                  20,081,064
2007                                                   7,514,103
2008                                                   9,920,753
Thereafter                                                 5,362
-----------------------------------------------------------------
Total                                               $227,832,897
-----------------------------------------------------------------


A summary of interest expense on deposits is as follows:

                                             Years ended December 31,
                           -----------------------------------------------------
                                2003              2002               2001
--------------------------------------------------------------------------------
Checking accounts            $  914,739       $ 1,620,862         $ 2,711,539
Savings accounts              1,248,755         1,920,339           2,644,185
Money market accounts         1,020,353         2,033,447           1,926,269
Certificates                  5,401,355         8,369,748          12,790,863
--------------------------------------------------------------------------------
Total interest expense       $8,585,202       $13,944,396         $20,072,856
--------------------------------------------------------------------------------


10.  ADVANCES FROM FEDERAL HOME LOAN BANK

     At December 31, 2003, the Bank had advances from the Federal Home Loan Bank
of New York  (FHLB)  in the  amount of $11.2  million  with a  weighted  average
interest rate of 1.56%.  Advances are  collateralized  by certain first mortgage
loans.
                              Years ended December 31,
--------------------------------------------------------------------------------
                     2003                                      2002
--------------------------------------------------------------------------------
                    Weighted                              Weighted
                    Average    Maturity                    Average   Maturity
       Amount         Rate       Date        Amount          Rate      Date
--------------------------------------------------------------------------------
    $ 1,191,047       5.00%   10/9/2007   $ 1,232,103        5.00%   10/9/2007
     10,000,000       1.15%   4/15/2005    10,000,000        1.38%   4/15/2005
--------------------------------------------------------------------------------
    $11,191,047       1.56%               $11,232,103        1.78%
--------------------------------------------------------------------------------



11.  SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

     At December 31, 2003, the Bank had securities  sold under the agreements to
repurchase  (repurchase  agreements) in the aggregate  amount of $225.0 million.
The repurchase  agreements are collateralized by U.S. Agency Notes, MBS and CMOs
with a market value of $241.2  million.  Accrued  interest  payable totaled $1.1
million at December 31, 2003.

                         Year ended December 31, 2003
--------------------------------------------------------------------------------
                                       Weighted       Maturity      Call
Counterparty           Amount        Average Rate       Date       Feature
----------------------------------------------------------------------------
FHLB              $   20,000,000         5.72%         12/19/07    03/19/04
FHLB                  20,000,000         5.13%         01/14/08    01/01/04
FHLB                  20,000,000         5.95%         08/30/10    02/29/04
FHLB                  20,000,000         5.54%         10/18/10    01/17/04
FHLB                  20,000,000         5.22%         12/20/10    03/19/04
FHLB                  20,000,000         4.85%         12/20/10    03/19/04
FHLB                  10,000,000         4.18%         02/28/11    02/02/04
FHLB                  15,000,000         3.84%         04/06/11    01/19/04
FHLB                  10,000,000         3.49%         08/10/11    02/29/04
FHLB                  10,000,000         1.98%         11/14/11    02/14/04
FHLB                  10,000,000         2.32%         01/31/12    01/01/04
FHLB                  10,000,000         2.28%         02/07/12    02/01/04
FHLB                  10,000,000         2.68%         04/24/07    01/24/04
FHLB                  10,000,000         1.64%         08/22/12    02/22/04
FHLB                  20,000,000         1.30%         10/04/12    01/04/04
----------------------------------------------------------------------------
Total             $  225,000,000         4.08%
----------------------------------------------------------------------------


                         Year ended December 31, 2002
----------------------------------------------------------------------------
                                       Weighted       Maturity        Call
Counterparty           Amount        Average Rate       Date        Feature
----------------------------------------------------------------------------
FHLB              $      20,000,000      5.72%         12/19/07    12/19/03
FHLB                     20,000,000      5.13%         01/14/08    11/14/03
FHLB                     20,000,000      5.95%         08/30/10    12/30/03
FHLB                     20,000,000      5.54%         10/18/10     2/18/03
FHLB                     20,000,000      5.22%         12/20/10    12/19/03
FHLB                     20,000,000      4.85%         12/20/10    12/20/03
FHLB                     10,000,000      4.18%         02/28/11    12/28/03
FHLB                     15,000,000      3.84%         04/06/11     11/6/03
FHLB                     10,000,000      3.49%         08/10/11    12/10/03
FHLB                     10,000,000      1.98%         11/14/11    11/14/03
FHLB                     10,000,000      2.32%         01/31/12     1/31/03
FHLB                     10,000,000      2.28%         02/07/12      2/7/03
FHLB                     10,000,000      2.68%         04/24/07     4/24/03
FHLB                     10,000,000      1.64%         08/22/12     8/22/03
FHLB                     20,000,000      1.30%         10/04/12     10/4/03
----------------------------------------------------------------------------
Total                  $225,000,000      4.08%
----------------------------------------------------------------------------

                                       22
<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>
                                                          2003                    2002                      2001
                                                  --------------------   ----------------------    ----------------------
                                                   Amount      Percent      Amount      Percent      Amount       Percent
                                                  ----------   -------   -----------    -------    -----------    -------

<S>                                               <C>           <C>      <C>             <C>       <C>            <C>
Tax at Federal tax rate:                          $3,491,164    34.00%   $ 4,340,770     34.00%    $ 2,868,255    34.00%
Increase (decrease) from:
  State income taxes, net of federal income
     tax benefit                                     678,950     6.61        859,765      6.73         174,772     2.07
  Change in State Tax Rate on Deferred tax
     Assets & Liabilities                                  0        0       (250,965)     1.97               0        0
  Tax exempt interest income                         (53,353)   (0.52)       (82,791)     0.65         (70,599)   (0.84)
  Other                                              (50,045)    0.49        (60,553)     0.47           4,324     0.05
                                                  ----------    -----    -----------     -----     -----------    -----
Total                                             $4,066,716    39.60%   $ 4,806,226     37.64%    $ 2,976,752    35.28%
                                                  ==========    =====    ===========     =====     ===========    =====
</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 are
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:
<TABLE>
<CAPTION>
                                                                            December 31
                                                               ------------------------------------
                                                                    2003                     2002
---------------------------------------------------------------------------------------------------
<S>                                                            <C>                      <C>
Deferred income tax assets:
     Allowance for loan losses                                  $1,760,377               $1,815,129
     Real estate losses                                                  0                  151,611
     Compensation and pension asset (liability)                     73,490                  116,745
     Amortization Deposit Premiums                                 321,180                  309,642
     Post retirement benefits                                      199,700                  199,700
     Capitalized interest                                                0                  713,093
     Accrued  expenses                                             252,662                  226,840
     Other                                                          22,751                  (42,852)
---------------------------------------------------------------------------------------------------
Deferred tax asset                                               2,630,160                3,489,908
---------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
     Prepaid Deposit Insurance premium                              12,847                   12,439
     Depreciation                                                  317,958                  249,451
     Deferred loan fees - net                                      255,446                  255,446
---------------------------------------------------------------------------------------------------
      Gross deferred tax liabilities                               586,251                  517,336
---------------------------------------------------------------------------------------------------
Deferred income tax asset, net                                  $2,043,909               $2,972,572
---------------------------------------------------------------------------------------------------
</TABLE>


     There was no change in the valuation  allowance for the year ended December
31, 2003, 2002 and 2001.

     The following represents the components of income tax expense for the years
ended December 31, 2003, 2002 and 2001, respectively.
<TABLE>
<CAPTION>
                                              2003           2002           2001
------------------------------------------------------------------------------------
<S>                                        <C>           <C>            <C>
Current Federal tax provision               $2,247,455    $3,369,485     $3,424,066
Current State tax provision                    890,598     1,389,574        350,387
------------------------------------------------------------------------------------
Total current provision                      3,138,053     4,759,059      3,774,453
------------------------------------------------------------------------------------
Deferred federal tax provision (benefit)       790,549       384,346       (733,022)
Deferred state tax provision (benefit)         138,114      (337,179)       (64,679)
------------------------------------------------------------------------------------
Total deferred tax provision (benefit)         928,663        47,167       (797,701)
------------------------------------------------------------------------------------
Total                                       $4,066,716    $4,806,226     $2,976,752
------------------------------------------------------------------------------------
</TABLE>

13.  LEASES

     The Bank leases eight branch  locations  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, 2003 are as
follows:

Fiscal Year                                          Amount
-----------------------------------------------------------------
2004                                               $  205,826
2005                                                  217,034
2006                                                  217,034
2007                                                  223,484
2008 and beyond                                     2,413,944
-----------------------------------------------------------------
Total                                              $3,277,322
-----------------------------------------------------------------

     The  leases  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 $298 thousand, $275 thousand and $201 thousand for
fiscal years 2003, 2002 and 2001, respectively.

                                       23
<PAGE>

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,
2003 and 2002.The  following  table  presents the capital  ratios of the Bank at
December 31, 2003 and 2002.

<TABLE>
<CAPTION>
                                                                                                       Minimum
                                                                                                     to be Well
                                                                                                      Captilaized
                                                                                                     Under Prompt
                                                                        Mimimum                       Corrective
                                                                        Capital                         Action
                                           Actual                     Requirement                     Provisions
----------------------------------------------------------------------------------------------------------------------
                                    Amount          Ratio         Amount         Ratio             Amount      Ratio
----------------------------------------------------------------------------------------------------------------------
December 31, 2003 (thousands)
<S>                           <C>                 <C>       <C>                 <C>            <C>            <C>
Tier 1 (Core) Capital:              $74,421          6.10%       $48,802           4.0%              $61,003     5.0%
Risked Based Capital                $78,401         16.43%       $38,168           8.0%              $47,710    10.0%
Tier 1 Risked-Based Capital         $74,421         15.60%       $19,084           4.0%              $28,626     6.0%
Tangible Equity                     $74,421          6.10%       $18,301           1.5%              $24,401     2.0%
----------------------------------------------------------------------------------------------------------------------
December 31, 2002 (thousands)
----------------------------------------------------------------------------------------------------------------------
Tier 1 (Core) Capital               $71,334          6.34%       $44,973           4.0%              $56,217     5.0%
Risked Based Capital                $75,222         18.04%       $33,365           8.0%              $41,706    10.0%
Tier 1 Risked-Based Capital         $71,334         17.10%       $16,682           4.0%              $25,023     6.0%
Tangible Equity :                   $71,334          6.34%       $16,865           1.5%              $22,487     2.0%
----------------------------------------------------------------------------------------------------------------------
</TABLE>

15.  Pension Plan

     The Bank has a defined  benefit  pension  plan for  active  employees.  Net
pension  expense was $800  thousand,  $621  thousand and $499 thousand for years
ended  December 31, 2003,  2002 and 2001,  respectively.  The  components of net
pension cost are as follows:

                                                Years ended
                                                December 31,
                       --------------------------------------------------------
                                 2003                2002               2001
-------------------------------------------------------------------------------
Service cost                 $(716,613)          $(641,336)         $(594,777)
Interest cost                 (486,386)           (448,782)          (395,140)
Return on assets               461,454             504,790            508,187
Net amortization
    and deferral               (58,912)            (35,585)           (17,459)
-------------------------------------------------------------------------------
Net periodic
    pension cost             $(800,457)          $(620,913)         $(499,189)
-------------------------------------------------------------------------------

     The following table presents a  reconciliation  of the funded status of the
defined benefit pension plan at December 31, 2003 and 2002:

                                                    December 31,
                                   -------------------------------------------
                                              2003                 2002
------------------------------------------------------------------------------
Projected benefit obligation               $9,221,994           $ 8,491,179
Fair value of plan assets                   8,714,389             6,512,856
------------------------------------------------------------------------------
(Excess) of plan assets over
    projected benefit obligation              507,605             1,978,323
Unrecognized net (loss) gain                  (82,778)           (1,529,695)
Unrecognized prior service cost               (51,765)              (56,117)
Unrecognized net transition
    obligation                                 (8,039)              (38,945)
------------------------------------------------------------------------------
Accrued pension cost
    included in the consolidated
    balance sheet                          $  365,023           $   353,566
------------------------------------------------------------------------------


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


                                                   December 31,
                                         ----------------------------------
Change in Projected Benefit Obligation        2003             2002
---------------------------------------------------------------------------
Projected benefit obligation
  at beginning of year                        $8,491,179      $ 7,488,903
Service cost                                     716,613          641,336
Interest cost                                    486,386          448,782
Actuarial (gain) loss                           (284,665)          47,334
Benefits paid                                   (187,519)        (135,176)
---------------------------------------------------------------------------
Projected benefit obligation
  at end of year                              $9,221,994      $ 8,491,179
---------------------------------------------------------------------------

Change in Plan Assets
---------------------------------------------------------------------------
Fair value of plan assets
  at beginning of year                        $6,512,856      $ 6,714,753
Actual return of plan assets                   1,600,052       (1,049,721)
Employer contribution                            789,000          983,000
Benefits paid                                   (187,519)        (135,176)
---------------------------------------------------------------------------
Fair value of plan assets
  at end of year                              $8,714,389      $ 6,512,856
---------------------------------------------------------------------------

                                       24
<PAGE>

Actuarial assumptions used in determining pension cost are as follows:

                                    Years ended December 31,
                          -----------------------------------------
                                2003         2002          2001
-------------------------------------------------------------------
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 accordance with the provisions to the Statement of Financial  Accounting
Standards  No. 132  (revised)  "Employer's  Disclosure  about  Pension and Other
Post-retirement Benefits"  disclosures have been increased to include investment
strategy, asset allocation mix, contributions, measurement dates and accumulated
benefit obligation levels for pension plans.

     The Pension Investment Committee of the Corporation in conjunction with the
Board of Directors oversees the investment of the plan assets. During the fourth
quarter of 2003 the committee conducted a review of the portfolio structure, and
the strategic asset allocation including the relationship of plan assets to plan
liabilities. The goals of the asset investment strategy are to:

     * Maximize the return on assets, over the long-term, by investing primarily
in equity  securities.  The inclusion of additional asset classes with differing
rates of return,  volatility  and  correlation  are  utilized  to reduce risk by
providing diversification relative to equity securities.
     * Diversify  investments  within asset classes to maximize  preservation of
principal and minimize  over-exposure to any one investment,  thereby minimizing
the impact of losses in single investments.
     *Provide a total  return  that,  over the  long-term,  provides  sufficient
assets  to  fund  its  liabilities  subject  to an  approriate  level  of  risk,
contributions and pension expense.

     The plan asset allocation percentage and market values at December 31, 2003
are as follows:

                                                    % of
                                 Market Value      Assets
-----------------------------------------------------------
Cash                              $  956,626         11.0%
Equity Securities                  6,034,213         69.2
U.S. Government & Agency           1,298,041         14.9
Corporate Bonds                      425,509          4.9
-----------------------------------------------------------
Total Plan Assets                 $8,714,389        100.0%
-----------------------------------------------------------


     Funding policy for the qualified plan is to make annual  contributions that
satisfy the minimum funding  requirements of Employee Retirement Income Security
Act 1974  (ERISA)  but that do not exceed the maximum  deductible  limits of the
Internal Revenue Code. The contributions to the pension plan are determined each
year as a result of an actuarial  valuation of the plan. In 2003 and 2002,  $789
thousand and $983 thousand,  respectively were contributed by the Corporation to
meet the pension funding requirements.  The contribution to the pension plan for
2004 is expected to be $720 thousand. The pension plan will remain in compliance
with the ERISA as amended, and any applicable regulations and laws.

     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,
                                       ---------------------------------------
                                            2003         2002           2001
------------------------------------------------------------------------------

Interest cost                            $ 47,209     $ 54,000       $ 47,737
Amortization of prior service cost        (11,339)     (14,499)       (14,499)
Amortization of loss (gain)                13,110       29,561         12,077
------------------------------------------------------------------------------
Net periodic post-retirement
    benefit cost                         $ 48,980     $ 69,062       $ 45,315
------------------------------------------------------------------------------


     The  assumed  health care cost trend rate for 2003 was 10.0% and was graded
down in 0.5%  increments  per year to an  ultimate  rate of 5.0% per  year.  The
impact of a 1.0% increase in the assumed  health care cost trend for each future
year would be as follows:

                                                     December 31, 2003
----------------------------------------------------------------------
Accumulated post-retirement obligation
    at year end                                                $42,172
Service and interest Cost                                       $2,741
----------------------------------------------------------------------

                                       25
<PAGE>

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

                                               December 31,
                                       -----------------------------
                                           2003            2002
--------------------------------------------------------------------
Accumulated post-retirement
    benefit obligation                $  $(687,004)      $(798,214)
Unrecognized prior service cost            (29,741)        (41,080)
Unrecognized net gain                      157,886         316,305
--------------------------------------------------------------------
Accrued post-retirement benefit
    cost                                 $(558,859)      $(522,989)
--------------------------------------------------------------------


     The assumed  discount  rate used in the  calculation  for the net  periodic
post-retirement  benefit  cost  and  the  accumulated   post-retirement  benefit
obligation as of December 31, 2003 and 2002 was 6.50% and 7.25%, respectively.


16.  LONG-TERM DEBT
     The  Corporation  established  FMS Statutory Trust 1 ("the Trust") in March
2002.  The trust issued $25.0  million of floating  rate capital  securities  to
institutional   investors  and  $774  thousand  of  common   securities  to  the
Corporation.  The  proceeds  of  these  were  used  by  the  Trust  to  purchase
subordinated  debentures  issued by the  Corporation.  The Corporation  used the
debenture  proceeds  to pay down  $10.0  million  10%  subordinated  debentures,
expansion of the Bank's operations and general corporate  purposes.  The Trust's
capital  securities are fully guaranteed by the  Corporation's  debentures which
interest  rates  reset every three  months to LIBOR plus 360 basis  points.  The
interest rate will not exceed 11.0% through the first five years from  issuance.
As of  December  31,  2003 and 2002,  the  interest  rate was  4.77% and  5.00%,
respectively. The debentures are redeemable at the Corporation's option any time
after March 2007. The redemption of the debentures would result in the mandatory
redemption of the Trust's capital and common securities at par.

     As a  result  of the  deconsolidation  of the  Trust  under  FIN  46R as of
December 31, 2003, the Corporation  recognized in its consolidated  statement of
financial  condition its investment in FMS Statutory Trust 1, which is presented
in other assets and the subordinated  debenture liability owed to the Trust. The
deconsolidation  of the Trust did not have any other impact in the  consolidated
financial statements as of December 31, 2003 and for the year then ended.

     On August 1, 2002, the Corporation  redeemed its $10.0 million subordinated
debentures.  The early redemption was at a price of 101%. The cost of redemption
and the remaining  unamortized  bond issuance  costs were recorded as a one-time
charge to net income of $134 thousand, net of $81 thousand in tax benefits.

                                       26
<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.

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

FMS Statutory  Trust 1 debentures:  Fair value is estimated  using quoted market
prices for similar securities.

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,  2003 and  December  31,  2002,  the  carrying  amount and the
estimated  market  value  of  the  Corporation's  financial  instruments  are as
follows:

<TABLE>
<CAPTION>
                                                                    December 31, 2003                    December 31, 2002
                                                              -----------------------------        ----------------------------
                                                                 Carrying      Estimated            Carrying     Estimated
                                                                  Amount      Market Value           Amount     Market Value
                                                              -------------  -------------       ------------- -------------
<S>                                                           <C>            <C>                  <C>            <C>
Financial assets:
    Cash and cash equivalents                                  $ 72,334,637  $ 72,334,637        $ 88,410,346  $ 88,410,346
    Investment securities held to maturity and investment
        securities available for sale                          $399,614,124  $399,909,432        $282,840,087  $284,215,471
    Mortgage-backed securities                                 $294,915,606  $299,642,032        $342,122,678  $351,621,728
    FHLB Stock                                                 $ 11,809,620  $ 11,809,620        $ 12,061,720  $ 12,061,720
    Loans, net of unearned income                              $407,013,608  $409,909,325        $365,991,875  $377,166,278
        Less: Allowance for possible loan losses               $ (4,407,552) $ (4,407,552)       $ (4,317,475) $ (4,317,475)
    Loans, net                                                 $402,606,056  $405,501,773        $361,674,400  $372,848,803


Financial liabilities:
    Deposits
        Checking, passbook, and money market accounts          $665,173,602  $665,173,602        $576,953,764  $576,953,764
        Certificates                                           $227,832,896  $227,935,000        $223,386,458  $225,792,088
    Securities sold under agreements to repurchase             $225,000,000  $241,239,750        $225,000,000  $245,302,000
    Advances from the Federal Home Loan Bank                   $ 11,191,047  $ 11,112,215        $ 11,232,103  $ 11,086,972
    FMS Statutory Trust 1 debentures                           $ 25,774,000  $ 26,410,618        $ 25,000,000  $ 25,195,375

Off-balance sheet financial instruments:
    Commitments to extend credit                               $ 48,270,583  $ 48,270,583        $ 48,732,173  $ 48,731,173
    Standby letters of credit                                  $  3,776,381  $  3,776,381        $  3,282,076  $  3,282,076

</TABLE>
                                       27
<PAGE>

18.  COMMITMENTS AND CONTINGENCIES

     The Bank has outstanding  loan  commitments of $48.2 million as of December
31, 2003. Of these  commitments  outstanding,  the  breakdown  between fixed and
variable rate loans is as follows:

                                             December 31, 2003
                              ------------------------------------------------
                                 Fixed          Variable
                                 Rate             Rate               Total
------------------------------------------------------------------------------
Commitments to
       fund loans             $6,818,435       $ 9,065,700        $15,884,135
Unused lines:
       Construction                    0         8,107,691          8,107,691
       Equity line of                  0
           credit loans                         24,278,757         24,278,757
    --------------------------------------------------------------------------
Total                         $6,818,435       $41,452,148        $48,270,583
------------------------------------------------------------------------------

     In addition to outstanding  loan  commitments,  the Bank as of December 31,
2003, issued $3.8 million in standby letters of credit to guarantee  performance
of a bank customer to a third party.

     Commitments and standby letters of credit are issued in accordance with the
same loan policies and underwriting  standards,  including collateral 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 were no  significant  pending legal  proceedings at December 31, 2003
which are  expected  to 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,  2003 and  2002,  loans  made to  directors  and  executive  officers  whose
indebtedness  exceeded $60 thousand  amounted to $5.6 million and $4.3  million,
respectively.  During 2003, new loans to these individuals  totaled $4.6 million
and repayments totaled $2.8 million.


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.

     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.  All stock  options
are dilutive and included in the  calculation  of earnings per share.  All stock
options have been  adjusted  for all stock  splits.  At December  31, 2003,  the
option exercise  prices were $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, 2003.


        Exercise       Outstanding       Average         Exercisable
         Price           Options         Life (1)          Options
----------------------------------------------------------------------
        $ 5.33           31,250            1.9            31,250
        $10.00           44,000            4.8            44,000
----------------------------------------------------------------------
        $ 8.06           75,250            3.6            75,250
================   ================   ===========    =================

(1) Average contractual life in years


     A  summary  of the  status of the  Corporation's  Stock  Option  Plan as of
December  31, 2003,  2002 and 2001 and changes  during the years ending on those
dates is presented below.

<TABLE>
<CAPTION>
                                                            Years Ended December 31,
                               -----------------------------------------------------------------------------
                                          2003                    2002                      2001
------------------------------------------------------------------------------------------------------------
<S>                             <C>           <C>         <C>          <C>         <C>         <C>
Outstanding at the
  Beginning of the year           115,000       $ 8.54      121,925      $ 8.56      175,418     $ 6.34
Options exercised                 (25,250)        9.71         (925)       1.29      (50,993)      1.29
Options surrendered               (14,500)       10.00       (6,000)      10.00       (2,500)      1.29
---------------------------------------------------------------------------------------------------------------
Outstanding at the
  End of the year                  75,250       $ 8.06      115,000      $ 8.54      121,925     $ 8.56
------------------------------------------------------------------------------------------------------------
</TABLE>

     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. There
were no options granted during 2003, 2002 and 2001.


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.

                                       28
<PAGE>

     Significant  estimates are made by management in determining  the allowance
for 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 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 loan losses and the  carrying  values of the real  estate  assets
could differ materially in the near term.

                                       29
<PAGE>

23.  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                                        2003              2002
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>               <C>
Assets:
    Cash                                                                                          $ 2,357,568       $ 1,447,088
    Investment in subsidiary                                                                       80,051,200        73,795,337
    Intercompany receivable, net                                                                    5,437,842         7,108,475
    FMS Statutory Trust 1 issue costs, net                                                            640,154           717,999
    Other                                                                                             328,631           554,733
                                                                                                  ------------------------------
Total Assets                                                                                      $88,815,395       $83,623,632
                                                                                                  ==============================
Liabilities:
    FMS Statutory Trust 1 debentures                                                              $25,774,000       $25,774,000
    Dividends payable                                                                                 194,576           193,914
    Accrued interest payable                                                                           17,076            17,899
                                                                                                  ------------------------------
Total Liabilities                                                                                 $25,985,652       $25,985,813
                                                                                                  ------------------------------

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 7,975,059 and 7,949,809 and shares outstanding 6,485,877 and 6,463,811 as
       of December 31, 2003 and 2002, respectively                                                    797,506           794,981
    Paid-in capital in excess of par                                                                8,507,333         8,279,525
    Accumulated comprehensive income - net of deferred income taxes                                   802,239         1,216,053
    Retained earning                                                                               63,657,664        58,233,840
    Less:Treasury Stock (1,489,182 and 1,485,998 shares, at cost at December 31, 2003 and
       2002, respectively)                                                                        (10,934,999)      (10,886,580)
                                                                                                  ------------------------------
Total Stockholders' Equity                                                                         62,829,743        57,637,819
                                                                                                  ------------------------------
Total Liabilities and Stockholders' Equity                                                        $88,815,395       $83,623,632
                                                                                                  ==============================
</TABLE>

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                            Years Ended December 31,
                                                            ---------------------------------------------------------
FMS Financial Corporation Statements of Operations                  2003               2002               2001
---------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>                <C>                <C>
Intercompany interest income                                       $   329,366        $   848,662        $   560,750
Interest expense                                                    (1,295,928)        (1,742,660)        (1,057,348)
Dividends from subsidiary                                            2,400,000          2,400,000          2,400,000
Other expense                                                                0           (215,078)                 0
Equity in undistributed income of subsidiary                         4,439,345          6,284,466          3,387,046
---------------------------------------------------------------------------------------------------------------------
Income before taxes                                                  5,872,783          7,575,390          5,290,448
Income tax benefit                                                     328,631            385,354            168,843
---------------------------------------------------------------------------------------------------------------------
Net Income                                                          $6,201,414        $ 7,960,744        $ 5,459,291
---------------------------------------------------------------------------------------------------------------------
</TABLE>

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

                                       30
<PAGE>

<TABLE>
<CAPTION>
                                                                  For Years Ended December 31,
                                                          --------------------------------------------------
FMS Financial Corporation Statements of Cash Flows                2003                      2002                2001
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>                        <C>
Operating Activities
Net income                                                        $ 6,201,414               $  7,960,744       $ 5,459,291
Adjustments to reconcile net income to net cash provided
   by operating activities:
Equity in undistributed earnings of the subsidiary                 (4,439,345)                (6,284,466)       (3,387,046)
Amortization of debt issue costs                                       77,845                     94,462            57,348
Decrease in interest payable                                             (823)                  (398,768)                0
Decrease (Increase) in intercompany receivable, net                 1,670,633                 (8,173,654)          (27,909)
Other                                                                 226,102                   (170,816)                0
                                                          --------------------   ------------------------  ----------------
    Net cash provided (used) by operating activities                3,735,826                 (6,972,498)        2,101,684

Investing Activities
Proceeds from maturities of investment securities                           0                  1,000,000                 0
                                                          -----------------------------------------------------------------
    Net cash provided by investing activities                               0                  1,000,000                 0

Financing Activities
Purchase of treasury stock                                            (48,419)                (2,813,136)         (432,840)
Repayment of subordinated debentures                                        0                (10,100,000)                0
Proceeds from issuance of trust capital securities                          0                 24,221,532                 0
Investment in subsidiary                                           (2,230,331)                (5,001,195)          (65,868)
Cash dividends paid on common stock                                  (776,929)                  (790,339)         (804,875)
Proceeds from issuance of stock                                       230,333                      1,195            65,868
                                                          -----------------------------------------------------------------
    Net cash (used) provided by financing activities               (2,825,346)                 5,518,057        (1,237,715)
                                                          -----------------------------------------------------------------
INCREASE (DECREASE) IN CASH                                       $   910,480               $   (454,441)      $   863,969
CASH, BEGINNING OF YEAR                                             1,447,088                  1,901,529         1,037,560
                                                          -----------------------------------------------------------------
CASH, END OF YEAR                                                 $ 2,357,568 $             $  1,447,088       $ 1,901,529
                                                          -----------------------------------------------------------------
</TABLE>
These  statements  should be read in conjunction with the other notes related to
the consolidated financial statements.

                                       31
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS



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 at December 31, 2003 and
2002,  and the results of their  operations and their cash flows for each of the
three years in the period ended December 31, 2003, 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

PricewaterhouseCoopers LLP
Philadelphia, PA
February 27, 2004

                                       32
<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, 2003,  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,  2003.  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, 2003.

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 Office of Thrift  Supervision 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, 2003.

<TABLE>
<CAPTION>
<S>                                         <C>
Craig W. Yates                                Channing L. Smith
President and Chief Executive Officer         Vice President and Chief Financial Officer

FMS Financial Corporation
Burlington, New Jersey
February 27, 2004
</TABLE>
                                       33

<PAGE>

                              CORORATE INFORMATION

ANNUAL MEETING

     The 2004 Annual Shareholders'  Meeting of FMS Financial Corporation will be
held at 10:30 a.m., on the 29th day of April, 2004 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
11, 2004 was  approximately  781, 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, 2003 and 2002:

                              2003
                   ------------------------------
QUARTER ENDED          HIGH             LOW
-------------------------------------------------
March 31,           $  14.500        $  12.300
June 30,            $  20.400        $  13.990
September 30,       $  18.500        $  13.150
December 31,        $  20.500        $  16.750
-------------------------------------------------

                              2002
                   ------------------------------
QUARTER ENDED          HIGH             LOW
-------------------------------------------------
March 31,           $  11.660        $   7.870
June 30,            $  12.700        $  10.510
September 30,       $  12.800        $   9.150
December 31,        $  15.690        $  10.850
-------------------------------------------------

     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 trust capital  securities  before payment of cash dividends to
its stockholders.

     As of December 31, 2003 the Bank was a Tier 1 capital compliant institution
and had available  $19.6 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.

                                       34
<PAGE>

                  BOARD OF DIRECTORS

                  ROY D. YATES
                  Chairman of the Board

                  WAYNE H. PAGE
                  Vice Chairman

                  GEORGE J. BARBER

                  JOSEPH W. CLARKE, JR

                  VINCENT R. FARIAS

                  DOMINIC W. FLAMINI

                  EDWARD J. STAATS, JR

                  MARY WELLS

                  CRAIG W. YATES


                  DIRECTORS EMERITUS

                  KAREN S. OLEKSA

                  HILYARD S. SIMPKINS


                  BANK OFFICERS

                  CRAIG W. YATES*
                  President

                  JAMES E. IGO*
                  Sr.  Vice  President  and Chief  Lending  Officer

                  CHANNING L. SMITH*
                  Vice President and Chief Financial Officer

                  THOMAS M. TOPLEY*
                  Sr. Vice President of Operations and
                  Corporate Secretary

                  MERLE A. BROWN
                  Vice President, Branch Administration and Security Officer

                  DOUGLAS B. HALEY
                  Vice President, Consumer Lending

                  AMY J. HANNIGAN
                  Vice President and Controller

                  CATHERINE A. MARSHALL
                  Vice President, Loan Servicing

                  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

                                       35
<PAGE>

         MARKET MAKERS
         The  following  companies  were  making a market in  the  Corporation's
         common stock at December 31, 2003:

         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
                                            (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, 2003, 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

                                       36
<PAGE>

     FARMERS & MECHANICS BANK
     EXECUTIVE AND ADMINISTRATIVE OFFICES
     3 Sunset Road and 811 Sunset Road
     Burlington NJ  08016
     (609) 386-2400

     MAIN BRANCH
     3 Sunset Road & Route 541
     Burlington, NJ  08016
     (609) 387-2728

     AUDUBON
     157 S. White Horse Pike
     Audubon, NJ 08106
     (856) 672-9070

     BEVERLY
     414 Cooper Street
     Beverly, NJ 08010
     (609) 239-4066

     BORDENTOWN
     335 Farnsworth Avenue
     Bordentown, NJ  08505
     (609) 291-8200

     BROWNS MILLS
     93 Pemberton-Browns Mills Road
     Browns Mills, NJ 08015
     (609) 893-5540

     BURLINGTON CITY
     352 High Street
     Burlington, NJ 08016
     (609) 386-4643

     BURLINGTON TOWNSHIP
     809 Sunset Road
     Burlington, NJ 08016
     (609) 387-1150

     BURLINGTON-NECK ROAD
     1029 Neck Road
     Burlington, NJ 08016
     (609) 239-4500

     CHESTERFIELD
     305 Bordentown-Chesterfield Road
     Chesterfield, NJ 08620
     (609) 324-1256

     CINNAMINSON
     1703 Highland Avenue
     Cinnaminson, NJ 08077
     (856) 303-1870

     DELANCO
     801 Burlington Avenue
     Delanco, NJ  08075
     (856) 824-0067

     DELRAN
     3002 Route 130 North
     Delran, NJ 08075
     (856) 764-3740

     EASTAMPTON
     1191 Woodlane Road
     Eastampton, NJ 08060
     (609) 261-6400

     EDGEWATER PARK
     1149 Cooper Street
     Edgewater Park, NJ 08010
     (609) 387-0046

     FLORENCE
     220 West Front Street
     Florence, NJ  08518
     (609) 499-4960

     LARCHMONT
     3220 Route 38
     Mount Laurel, NJ 08054
     (856) 235-6666

     LUMBERTON
     1636-61 Route 38 & Eayrestown Road
     Lumberton, NJ 08048
     (609) 267-6811

     MARLTON
     42 Main Street
     Marlton, NJ 08053
     (856) 596-6555

     MEDFORD
     200 Tuckerton Road
     Medford, NJ 08055
     (856) 596-4300

     MEDFORD LAKES
     700 Stokes Road
     Medford, NJ 08055
     (609) 654-6373

     MEDFORD VILLAGE
     1 S. Main Street at Bank Street
     Medford, NJ 08055
     (609) 714-1115

     MOORESTOWN
     53 East Main Street
     Moorestown, NJ 08057
     (856) 235-0544

     MOUNT HOLLY
     555 High Street
     Mount Holly, NJ 08060
     (609) 261-0975

     MOUNT LAUREL
     4522 Church Road
     Mount Laurel, NJ 08054
     (856) 235-4445

     MT. LAUREL - FELLOWSHIP
     301 Fellowship Road
     Mount Laurel, NJ 08054
     (856) 222-9364

     PEMBERTON
     25 Fort Dix Road
     Pemberton, NJ 08068
     (609) 726-9111


     PENNSAUKEN
     Route 130 & Merchantville Avenue
     Pennsauken, NJ  08110
     (856) 663-9200

     RIVERSIDE
     2 Scott Street & Pavilion Avenue
     Riverside, NJ 08075
     (856) 461-4333

     RIVERTON
     604 Main Street
     Riverton, NJ 08077
     (856) 786-5333

     SOUTHAMPTON
     1841 Route 70
     Southampton, NJ 08088
     (609) 859-2700

     TABERNACLE
     1484 Route 206
     Tabernacle, NJ 08088
     (609) 268-5993

     WAL*MART BURLINGTON
     2106 Burlington-Mt. Holly Road
     Burlington, NJ 08016
     (609) 386-5960

     WAL*MART CINNAMINSON
     2501 Route 130 South
     Cinnaminson, NJ  08077
     (856) 303-1395

     WAL*MART HAMILTON
     700 Market Place Boulevard
     Hamilton, NJ  08691
     (609) 585-2252

     WAL*MART  LUMBERTON
     1740 Route 38
     Mount Holly, NJ 08060
    (609)  702-9800

     WAL*MART MARLTON
     150 Route 70
     Marlton, NJ 08053
    (856) 988-1442

     WILLINGBORO
     399 Charleston Road
     Willingboro, NJ 08046
     (609) 877-2888

     WILLINGBORO EAST
     611 Beverly-Rancocas Road
     Willingboro, NJ 08046
     (609) 871-4900

     WILLINGBORO ROUTE 130
     Route 130 & Van Sciver Parkway
     Willingboro, NJ  08046
     (609) 871-6009

     WILLINGBORO WEST
     1 Rose Street & Beverly-Rancocas Road
     Willingboro, NJ 08046
     (609) 835-4700

                                       37