EXHIBIT 13


<PAGE>
<PAGE>

                               CORPORATE PROFILE

 FMS Financial  Corporation is the holding company for Farmers & Mechanics Bank.
 Farmers & Mechanics  Bank,  with total assets of $542  million,  is the largest
 community bank  headquartered in its primary market area of Burlington  County,
 New Jersey.

 Founded in  Burlington  City in 1871 under the name of Farmers' and  Mechanics'
 Building and Loan Association,  the Bank operates eighteen banking offices, all
 of which are in Burlington County, New Jersey.

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

<PAGE>


FINANCIAL HIGHLIGHTS FINANCIAL CONDITION (IN THOUSANDS)

<TABLE>
<CAPTION>

DECEMBER 31,                          1996      1995       1994      1993      1992
<S>                                 <C>        <C>       <C>       <C>       <C>     
Assets                              $541,710   $501,550  $483,776  $445,029  $432,072

Loans receivable and loans held
for sale, net                        306,871    288,400   283,260   269,264   254,989

Deposits                             453,277    428,809   429,431   406,017   402,172

Stockholders' equity                  33,826     33,053    29,159    25,906    21,582

</TABLE>



OPERATIONS: (IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31,                1996      1995       1994      1993      1992
<S>                                  <C>        <C>       <C>       <C>       <C>    
Interest income                      $36,841    $35,201   $32,270   $31,510   $31,836

Interest expense                      18,978     18,041    15,336    16,100    18,854

Net interest income                   17,863     17,160    16,934    15,410    12,982

Net income                             3,026      4,343     4,455     4,215     1,752

Earnings per common share               1.20       1.69      1.68      1.63      0.68

Dividends declared per common                                   
share                                   0.20       0.20         0         0         0

Weighted average common shares and
common stock equivalents outstanding   2,524      2,565     2,651     2,580     2,574

</TABLE>


OTHER SELECTED DATA:

<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31,                1996       1995      1994      1993      1992
<S>                                   <C>        <C>       <C>       <C>       <C>  
Net interest rate spread                3.50%      3.49%     3.64%     3.49%     3.24%

Net interest margin                     3.66       3.66      3.72      3.62      3.36

Return on average assets                0.60       0.89      0.94      0.96      0.43

Return on average equity                8.99      14.00     16.01     17.80      8.20

Dividend payout ratio                  16.67      11.83      0.00      0.00      0.00

Equity-to-asset ratio                   6.24       6.59      6.03      5.82      4.99

</TABLE>

<PAGE>



1.

TO OUR SHAREHOLDERS:

     We are  pleased to report  continued  progress in  building  our  community
banking  franchise in  Burlington  County,  New Jersey.  During 1996,  Farmers &
Mechanics Bank increased  assets,  deposits,  loans,  branches,  personnel,  and
service to our customers.

     The bank had good operating  results for 1996, but they were  significantly
offset by the  assessment  to  recapitalize  the SAIF  insurance  fund.  This is
expected to be a one-time  charge that will  result in lower  deposit  insurance
costs in the future.

     We have completed the move to our headquarters  building  purchased several
years ago and took over the branch bank in the building in 1996.  We also opened
branches  in  Bordentown,  Riverton  and  Mount  Laurel-Larchmont  in  buildings
purchased  from  Corestates and PNC. The decision of larger banks to consolidate
and close some  branches  has  created  excellent  opportunities  for us to make
significant additions to our branch system. We also already own a number of good
locations to build future branches.

     The most important activity in a community bank is customer service. During
1996 we introduced  Sunday Banking with all of our drive-thrus open from 12 to 4
and three of our larger  regional  branches  also open  indoors for full banking
service  and new  accounts.  We also began to use a  signature  in the  computer
system that reduces the time necessary to handle check cashing transactions. For
1997, we are introducing  Free Business  Checking with no account balance or per
check charges. We have been very successful with Free Personal Checking over the
last  several  years.  More  services,  additional  offices and longer  hours of
banking  increase our operating  costs, but are really an investment in building
core deposits.

     The banking  industry has continued to consolidate and we believe that this
is good for the  community  banks  that  remain.  During  1996 our  competitors,
Midlantic and Chemical,  merged into PNC. A local  commercial  bank,  Burlington
County Bank,  was  acquired by Trenton  Savings.  During 1997,  Summit Bank will
acquire BMJ  Financial and  Collective  Bancorp,  both of which are  significant
competitors in Burlington  County. We believe there is a significant  difference
between  community  banks and the larger  institutions,  in service and decision
making, and that a local  organization can compete very effectively  against the
larger banks.

     Once  again we want to  express  our  appreciation  for the  loyalty of our
customers,  the dedicated  efforts of our staff, and the support of shareholders
in building the continued success of this institution.


     Sincerely,



     Craig W. Yates                     Charles B. Yates
     President                          Chairman

<PAGE>


MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS 
GENERAL
    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 and employee  benefits,  deposit  insurance
premiums, depreciation, property maintenance and advertising.
ASSET AND LIABILITY MANAGEMENT
     The ability to maximize net interest  income is largely  dependent upon the
achievement  of a positive  interest  rate spread which can be sustained  during
fluctuations  in  prevailing  interest  rates.  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. 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.

<PAGE>

GAP TABLE
    The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1996, which are
expected to reprice or mature in each of the future time periods shown.  The
amount of assets or liabilities shown which reprice or mature during a
particular period were determined by the contractual terms or assumed decay
rates of the asset or liability. The table assumes prepayments and scheduled
principal amortization of fixed-rate loans and mortgage-backed securities, and
assumes that adjustable-rate mortgage loans will reprice at contractual
repricing intervals.  There has been no adjustment for the impact of future loan
commitments and loans in process.

<TABLE>
<CAPTION>
FARMERS & MECHANICS BANK   3 MONTHS     3 MONTHS     1 TO 3      3 TO 5     OVER 5
GAP TABLE                  OR LESS     TO 1 YEAR     YEARS        YEARS      YEARS     TOTAL
                           --------    ---------     -------     ------     -------    ------
                                                (DOLLARS IN THOUSANDS)
Interest-earning assets:
<S>                       <C>         <C>         <C>         <C>          <C>       <C>     
Investment securities     $  29,510   $   7,837   $    7,889  $     4,287  $ 47,493  $ 97,016
Loans                        57,569      40,886       57,439       44,724   109,035   309,653
Mortage-backed securities     6,466      41,279       20,818       11,817    23,933   104,313
                          ---------   ---------   ----------  -----------  --------  --------
 Total                       93,545      90,002       86,146       60,828   180,461   510,982
                          ---------   ---------   ----------  -----------  --------  --------
Interest-bearing 
  liabilities:
Now, Super Now, Passbook
 and Club accounts            8,531      18,185       36,217       23,202    31,674   117,809
Money market accounts        11,664      22,610       19,232        2,972       483    56,961
Certificates of Deposit      35,520     106,145       66,418       32,359       512   240,954
Borrowings                    4,406       5,500        6,250       15,000     4,092    35,248
                          ---------   ---------   ----------  -----------  --------  --------
 Total                       60,121     152,440      128,117       73,533    36,761   450,972
                          ---------   ---------   ----------  -----------  --------  --------
Interest Rate Sensitivity 
  GAP                     $  33,424   $ (62,438)   $ (41,971)  $  (12,705) $143,700  $ 60,010
                          =========   =========    =========   ==========  ========  ========
Cumulative Interest Rate  
  Sensitivity GAP         $  33,424   $ (29,014)   $ (70,985)  $  (83,690) $ 60,010
                          =========   =========    =========   ==========  ========  
Ratio of Interest Rate
 Sensitive Assets to 
  Interest Rate
  Sensitive Liabilities      155.59 %     59.04 %      67.24 %      82.72 %  490.90 %  113.31 %
                          =========   =========    =========   ==========  ========  ========
RATIO OF CUMULATIVE GAP
  TO TOTAL BANK ASSETS         6.18 %     (5.36)%     (13.11)%     (15.46)%   11.09 %
                          =========   =========    =========   ==========  ========  

</TABLE>


The  Bank's  analysis  of its  interest-rate  sensitivity  incorporates  certain
assumptions  concerning  the  amortization  of loans and other  interest-earning
assets and the  repricing  characteristics  of  deposits.  The Bank has made the
following   assumptions   in   calculating   the   values  on  the  GAP   table:
adjustable-rate   mortgage  loans  have  a  constant  prepayment  rate  of  10%;
fixed-rate  mortgage loans have a prepayment rate that is constant  through time
at 6.0%; fixed and adjustable rate commercial  loans have a constant  prepayment
rate of 10%; consumer loans have a prepayment rate that is constant over time at
12%;  mortgage-backed  securities and CMO/REMIC's have a prepayment rate that is
constant over time at 10%.  Core savings and NOW checking  deposits have a decay
rate of 17% which is based on OTS  assumption  rates from  industry  experience;
money market deposits have a decay rate of 80%. The interest-rate sensitivity of
the  Bank's  assets  and  liabilities   illustrated  in  the  table  could  vary
substantially if different assumptions were used or if actual experience differs
from the assumptions used.
    The table  indicates  the time period in which  interest-earning  assets and
interest-bearing  liabilities  will mature or reprice in  accordance  with their
contractual  terms or assumed decay rates,  as applicable.  However,  this table
does not necessarily  indicate the impact of general  interest rate movements on
the Bank's net interest  income  because the repricing of various  categories of
assets and liabilities is discretionary  and is subject to competition and other
pressures.  As a result,  various assets and liabilities  indicated as repricing
within the same period may in fact reprice at  different  times and at different
rate levels.
      The Bank  measures  its  interest  rate  risk  (IRR)  using  the OTS's net
portfolio  value  (NPV)  method.  NPV is the  difference  between  incoming  and
outgoing  discounted cash flows from assets,  liabilities and off-balance  sheet
contracts. An institution's IRR is measured as the change to its NPV as a result
of a hypothetical 200 basis point change in market interest rates. Based on this
analysis at  December  31,  1996,  the Bank would  experience  a 261 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  and a 123 basis  point  increase in NPV if
rates decline 200 basis points. 
RESULTS OF OPERATIONS
Net Interest Income
     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 interest-bearing
liabilities,  such as deposits 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 sales of
loans and investments,  provision for loan losses and real estate owned, service
charges and other fees, and operating expenses.

<PAGE>

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

<TABLE>
<CAPTION>

                                                                YEARS ENDED DECEMBER 31,
                              -------------------------------------------------------------------------------------------- 
                                          1996                             1995                           1994
                              -----------------------------   ------------------------------  ----------------------------
                              
                              AVERAGE              AVERAGE    AVERAGE              AVERAGE    AVERAGE            AVERAGE
                              BALANCE   INTEREST YIELD/RATE   BALANCE    INTEREST YIELD/RATE  BALANCE  INTEREST YIELD/RATE
                              -------   -------- ----------   -------    -------- ----------  -------  -------- ----------
                                                                          (DOLLARS IN THOUSANDS)
Interest-earning              
  assets:                      
<S>                           <C>       <C>           <C>      <C>      <C>            <C>   <C>       <C>            <C>  
 Loans receivable             $296,276  $ 23,797      8.03%    289,665  $  23,572      8.14% $ 280,041 $ 22,241       7.94%

 Mortgage-backed securities    107,268     7,499      6.99%    122,838      8,034      6.54%   128,775    7,492       5.82%

 Investment securities          84,762     5,545      6.54%     55,798      3,595      6.44%    46,591    2,536       5.44%
                              --------  --------    ------     -------  ---------   -------  --------- --------    ------- 
Total interest-earning            
  assets                       488,306    36,841      7.54%    468,301     35,201      7.52%   455,407   32,269       7.09%
                              --------  --------    ------     -------  ---------   -------  --------- --------    ------- 
                              
Interest-bearing              
  liabilities:                 
 Deposits                      429,413    16,176      3.77%    419,394     15,961      3.81%   429,341   14,539       3.39%
 Borrowings                     29,450     1,745      5.93%     17,889      1,031      5.76%     7,407      340       4.59%
 Subordinated Debentures        10,000     1,057     10.57%     10,000      1,049     10.49%     7,684      456       5.93%
                              --------  --------    ------     -------  ---------   -------  --------- --------    ------- 
Total interest-bearing               
   liabilities                $468,863    18,978      4.05%   $447,283     18,041      4.03% $ 444,432   15,335       3.45%
                              ========  --------    -------    =======  ---------   -------  ========= --------    ------- 
                              
Net interest income                     $ 17,863                        $  17,160                     $  16,934
                                        ========                        =========                     =========
Interest rate spread                                  3.50%                            3.49%                          3.64%
                                                    ======                           ======                         ====== 
Net yield on average                  
  interest-earning assets                             3.66%                            3.66%                          3.72%
                                                    ======                           ======                         ====== 
                              
Ratio of average interest-                     
  earning assets to average                   
  interest-bearing            
   liabiliies                                       104.15%                          104.70%                        102.47%
                                                    ======                           ======                         ====== 

</TABLE>

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
volume;  (ii)  changes in rates;  (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.

<PAGE>

<TABLE>
<CAPTION>
                                                 YEARS ENDED DECEMBER 31,
                                   -----------------------------------------------------
                                         1996 VS. 1995                1995 VS. 1994
                                   ------------------------      -----------------------
                                      INCREASE (DECREASE)          INCREASE (DECREASE)
                                       DUE TO CHANGE IN             DUE TO CHANGE IN
                                   ------------------------      -----------------------
                                   RATE     VOLUME    TOTAL      RATE    VOLUME    TOTAL
                                   -----    ------    -----      ----    ------    -----        
                                                      (IN THOUSANDS)
Interest income:              
<S>                              <C>      <C>       <C>       <C>      <C>      <C>     
  Loans receivable               $  (313) $    538  $   225   $   567  $    764 $  1,331

  Mortgage-backed securities         483    (1,018)    (535)      887      (346)     541
  Investment securities               84     1,866    1,950       558       501    1,059
                                 -------  --------  -------   -------  -------- --------
                              
  Total change - interest 
   income                            254     1,386    1,640     2,012       919    2,931
                                 -------  --------  -------   -------  -------- --------
                              
Interest expense:             
  Deposits                          (166)      381      215     1,759      (337)   1,422
  Borrowings                          48       666      714       210       481      691
  Subordinated Debentures              8         0        8       456       137      593
                                 -------  --------  -------   -------  -------- --------
                              
  Total change - interest
    expense                         (110)    1,047      937     2,425       281    2,706
                                 -------  --------  -------   -------  -------- --------
                              
Net change in net interest 
  income                        $    364  $    339  $    703  $  (413) $    638 $    225
                                ========  ========= ========  =======  ======== ========
</TABLE>


IMPACT OF INFLATION AND CHANGING PRICES
     The  financial  statements  and  related  data  presented  herein have been
prepared in accordance  with  generally  accepted  accounting  principles  which
generally require the measurement of financial position and operating results in
terms of historical  dollars (except  investments  available for sale),  without
considering  changes in the relative  purchasing power of money over time due to
inflation.  Unlike most  industrial  companies,  virtually all of the assets and
liabilities  of a financial  institution  are  monetary in nature.  As a result,
interest  rates  have a more  significant  impact on a  financial  institution's
performance than general levels of inflation.  Interest rates do not necessarily
move in the same  direction  or in the same  magnitude as the price of goods and
services,  since such prices are affected by inflation.  In the current interest
rate environment,  liquidity and the maturity structure of the Bank's assets and
liabilities are critical to the maintenance of acceptable performance levels.
NEW ACCOUNTING PRONOUNCEMENTS
     In June  1996,  the FASB  issued  the  Statement  of  Financial  Accounting
Standards  No. 125 (SFAS No. 125),  "Accounting  for  Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" which  is effective for the
Corporation  beginning  January 1, 1997.  SFAS No.  125,  which is to be applied
prospectively,  provides  accounting  and reporting  standards for transfers and
servicing of financial assets and  extinguishments  of liabilities  based on the
concept of control. It is anticipated that the adoption of SFAS No. 125 will not
have a material effect on the financial  position or results of operation of the
Corporation.

<PAGE>

COMPARISONS OF YEARS ENDED DECEMBER 31, 1996 AND 1995
Net Income
     The Corporation and its subsidiary  recorded net income of $3.0 million for
the year ended  December 31, 1996,  or $1.20 per share as compared to net income
of $4.3 million,  or $1.69 per share for the year ended  December 31, 1995.  Net
interest  income was $17.9  million in 1996  compared to $17.2  million in 1995.
Provisions for loan losses remained  consistent at $120 thousand during 1996 and
1995. Other income totaled $2.3 million in 1996 compared to $1.7 million for the
same period in 1995.  Total  operating  expenses for the year ended December 31,
1996 were $15.7 million (includes $2.7 million for a one-time special assessment
to  recapitalize  the  Savings  Association  Insurance  Fund)  compared to $11.9
million in the previous year.  During 1996, the Corporation  declared  dividends
which  totaled  $.20 per share  which  resulted  in a dividend  payout  ratio of
16.67%.  The ability of the  Corporation  to pay  dividends to  shareholders  is
directly  dependent  upon  the  ability  of the  Bank  to pay  dividends  to the
Corporation. See Stockholders' Equity footnote.

Interest Income
     Total interest income  increased $1.6 million to $36.8 million in 1996 from
$35.2  million in 1995.  The increase is  attributable  to increases in interest
income on  investment  securities  of $1.9  million and loans of $225  thousand,
partially offset by a decrease in interest income on mortgage-backed  securities
of $535 thousand.
     The increase in interest income on investment securities was due to a $29.0
million  increase  in the  average  balance of  investment  securities  to $84.8
million in 1996 from $55.8 million in 1995. The investment  portfolio  increased
due to the net purchase of $9.7 million in U.S. Agency notes and net increase of
and  $11.0  million  in  reverse  repurchase  agreements  and  $7.5  million  in
collaterialized mortgage obligations (CMOs). The increase in the average balance
of  investment  securities  resulted in an  increase in interest  income of $1.9
million.  The average yield increased to 6.54% in 1996 from 6.44% in 1995, which
resulted in an increase in interest income of $84 thousand.
     The average balance of the loan portfolio  increased $6.6 million to $296.3
million in 1996 from $289.7 million in 1995.  During the year the Bank purchased
$14.5 million of adjustable  rate mortgages  from First  Tennessee  Bank.  These
loans are  residential  mortgages on  properties  primarily  located  within the
Bank's lending area of Burlington  County, NJ. The loan volume increase resulted
in a $538  thousand  increase in  interest  income,  partially  offset by a $313
thousand decrease in interest income attributed to an 11 basis point decrease in
the average yield on the loan portfolio. The average yield on the loan portfolio
decreased to 8.03% in 1996 from 8.14% in 1995.

     Interest income on  mortgage-backed  securities  decreased $535 thousand in
1996 due to a volume decrease of the portfolio,  partially offset by an increase
in the yield on the portfolio.  The average  balance of the portfolio  decreased
$15.5 million to $107.3 million in 1996 from $122.8  million in 1995,  resulting
in a decrease in  interest  income of $1.0  million.  The decline in the average
balance  is due to $24.4  million of  principal  paydowns,  partially  offset by
mortgage-backed  securities  purchases  of $17.5  million  during the year.  The
average  yield on the  portfolio  increased to 6.99% in 1996 from 6.54% in 1995,
which resulted in an increase in interest income of $483 thousand.

Interest Expense
     Total  interest  expense  increased  $937 thousand to $19.0 million in 1996
from $18.0  million in 1995.  The  increase  was due to an  increase in interest
expense on deposits and borrowings.

     Interest  expense on deposits  increased  $215 thousand to $16.2 million in
1996 from $16.0 million in 1995. The average balance of deposits increased $10.0
million to $429.4 million in 1996 from $419.4  million in 1995,  resulting in an
increase  in  interest  expense of $381  thousand.  The  increase in deposits is
primarily due to an increase in the average balance of checking accounts in 1996
of $9.2  million to $72.8  million.  This  increase  was  partially  offset by a
decline in the average  rate paid on deposits of 4 basis points to 3.77% in 1996
from  3.81% in  1995,  resulting  in a  decrease  in  interest  expense  of $166
thousand.
     Interest  expense on borrowings  increased $714 thousand to $1.7 million in
1996 from $1.0  million in 1995.  This  increase  was due to an  increase in the
average  balance of borrowings  as well as an increase in the average rate.  The
average  balance  of  borrowing  increased  to $29.5  million in 1996 from $17.9
million in 1995,  resulting in a $666 thousand  increase in interest expense due
to volume.  This was primarily  the result of an $11.7  million  increase in the
average balance of advances from the Federal Home Loan Bank during the year. The
average rate on borrowing increased to 5.93% during 1996 from 5.76% during 1995,
resulting in a $48 thousand increase in interest expense due to rate.

Provision For Loan Losses
     The provision  for loan losses  remained  constant at $120 thousand  during
1996 and 1995. The determination of the allowance level 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.

Other Income (Expense)
    Other income from  operations  was $2.3 million in 1996  compared  with $1.7
million in 1995.

<PAGE>

     Real  estate  owned  operations,  net in  1996  resulted  in a loss of $175
thousand,  which was  comprised of $43  thousand in real estate owned  operating
expenses, $124 thousand of provisions for loss on real estate, net, and realized
losses of $8 thousand on the sale of real estate owned properties.
      Service charges collected on depositors'  accounts increased $427 thousand
to $1.9 million in 1996 from $1.5 million in 1995. The increase is the result of
additional retail banking fees due to higher transaction volume during the year.

Operating Expenses
     Total  operating  expenses  increased $3.8 million to $15.7 million in 1996
from $11.9 million in 1995. The increase in operating expenses was primarily due
to a one-time special  assessment of $2.7 million charged in connection with the
federal  legislation  requiring the  recapitalization of the Savings Association
Insurance Fund (SAIF).  Operating expenses also increased as a result of opening
four additional branches during 1996.

     On September 30, 1996,  the President  signed  legislation  which  required
savings  institutions  with SAIF  insured  deposits  to pay a  one-time  special
assessment to facilitate  the  recapitalization  of the SAIF. The assessment was
based on 65.7 cents per $100 of  deposits  at March 31,  1995.  This  assessment
resulted in a charge of approximately  $2.7 million to operating  expense during
the year ended  December 31, 1996.  The  legislation  also  includes  provisions
whereby at such time as the SAIF is adequately recapitalized,  the Bank's future
deposit  premiums  will decrease from $.23 per $100 of deposits paid during 1996
to  approximately  $.065 in 1997 through the year 2000 and  approximately  $.025
through the year 2017.

     Salaries and benefits  increased $758 thousand to $7.0 million in 1996 from
$6.3  million  in 1995.  The  increase  was due to  additional  staff in the new
branches  opened  during  the year as well as an  increase  in branch  staff for
additional operating hours, principally for "Sunday Banking".  Average full time
equivalent employees during 1996 were 236 as compared to 209 during 1995.
          Occupancy  and  equipment  expense  increased  $488  thousand  to $2.5
million in 1996 from $2.1 million in 1995.  This  increase is due to  additional
depreciation and occupancy expenses on four new branches opened in 1996, as well
as other facility and equipment additions and improvements during the year.

          Purchased services expense decreased $105 thousand to $917 thousand in
1996 from $1.0  million in 1995.  This  decrease  includes a reduction  in check
processing  costs  attributed  to  the   implementation  of  an  in-house  check
processing  system in October 1995. The decrease in check  processing costs were
partially offset by an increase in MAC charges of $83 thousand.
COMPARISONS OF YEARS ENDED DECEMBER 31, 1995 AND 1994
Net Income
    The Corporation  and its subsidiary  recorded net income of $4.3 million for
the year ended  December 31, 1995,  or $1.69 per share as compared to net income
of $4.5 million,  or $1.68 per share for the year ended  December 31, 1994.  Net
interest  income was $17.2  million in 1995  compared to $16.9  million in 1994.
Provisions for loan losses in 1995 was $120 thousand compared to $66 thousand in
1994. Other income totaled $1.7 million in 1995 compared to $1.3 million for the
same period in 1994.  Total  operating  expenses for the year ended December 31,
1995 were $11.9 million  compared to $11.4 million in the previous year.  During
1995,  the  Corporation  declared  dividends  which totaled $.20 per share which
resulted in a dividend payout ratio of 11.83% during 1995.

Interest Income
     Total interest income  increased $2.9 million to $35.2 million in 1995 from
$32.3  million in 1994.  The increase is  attributable  to increases in interest
income on loans,  investment  securities and mortgage-backed  securities of $1.3
million, $1.1 million and $541 thousand, respectively.

     The  increase  in  interest  income on loans was due to an  increase in the
average  volume of loans of $9.6  million,  primarily  due to an increase in the
average  balance of fixed rate  mortgages,  adjustable  rate mortgage  loans and
commercial loans of $5.7 million,  $3.7 million and $1.9 million,  respectively,
which resulted in an increase in interest income of $764 thousand.  The increase
in interest  income was also the result of an increase of 20 basis points in the
average  yield  on the  loan  portfolio.  The  average  yield  on the  portfolio
increased  to 8.14% in 1995 from 7.94% in 1994 which  resulted in an increase of
$567 thousand of interest income.

     Interest  income on investment  securities  increased  $1.1 million to $3.6
million in 1995.  The increase was the result of a $9.2 million  increase in the
average  balance of  investments  to $55.8 million in 1995 from $46.6 million in
1994 as  well as an  increase  in the  average  yield  on the  investments.  The
increase  in the average  balance of the  portfolio  was due to the  purchase of
$18.5 million of U.S. Government Agency notes and $2.8 million of collateralized
mortgage  obligations in 1995. The increase in the average balance of investment
securities  resulted in an increase in  interest  income of $501  thousand.  The
average yield increased to 6.44% in 1995 from 5.44% in 1994 which resulted in an
increase in interest income of $558 thousand.

<PAGE>

     Interest income on  mortgage-backed  securities  increased $541 thousand to
$8.0 million in 1995.  The increase was due to an increase in the average  yield
of these  securities  to 6.54% in 1995 from 5.82% in 1994,  which  resulted in a
$887 thousand increase in interest income. This increase was partially offset by
a decrease  in the average  balance of the  portfolio.  The  average  balance of
mortgage-backed  securities  declined  $5.9  million  to $122.8  million  due to
principal  paydowns  of $19.8  million  during  the year,  which  resulted  in a
decrease in interest income of $346 thousand.

Interest Expense
     Total interest expense increased $2.7 million to $18.0 million in 1995 from
$15.3  million in 1994.  The  increase  in  interest  expense was due to both an
increase in interest expense on deposits as well as borrowings.

     Interest  expense on deposits  increased  $1.4 million to $15.9  million in
1995 from $14.5 million in 1994. The average rate on deposits increased 42 basis
points to 3.81% during 1995 from 3.39% during 1994,  resulting in an increase in
interest  expense of $1.8  million.  This  increase  was  partially  offset by a
decline in the average  balance of deposits of $9.9 million to $419.4 million in
1995,  resulting in a decrease in interest  expense of $337  thousand.  This was
primarily  due to a decline in the average  balance of money market  accounts of
$12.4  million,  partially  offset by an  increase  in the  average  balance  of
certificates of deposit of $7.1 million in 1995.
     Interest  expense on borrowings  increased $691 thousand to $1.0 million in
1995 from $340  thousand in 1994.  This  increase  was due to an increase in the
average  balance of borrowings  as well as an increase in the average rate.  The
average  balance  of  borrowing  increased  to $17.9  million  in 1995 from $7.4
million in 1994,  resulting in a $481 thousand  increase in interest expense due
to  volume.  This was the  result of a $10.2  million  increase  in the  average
balance of advances from the Federal Home Loan Bank in 1995. The average rate on
borrowing  increased  to 5.76% in 1995 from 4.59% in 1994,  resulting  in a $210
thousand increase in interest expense due to rate.

Provision For Loan Losses
   The provision for loan losses  increased $54 thousand to $120 thousand during
1995 from $66 thousand in 1994.  The  determination  of the allowance  level 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.

Other Income (Expense)
    Other income from  operations  was $1.7 million in 1995  compared  with $1.3
million in 1994.

     Loss from real estate held for  development of $200 thousand was the result
of an additional provision to the valuation  allowance.  The allowance level was
adjusted in 1995 based on management's analysis of the current market conditions
relating to the two remaining land development properties.

     Real  estate  owned  operations,  net in  1995  resulted  in a loss  of $92
thousand,  which was  comprised of $35  thousand in real estate owned  operating
expenses,  $234  thousand of provisions, for loss on real estate,  net, and $177
thousand of realized gains on the sale of real estate owned properties.

     Service charges collected on depositors'  accounts  increased $431 thousand
to $1.5 million in 1995 from $1.1 million in 1994. The increase is the result of
additional  retail  banking fees due to a higher  transaction  volume during the
year.

 Operating Expenses
          Total operating  expenses  increased $563 thousand to $11.9 million in
1995 from  $11.4  million  in 1994.  The  increase  in  operating  expenses  was
primarily due to the addition of one branch to the Bank's branch  network during
the year.

          Salaries and benefits  increased $339 thousand to $6.3 million in 1995
from $5.9 million in 1994.  The increase was due to additional  staff in the new
branch opened during the year as well as an increase in administrative staffing.
Average full time equivalent  employees  during 1995 were 209 as compared to 196
during 1994.

          Occupancy  and  equipment  increased  $131 thousand to $2.1 million in
1995 from $1.9 million in 1994. This increase is due to additional  depreciation
and occupancy expenses on a new branch opened in 1995, as well as other facility
and equipment additions and improvements during the year.

          Purchased  services  increased  $176  thousand to $1.0 million in 1995
from $846  thousand  in 1994 which  includes  an  increase in MAC charges of $85
thousand as well as an increase in DDA  processing of $11 thousand due to higher
transaction volume during the year.

     Federal deposit insurance  premiums decreased to $974 thousand in 1995 from
$1.0 million in 1994.  The decrease is due to a decline in the average  deposits
of the Bank as well as a full  year of the  lowered  FDIC  rate of $.23 per $100
which was changed during the last six months of 1994.

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES
     The Bank's liquidity is a measure of its ability to fund loans, withdrawals
of deposits  and other cash  outflows  in a cost  effective  manner.  The Bank's
primary sources of funds are deposits and scheduled amortization and prepayments
of loan  principal.  The Bank also  obtains  funds from the sale and maturity of
investment  securities  and  short-term  investments  as well as the maturity of
mortgage-backed  securities and funds  provided by  operations.  During the past
several  years,  the Bank has used  such  funds  primarily  to meet its  ongoing
commitments  to fund  maturing time  deposits and savings  withdrawals,  to fund
existing and continuing loan  commitments and to maintain  liquidity.  While the
Bank has been able to fund its operations  internally during recent periods,  it
has periodically supplemented its liquidity needs with advances from the FHLB of
New York.  At December 31, 1996 the Bank had $32.6  million in advances from the
Federal Home Loan Bank 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.

     The Bank is  required  under  applicable  federal  regulations  to maintain
specified  levels of "liquid  investments",  which include certain United States
government  and  federal  agency  securities  and  other  approved  investments.
Regulations  currently in effect  require the Bank to maintain  liquid assets of
not  less  than 5% of its  withdrawable  accounts  plus  short-term  borrowings.
Short-term  liquid  assets must consist of not less than 1% of such accounts and
borrowings,  which amount is also included in the 5%  requirement.  These levels
are changed from time to time by the regulators to reflect the current  economic
conditions.  The Bank has generally  maintained  liquidity in excess of required
levels. The Bank's regulatory  liquidity and short-term liquidity was 11.55% and
7.31%, respectively, at December 31, 1996.

     The amount of certificate accounts which are scheduled to mature during the
twelve months ending December 31, 1997 is approximately  $141.4 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.

     At December 31, 1996,  the Bank had loan  commitments  outstanding of $26.2
million,  of which $3.5 million were for fixed-rate loans and $22.7 million were
for adjustable-rate loans. Funds required to fulfill the commitments are derived
primarily  from loan  repayments,  net deposit  inflows  or,  when  appropriate,
borrowings.

     Under the Financial  Institutions  Reform,  Recovery and Enforcement Act of
1989 ("FIRREA") the Bank must have core capital equal to 3% of assets,  of which
1.5% must be tangible  capital,  excluding  goodwill.  FIRREA  also  established
risk-based  capital  standards.  In measuring the Bank's  compliance with FIRREA
capital standards,  the Bank must deduct from its regulatory capital calculation
investments  in,  and  advances  to,  subsidiaries  engaged  in  activities  not
permissible  for national  banks.  At December 31, 1996,  the Bank  exceeded all
three regulatory capital levels required under FIRREA. At December 31, 1996, the
Bank's regulatory  tangible and core capital was $39.0 million or 7.23% of total
bank assets and risk-based capital was $41.6 million or 15.35% of risk- weighted
assets.

     The Bank holds a  substantial  component  of its  investment  portfolio  in
mortgage-backed    securities   and    collateralized    mortgage    obligations
(collectively,  "MBS"). At the end of 1996, the total investment in MBS amounted
to  $122.8  million,  or  61%  of  total  investments.   These  are  instruments
collateralized  by pools of residential and commercial  mortgages,  which return
interest and principal payments to the investor. Approximately 85% of the Bank's
MBS holdings are U.S.  Government  Agency  securities  (GNMA,  FNMA, and FHLMC),
which carry either a direct government or a quasi-government  guarantees and are
rated AAA in terms of  quality.  The Bank also owns  non-agency  MBS,  issued by
major financial institutions, which are rated AAA and AA. MBS are generally very
liquid issues with major brokerage houses providing ready markets.  However, MBS
are subject to prepayment  and extension  risk which can adversely  affect their
yields and expected maturities.

<PAGE>

CONSOLIDATED SUMMARY OF QUARTERLY EARNINGS (UNAUDITED)

The following table presents summarized quarterly data for 1996 and 1995:


--------------------------------------------------------------------------------
                              1ST        2ND        3RD        4TH      TOTAL
1996                        QUARTER    QUARTER    QUARTER    QUARTER    YEAR
--------------------------------------------------------------------------------
                                 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total interest income       $ 8,847    $9,028    $ 9,415      $9,551  $36,841
                         
Total interest expense        4,657     4,663      4,834       4,824   18,978
                            -------    ------     ------      ------  -------
Net interest income           4,190     4,365      4,581       4,727   17,863
Provision for loan losses        30        30         30          30      120
                            -------    ------     ------      ------  -------
                                                                      
Net interest income after                                             
  provision for loan losses   4,160     4,335      4,551       4,697   17,743
Total other income              497       484        601         671    2,253
Total operating expenses      3,088     3,222      6,007(a)    3,374   15,691(a)
                            -------    ------     ------      ------  -------
Income before income taxes    1,569     1,597      (855)       1,994    4,305
Federal and state income
  taxes                         567       485      (385)         612    1,279
                            -------    ------     ------      ------  -------
                                                                      
Net income                  $ 1,002    $1,112    $ (470)      $1,382  $ 3,026
                            =======    ======     =====       ======  =======
                                                                      
Earnings per common share   $  0.39    $ 0.44    $(0.19)      $ 0.56  $  1.20
                            =======    ======     =====       ======  =======
                                                                     
(a) Includes $2.7 million for the one-time assessment  to recapitalize the SAIF

--------------------------------------------------------------------------------
                                   1st      2nd        3rd       4th     Total
1995                             Quarter  Quarter    Quarter   Quarter   Year
--------------------------------------------------------------------------------
                                   (In Thousands, except per share amounts)

Total interest income            $8,444   $8,721    $9,013    $9,023   $35,201
                           
Total interest expense            4,052    4,408     4,791     4,790    18,041
                                 ------   ------    ------    ------   -------
                                                    
Net interest income               4,392    4,313     4,222     4,233    17,160
Provision for loan losses            30       30        30        30       120
                                 ------   ------    ------    ------   -------
                                                    
Net interest  income                                
after provision for loan losses   4,362    4,283     4,192     4,203    17,040
Total other income                  438      446       458       348     1,690
Total operating expenses          2,967    2,961     2,993     2,995    11,916
                                 ------   ------    ------    ------   -------
Income before income taxes        1,833    1,768     1,657     1,556     6,814
Federal and state income taxes      669      639       600       563     2,471
                                 ------   ------    ------    ------   -------
                                                    
Net income                       $1,164   $1,129    $1,057    $  993   $ 4,343
                                 ======   ======    ======    ======   =======
                                                    
Earnings per common share        $ 0.45   $ 0.44    $ 0.42    $ 0.38   $  1.69
                                 ======   ======    ======    ======   =======

<PAGE>

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

DECEMBER 31,                                                               1996             1995
-----------------------------------------------------------------------------------------------------
ASSETS
-----------------------------------------------------------------------------------------------------
<S>                                                                    <C>              <C>          
  Cash and amounts due from depository institutions                    $   9,572,347    $   9,804,770
  Interest-bearing deposits                                                  296,702          124,334
  Short term funds                                                            50,500           56,476
                                                                       -------------    -------------
    Total cash and cash equivalents                                        9,919,549        9,985,580
  Investment securities held to maturity                                  67,601,343       43,564,913
  Investment securities available for sale                                25,446,520       22,767,981
  Loans receivable  - net                                                306,870,816      288,400,236
  Mortgage-backed securities held to maturity                            104,312,581      111,554,864
  Accrued interest receivable:
    Loans                                                                  1,754,117        1,749,652
    Mortgage-backed securities                                               912,599          964,148
    Investments                                                              964,319          892,533
  Federal Home Loan Bank stock                                             3,620,600        4,058,100
  Real estate held for development - net                                   1,227,732        1,227,732
  Real estate owned - net                                                    621,556          668,792
  Office properties and equipment - net                                   14,756,238       12,773,479
  Deferred income taxes                                                    1,563,480          897,443
  Excess cost over fair value of net assets acquired                         812,599          997,505
  Prepaid expenses and other assets                                          889,899          553,944
  Subordinated Debentures issue cost - net                                   435,809          493,157
                                                                       -------------    -------------
TOTAL ASSETS                                                           $ 541,709,757    $ 501,550,059
                                                                       =============    =============

LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------
Liabilities:
  Deposits                                                             $ 453,276,534    $ 428,809,380
  Advances from the Federal Home Loan Bank                                32,550,000       24,500,000
  Advances from Bank                                                       6,691,758                0
  10% Subordinated Debentures, due 2004                                   10,000,000       10,000,000
  Guarantee of employee stock ownership plan debt                            106,463          182,444
  Advances by borrowers for taxes and insurance                            2,138,638        2,093,130
  Accrued interest payable                                                   860,545          888,456
  Dividends payable                                                          119,636          125,288
  Other liabilities                                                        2,140,009        1,898,861
                                                                       -------------    -------------
  Total liabilities                                                      507,883,583      468,497,559
                                                                       -------------    -------------

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 2,602,884 and 2,601,634 and shares outstanding 2,392,707
    and 2,505,756 as of December 31, 1996 and 1995, respectively             260,288          260,163
  Paid-in capital in excess of par                                         8,413,558        8,408,840
  Unrealized loss on securities available for sale - net of deferred 
    income taxes                                                            (166,152)        (236,154)
  Guarantee of employee stock ownership plan debt                           (106,463)        (182,444)
  Retained earnings                                                       28,487,903       25,951,864
  Less:  Treasury stock (210,177 and 95,878 shares, at cost,  as of
    December 31, 1996 and 1995, respectively)                             (3,062,960)      (1,149,769)
                                                                       -------------    -------------
Total stockholders' equity                                                33,826,174       33,052,500
                                                                       -------------    -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                             $ 541,709,757    $ 501,550,059
                                                                       =============    =============
</TABLE>


See notes to consolidated financial statements.

<PAGE>

FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                             1996         1995         1994
-----------------------------------------------------------------------------------------
INTEREST  INCOME:
Interest income on:
<S>                                              <C>          <C>           <C>        
  Loans                                          $23,797,512  $23,572,092   $22,241,502
  Mortgage-backed securities                       7,499,231    8,033,982     7,492,533
  Investments                                      5,544,668    3,594,867     2,535,568
                                                 -----------  -----------   -----------
Total interest income                             36,841,411   35,200,941    32,269,603
                                                 -----------  -----------   -----------
INTEREST EXPENSE:
Interest expense on:
  Deposits                                        16,176,223   15,961,110    14,539,097
  Subordinated Debentures                          1,057,348    1,049,015       456,306
  Borrowings                                       1,745,032    1,031,043       339,840
                                                 -----------  -----------   -----------
Total interest expense                            18,978,603   18,041,168    15,335,243
                                                 -----------  -----------   -----------

NET INTEREST INCOME                               17,862,808   17,159,773    16,934,360
PROVISION FOR LOAN LOSSES                            120,000      120,000        66,000
                                                 -----------  -----------   -----------
NET INTEREST INCOME AFTER PROVISION
    FOR LOAN LOSSES                               17,742,808   17,039,773    16,868,360
                                                 -----------  -----------   -----------
OTHER INCOME (EXPENSE):
  Loan service charges and other fees                219,639      269,977       319,192
  Gain on sale of loans                                8,432        8,836        14,728
  Gain (Loss) on sale of investment securities        54,406            0      (121,609)
  Loss from real estate held for development               0     (200,000)            0
  Real estate owned operations, net                 (174,503)     (91,986)     (258,685)
  Service charges on  accounts                     1,946,307    1,519,078     1,087,928
  Other income                                       199,097      184,687       233,172
                                                 -----------  -----------   -----------
Total other income (expense)                       2,253,378    1,690,592     1,274,726
                                                 -----------  -----------   -----------
OPERATING EXPENSES:
  Salaries and employee benefits                   7,043,584    6,285,898     5,947,270
  Occupancy and equipment                          2,541,296    2,053,513     1,922,159
  Purchased services                                 916,803    1,021,442       845,537
  Federal deposit insurance premiums                 946,594      973,503     1,022,196
  SAIF recapitalization assessment                 2,720,765            0             0
  Professional fees                                  285,972      367,160       363,347
  Advertising                                         42,956       25,250        24,104
  Other                                            1,192,896    1,189,114     1,227,855
                                                 -----------  -----------   -----------
Total operating expenses                          15,690,866   11,915,880    11,352,468
                                                 -----------  -----------   -----------

INCOME BEFORE INCOME TAXES                         4,305,320    6,814,485     6,790,618

INCOME TAXES:
Current                                            2,044,225    2,526,805     2,076,887
Deferred                                            (764,726)     (55,724)      258,276
                                                 -----------  -----------   -----------
Total income taxes                                 1,279,499    2,471,081     2,335,163

NET INCOME                                       $ 3,025,821  $ 4,343,404   $ 4,455,455
                                                 ===========  ===========   ===========

 EARNINGS PER COMMON SHARE                       $      1.20  $      1.69   $      1.68
                                                 ===========  ===========   ===========

 Weighted average common shares and
   common stock equivalents outstanding            2,524,490    2,565,166     2,650,634
                                                 ===========  ===========   ===========
</TABLE>

See notes to consolidated financial statements.

<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                                   1996            1995  (a)        1994  (a)
------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
<S>                                                                    <C>             <C>              <C>         
Net income                                                             $   3,025,821   $  4,343,404     $  4,455,455
Adjustments to reconcile net income to net cash provided
   by operating activities:
Provision for loan losses                                                    120,000        120,000           66,000
Depreciation and amortization                                              1,639,469      1,622,710        1,735,995
Provision for real estate owned                                              124,315        354,453          157,526
Provision for real estate held for development                                     0        200,000                0
Realized (gains) and losses on:
 Sale of loans and loans held for sale                                        (8,432)        (8,836)         (14,728)
 Sale of investments available for sale                                      (54,406)             0          121,609
 Disposal and sale of fixed assets                                             7,240          3,836              265
 Sale of real estate owned                                                     8,235       (177,197)          90,204
Proceeds from sale of loans held for sale                                    112,226        257,989          571,966
Loans originated for sale                                                   (110,000)      (254,000)        (519,164)
Increase in accrued interest receivable                                      (24,702)      (533,227)        (171,288)
(Increase) Decrease in prepaid expenses and other assets                    (120,213)       348,840         (210,871)
(Decrease) Increase in accrued interest payable                              (27,911)        50,762          480,227
Increase (Decrease) in other liabilities                                     241,148        (15,899)        (600,518)
Deferred income taxes                                                       (705,382)       (55,724)         258,276
Other                                                                         75,981         75,981           80,108
                                                                       -------------   ------------     ------------
 Net cash provided by operating activities                                 4,303,389      6,333,092        6,501,062
                                                                       -------------   ------------     ------------
INVESTING ACTIVITIES:
Proceeds from sale of:
 Education loans                                                             846,443        868,725        1,182,050
 Real estate owned                                                           396,519      1,022,006          641,754
 Office property and equipment                                                 1,700              0                0
Proceeds from maturities of investment securities held to maturity       157,566,650     35,549,229       51,749,025
Proceeds from maturities of investment securities available for sale      16,327,791     13,767,144        3,527,118
Principal collected on mortgage-backed securities                         32,335,567     21,454,381       35,831,645
Principal collected on longer-term loans, net                             52,372,663     40,393,832       47,098,661
Longer-term loans originated or acquired, net                            (72,113,495)   (46,373,552)     (63,052,814)
Purchase of investment securities and mortgage-backed securities
  held to maturity                                                      (199,107,774)   (62,865,500)    (106,872,825)
Purchase of investment securities available for sale                     (26,797,361)   (21,317,509)      (1,136,497)
Decrease in real estate held for development                                       0              0           25,575
Redemption (Purchase) of Federal Home Loan Bank stock                        437,500       (329,700)        (240,800)
Purchase of office property and equipment                                 (3,271,960)    (3,037,422)      (2,314,663)
Net cash received from deposit and branch purchase                         9,044,846              0       37,423,277
                                                                       -------------   ------------     ------------
 Net cash (used) provided by investing activities                        (31,960,911)   (20,868,366)       3,861,506
                                                                       -------------   ------------     ------------
FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits and savings accounts            3,813,048     (5,609,287)      (6,649,839)
Net increase (decrease) in time deposits                                  11,470,940      4,987,853       (9,254,006)
Net increase in FHLB advances and advances from Bank                      14,741,758     14,430,000        2,070,000
Principal repayment of employee stock onership plan debt                     (75,981)       (75,981)         (65,981)
Net proceeds from issuance of 10% Subordinated Debentures                          0              0        9,426,522
Increase (Decrease) in advances from borrowers for taxes and insurance        45,508        (12,151)         196,380
Purchase of treasury stock                                                (1,913,191)      (249,219)        (900,550)
Dividends paid on common stock                                              (495,434)      (375,213)               0
Net proceeds from issuance of common stock                                     4,843         44,307           24,025
                                                                       -------------   ------------     ------------
 Net cash provided (used) by financing activities                         27,591,491     13,140,309       (5,153,449)
                                                                       -------------   ------------     ------------
DECREASE (INCREASE) IN CASH AND CASH EQUIVALENTS                             (66,031)    (1,394,965)       5,209,119
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                               9,985,580     11,380,545        6,171,426
                                                                       -------------   ------------     ------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                 $   9,919,549   $  9,985,580     $ 11,380,545
                                                                       =============   ============     ============


Supplemental Disclosures:
 Cash paid for:
      Interest on deposits, advances, and other borrowings             $  19,006,514   $ 17,990,406     $ 14,855,016
      Income taxes                                                         1,647,476      2,503,591        2,212,593
 Non-cash investing and financing activities:

      Transfer of securities to available for sale during FASB 115
      suspension period                                                            0      4,979,408                0
      Dividends declared and not paid at year end                            119,636        125,288                0
      Non-monetary transfers from loans to real estate acquired
      through foreclosure                                                    481,833         56,527        1,090,740
See notes to consolidated financial statements.
(a) Reclassified for comparative purposes.
</TABLE>

<PAGE>
--------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                               UNREALIZED    GUARANTEE OF
                                                  PAID-IN       LOSS ON       EMPLOYEE
                                                  CAPITAL      SECURITIES      STOCK                                  TOTAL
                                        COMMON    IN EXCESS    AVAILABLE     OWNERSHIP   RETAINED    TREASURY      STOCKHOLDERS'
                                        STOCK      OF PAR     FOR SALE, NET  PLAN DEBT   EARNINGS      STOCK          EQUITY
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>        <C>          <C>          <C>         <C>         <C>           <C>          
Balances at December 31,  1993         $ 129,200  $ 8,471,471  $ (23,600)   $(324,406)  $17,653,506 $         0   $   25,906,171
Net Income                                                                                4,455,455                    4,455,455
Increase in unrealized loss on
 securities available for sale, net                             (392,272)                                               (392,272)
Decrease in guarantee of
 employee stock ownership plan debt                                            65,981                                     65,981
Exercise of stock options                    310       23,715                                                             24,025
Purchase of common stock                                                                               (900,550)        (900,550)
-----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31,  1994           129,510    8,495,186   (415,872)    (258,425)   22,108,961    (900,550)      29,158,810
Net Income                                                                                4,343,404                    4,343,404
Dividends declared                                                                         (500,501)                    (500,501)
Decrease in unrealized loss on
 securities available for sale, net                              179,718                                                 179,718
Decrease in guarantee of
 employee stock ownership plan debt                                            75,981                                     75,981
Exercise of stock options                    572       43,735                                                             44,307
Purchase of common stock                                                                               (249,219)        (249,219)
Two-for-one stock split                  130,081     (130,081)                                                                 0
-----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31,  1995           260,163    8,408,840   (236,154)    (182,444)   25,951,864  (1,149,769)      33,052,500
Net Income                                                                                3,025,821                    3,025,821
Dividends declared                                                                         (489,782)                    (489,782)
Decrease in unrealized loss on
 securities available for sale, net                               70,002                                                  70,002
Decrease in guarantee of
 employee stock ownership plan debt                                            75,981                                     75,981
Exercise of stock options                    125        4,718                                                              4,843
Purchase of common stock                                                                             (1,913,191)      (1,913,191)
-----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31,  1996         $ 260,288  $ 8,413,558  $(166,152)   $(106,463)  $28,487,903 $(3,062,960)   $  33,826,174
==================================================================================================================================
</TABLE>


See notes to consolidated financial statements.

<PAGE>

FMS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
-------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

REGULATORY AUTHORITIES
    The  regulatory  agency  overseeing  savings  associations  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").

SAIF RECAPITALIZATION ASSESSMENT
     Legislation  was signed by the  President on September  30, 1996  requiring
savings  institutions  with SAIF  insured  deposits  to pay a  one-time  special
assessment to facilitate  the  recapitalization  of the SAIF. The assessment was
based on 65.7 cents per $100 of  deposits  at March 31,  1995.  This  assessment
resulted in a charge of approximately  $2.7 million to operating expenses during
the year ended December 31, 1996.

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, 1996 and
1995 were $4.7 million and $3.2 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
     During 1994,  the  Corporation  adopted  Statement of Financial  Accounting
Standards No. 115 (SFAS No. 115),  "Accounting  for Certain  Investments in Debt
and Equity  Securities " which required the  classification  of investments into
three  categories,  as  applicable;  trading,  available  for  sale  or  held to
maturity.  Upon the adoption of SFAS No. 115 on January 1, 1994, the Corporation
categorized selected investments and mortgage-backed securities that are part of
the Corporation's  asset/liability  management  strategy and that may be sold in
response to changes in interest  rates,  prepayments  and  similar  factors,  as
available for sale. 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. 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  over the term of the  security.  Premiums and discounts are amortized
using a  method  which  in  total  approximates  the  interest  method  over the
remaining  contractual life of the security.  The Corporation has the intent and
ability to hold these securities to maturity.

REVERSE REPURCHASE AGREEMENTS
       The  Bank  invests  excess  funds  in  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 and the Bank believes that
it is not  exposed  to  any  significant  risk  on its  investments  in  reverse
repurchase agreements.

ALLOWANCE FOR POSSIBLE LOAN LOSSES
     An  allowance  for  possible  loan  losses is  maintained  at a level  that
management  considers  adequate to provide for  potential  losses based upon the
portfolio's past loss experience, current economic conditions and other relevant
factors.  When  collection of a loan's  principal  balance or portion thereof is
considered  doubtful,  management charges the allowance for possible loan losses
based on their  assessment of the loan's  underlying  collateral,  if collateral
dependent,  or present value of estimated  future cash flows.  While  management
uses the best information  available to

<PAGE>

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 evaluations.

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


INTEREST ON LOANS
     The Bank recognizes interest on loans when earned. Generally, the Bank does
not recognize  interest on loans three months or more delinquent.  Such interest
ultimately collected is credited to 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.

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 costs of maintenance and repairs are expensed as they are incurred.
Renewal and improvement costs are capitalized.

DEFERRED LOAN FEES
     The Bank defers all loan fees and related  direct loan  origination  costs.
Deferred loan fees and costs are generally  amortized as a yield adjustment over
the life of the loan using the interest method.

LOANS SERVICED FOR OTHERS
     Servicing  loans for  others  generally  consists  of  collecting  mortgage
payments,  disbursing  payments to investors and processing  foreclosures.  Loan
servicing  income is recorded  upon  receipt and  includes  servicing  fees from
investors and certain  charges  collected from  borrowers,  such as late payment
fees.  The total  amount of loans being  serviced  for the benefit of others was
$29.3  million and $34.4  million at December  31, 1996 and 1995,  respectively.
Loan servicing fee income was approximately $98 thousand, $113 thousand and $132
thousand for the years ended December 31, 1996, 1995 and 1994, respectively.

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.

EXCESS COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
     The excess costs over the fair value of assets acquired are being amortized
over a five year period using the straight-line method.

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

ACCOUNTING STANDARDS CHANGE
     Effective  January  1, 1994,  the  Corporation  adopted  the  Statement  of
Financial Accounting  Standards No. 115 (SFAS No. 115),  "Accounting for Certain
Investments in Debt and Equity Securities'.  The effect of adopting SFAS No. 115
resulted  in an  unrealized  holding  loss  of  $615  thousand  for  investments
available for sale.  The impact on  stockholders'  equity,  net of tax, was $392
thousand. The adoption of SFAS No. 115 had no effect on net income.

<PAGE>

     During the first quarter of 1995, the Corporation adopted the provisions of
Statement of Financial  Accounting Standards Nos. 114 and 118 (SFAS Nos. 114 and
118) "Accounting by Creditors for Impairment of a Loan" which generally  applies
to all loans  including  all loans  that are  restructured  as a  troubled  debt
restructuring  involving a modification of terms. According to SFAS Nos. 114 and
118,  impairment  of a loan occurs when it is probable the Bank will not be able
to collect  all  amounts  due  according  to the  contractual  terms of the loan
agreement.  The  measurement of impaired loans is generally based on the present
value of expected cash flows  discounted at the  historical  effective  interest
rate,  except that  collateral  dependent  loans may be measured for  impairment
based on the fair value of collateral. The adoption of SFAS Nos. 114 and 118 did
not have a material impact on the financial position or results of operations of
the Corporation during the years ended December 31, 1996 and 1995.

     In May  1995,  the  FASB  issued  the  Statement  of  Financial  Accounting
Standards No. 122 (SFAS No. 122)  "Accounting  for Mortgage  Servicing  Rights".
This  pronouncement  requires entities which sell or securitize loans and retain
the mortgage  servicing  rights to allocate the total cost of the mortgage loans
to the mortgage  servicing rights and the loans (without the mortgage  servicing
rights) based on their fair values if it is  practicable  to estimate those fair
values.  Any cost allocated to mortgage servicing rights should be recognized as
a separate  asset and  amortized  over the  period of  estimated  net  servicing
income. The adoption of SFAS No. 122 during 1996, did not have a material impact
on the financial position or results of operations of the Corporation due to the
Bank's limited volume of loan sales.
     In October  1995,  the FASB issued the  Statement of  Financial  Accounting
Standards No. 123 (SFAS No. 123) "Accounting for Stock-Based Compensation". This
statement  defines a fair value based method of accounting for an employee stock
option  or  similar  equity  instrument.  However,  it also  allows an entity to
continue to measure  compensation cost for those plans using the intrinsic value
based  method.  Corporations  electing to remain with their  current  accounting
method must make pro forma  disclosures  of net income and earnings per share as
if the fair value based method of accounting had been applied. This statement is
effective  for the fiscal  year  ending  December  31,  1996.  The bank opted to
continue with its current method of accounting for stock based  compensation  as
prescribed by APB opinion No. 25,  "Accounting  for Stock Issued to  Employees".
See Stock Options footnote.

     In June  1996,  the FASB  issued  the  Statement  of  Financial  Accounting
Standards  No. 125 (SFAS No. 125),  "Accounting  for  Transfers and Servicing of
Financial Assets and  Extinguishments of Liabilities" which is effective for the
Corporation  beginning  January 1, 1997.  SFAS No.  125,  which is to be applied
prospectively,  provides  accounting  and reporting  standards for transfers and
servicing of financial assets and  extinguishments  of liabilities  based on the
concept of control. It is anticipated that the adoption of SFAS No. 125 will not
have a material effect on the financial  position or results of operation of the
Corporation.

RECLASSIFICATIONS
     Certain items in the 1995 and 1994 consolidated  financial  statements have
been  reclassified  to conform with the  presentation  in the 1996  consolidated
financial statements.


EARNINGS PER COMMON SHARE
     Earnings per common share and weighted  average  common shares  outstanding
and common stock  equivalents  have been  retroactively  restated to reflect the
increased number of common shares resulting from a two-for-one  stock split that
was announced in November 1995 and paid to  shareholders  on January 12, 1996. A
total of 1,300,817  additional  shares were issued in conjunction with the stock
split. The par value of the Corporation's stock remained unchanged. As a result,
$130,081 was transferred  from paid-in capital in excess of par to common stock.
Earnings per share are  calculated  based on dividing net income by the weighted
average  number of common  shares  outstanding  plus the  shares  that  would be
outstanding  assuming the exercise of dilutive stock  options,  all of which are
considered  to be common  stock  equivalents.  The weighted  average  shares and
common stock equivalents  outstanding for the year ended December 31, 1996, 1995
and 1994 totaled 2,524,490, 2,565,166 and 2,650,634, respectively.

<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, 1996 and 1995 are as follows:
                                      DECEMBER 31, 1996
                    ----------------------------------------------------------
                                      GROSS        GROSS         ESTIMATED
                     AMORTIZED      UNREALIZED   UNREALIZED        MARKET
                        COST          GAINS        LOSSES           VALUE
------------------------------------------------------------------------------
U.S. Gov't Agencies $  46,791,618   $   39,819   $ (675,831)    $  46,155,606
Reverse Repurchase     20,000,000            0            0        20,000,000
Municipal bonds           794,725        5,734          (26)          800,433
U.S. Treasury              15,000            0       (1,000)           14,000
------------------------------------------------------------------------------
Total               $  67,601,343   $   45,553   $ (676,857)    $  66,970,039
==============================================================================

                                        December 31, 1995
                       ------------------------------------------------------
                                        Gross        Gross        Estimated
                         Amortized    Unrealized  Unrealized       Market
                            Cost        Gains       Losses          Value
-----------------------------------------------------------------------------

U.S. Gov't Agencies    $ 34,086,243   $   64,656   $ (40,910)  $  34,109,989
Reverse Repurchase        9,000,000            0           0       9,000,000
Municipal bonds             463,670          447           0         464,117
U.S. Treasury                15,000            0      (1,000)         14,000
-----------------------------------------------------------------------------
Total                  $ 43,564,913   $   65,103   $ (41,910)  $  43,588,106
=============================================================================

     The  amortized  cost and  estimated  market  value of  investments  held to
maturity  at  December  31,  1996,  by  contractual  maturity  are  shown in the
following table.  Expected  maturities may differ as borrowers have the right to
call certain obligations.
                               DECEMBER 31, 1996
                       --------------------------------
                           AMORTIZED       ESTIMATED
                              COST        MARKET VALUE
-------------------------------------------------------
Due one year or less   $   22,464,482    $  22,464,117
Due one to five years       3,111,553        3,100,250
Due five to ten years      16,249,625       16,174,888
Due after ten years        25,775,683       25,230,784
-------------------------------------------------------
                       $   67,601,343    $  66,970,039
=======================================================

     The Bank has the intent and ability to hold these  securities  to maturity.
During  December 1996 the Bank  purchased  $20.0  million of reverse  repurchase
agreements with Paine Webber, with an average maturity of 11 days and an average
rate of 6.05%.  At December 31, 1996,  neither a disposal,  nor conditions  that
could lead to a decision  not to hold these  remaining  securities  to maturity,
were reasonably foreseen.

3. INVESTMENT SECURITIES AVAILABLE FOR SALE
     The  amortized  cost and estimated  market value of  investment  securities
available for sale at December 31, 1996 and 1995 are as follows:

                                      DECEMBER 31, 1996
                      ---------------------------------------------------
                                       GROSS        GROSS      ESTIMATED
                        AMORTIZED    UNREALIZED   UNREALIZED     MARKET
                           COST        GAINS        LOSSES        VALUE
-------------------------------------------------------------------------
U.S. Gov't Agencies   $  5,000,000   $ 10,060  $ (13,100)  $  4,996,960
U.S. Treasury            1,997,757        803          0      1,998,560
CMOs                    12,683,603     24,400    (86,504)    12,621,499
REMICs                   6,027,067          0   (197,566)     5,829,501
-------------------------------------------------------------------------
Total                 $ 25,708,427   $ 35,263  $(297,170)  $ 25,446,520
=========================================================================

                                       December 31, 1995
                      ---------------------------------------------------
                                       Gross       Gross       Estimated
                         Amortized   Unrealized   Unrealized     Market
                            Cost       Gains       Losses        Value
-------------------------------------------------------------------------
U.S. Gov't Agencies   $  8,000,000   $       0   $ (72,500)  $ 7,927,500
U.S. Treasury            1,979,408         592           0     1,980,000
CMOs                     5,520,407      13,179     (48,787)    5,484,799
REMICs                   7,589,420           0    (298,218)    7,291,202
Common Stock                50,000      34,480           0        84,480
-------------------------------------------------------------------------
Total                 $ 23,139,235   $  48,251   $(419,505)  $22,767,981
=========================================================================

     The amortized cost and estimated market value of investments  available for
sale at December 31, 1996,  by  contractual  maturity are shown in the following
table.  Expected  maturities  may differ as borrowers  have the right to call or
prepay  certain  obligations.  CMOs and REMICs are shown  separately  due to the
amortization and prepayment of principal occurring  throughout the life of these
instruments.
                            DECEMBER 31, 1996
                       ---------------------------
                         AMORTIZED    ESTIMATED
                            COST        MARKET
                                        VALUE
--------------------------------------------------
Due one year or less   $  2,997,757 $  2,994,810
Due one to five years     4,000,000    4,000,710
CMOs                     12,683,603   12,621,499
REMICs                    6,027,067    5,829,501
--------------------------------------------------
Total                  $ 25,708,427   25,446,520
==================================================

     During 1996,  Common  Stock and  FHLMC-Remics  were sold which  resulted in
realized gains of $51 thousand and $3 thousand, respectively. During 1995, there
were no sales of investment  securities  available  for sale.  In 1994,  the ARM
mutual funds were sold which resulted in a $122 thousand loss.
<PAGE>
4. LOANS RECEIVABLE
     Loans receivable at December 31, 1996 and 1995 consist of the following:

                                    1996            1995
-------------------------------------------------------------
Mortgage Loans                 $ 257,607,922  $  249,278,288
Construction Loans                 5,989,300       4,063,081
Commercial Construction            4,715,000               0
Consumer Loans                     4,015,403       4,336,346
Commercial Real Estate            39,177,194      34,721,212
Commercial Business                1,829,956       1,779,051
-------------------------------------------------------------
Subtotal                         313,334,775     294,177,978
Less:
  Loans in process                 2,597,733       1,947,301
  Deferred loan fees               1,084,289       1,063,662
  Allowance for
   possible loan losses            2,781,937       2,766,779
-------------------------------------------------------------
Total loans receivable, net    $ 306,870,816  $  288,400,236
=============================================================

     The Corporation adopted SFAS Nos. 114 and 118, "Accounting by Creditors for
Impairment of a Loan" during the first quarter of 1995. At December 31, 1996 and
1995 the recorded  investment in loans for which  impairment had been recognized
in accordance  with SFAS Nos. 114 and 118 totaled $4.1 million and $4.5 million,
respectively.  At December 31, 1996,  impaired loans of $1.8 million  related to
loans that were individually  measured for impairment with a valuation allowance
of $274 thousand and $2.3 million of loans that were  collectively  measured for
impairment  with a valuation  allowance of $130  thousand.  At December 31, 1995
impaired loans of $2.0 million related to loans that were individually  measured
for impairment  with a valuation  allowance of $350 thousand and $2.5 million of
loans that were collectively  measured for impairment with a valuation allowance
of $150  thousand.  For the years ended  December 31, 1996 and 1995, the average
recorded  investment in impaired loans was  approximately  $4.0 million and $3.6
million,  respectively.  During the years ended  December  31, 1996 and 1995 the
Corporation  recognized  $296  thousand  and  $259  thousand,  respectively,  of
interest on impaired loans, all of which is recognized on the cash basis.

     Loans which are 90 days  delinquent as to principal and 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, 1996 and 1995 was $4.1
million.  Interest income on non-accrual  loans that would have been recorded in
1996 under the original terms of such loans was $364 thousand,  and the interest
income  actually  recognized in 1996 for such loans was $201 thousand.  Interest
income on  non-accrual  loans that would  have been  recorded  in 1995 under the
original terms of such loans was $232 thousand,  and the actual  interest income
recognized in 1995 for such loans was $186 thousand.

     The Bank  originates and purchases both  adjustable and fixed interest rate
loans. At December 31, 1996, the composition of these loans is as follows:

<TABLE>
<CAPTION>

                                           Maturing     Maturing
                                            during     from 1998      Maturing
(In Thousands)                               1997     through 2000   after 2001   Total    
------------------------------------------------------------------------------------------
<S>                                        <C>        <C>            <C>         <C>     
Mortgage Loans (1-4 dwelling)              $  2,299   $ 12,029       $ 243,280   $257,608
Construction Loans                            3,480      2,510               0      5,990
Commercial Construction                           0          0           4,715      4,715
Consumer Loans                                1,668        793           1,554      4,015
Commercial Real Estate                       11,627     14,125          13,425     39,177
Commercial Business                           1,021        665             144      1,830
------------------------------------------------------------------------------------------
        Total                              $ 20,095   $ 30,122       $ 263,118   $313,335
------------------------------------------------------------------------------------------
                                                                   
Interest sensitivity on the above loans:                             
    Loans with predetermined rates         $ 18,445   $ 28,496       $ 164,141   $211,082
    Loans with adjustable or                                         
      floating rates                          1,650      1,626          98,977    102,253
------------------------------------------------------------------------------------------
        Total                              $ 20,095   $ 30,122       $ 263,118   $313,335
------------------------------------------------------------------------------------------
</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 loan interest rate  adjustments  with the rates the Bank pays
on the  short-term  deposits  that have been  primarily  utilized  to fund these
loans.

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

                                       YEARS ENDED DECEMBER 31,
                              -----------------------------------------
                                 1996          1995           1994
-----------------------------------------------------------------------
Balance at beginning
  of year                     $ 2,766,779   $2,621,512    $  2,588,660
Provision charged to
  operations                      120,000      120,000          66,000
Charge-offs                      (115,253)     (18,475)       (119,625)
Recoveries                         10,411       43,742          86,477
-----------------------------------------------------------------------
Balance at end of year        $ 2,781,937   $2,766,779    $  2,621,512
=======================================================================

<PAGE>
5. MORTGAGE-BACKED SECURITIES
     Mortgage-backed  securities  held to maturity at December 31, 1996 and 1995
are summarized as follows:

                              DECEMBER 31, 1996
          -------------------------------------------------------
                            GROSS         GROSS       
             AMORTIZED    UNREALIZED    UNREALIZED    ESTIMATED
               COST         GAINS        LOSSES      VALUE MARKET
-----------------------------------------------------------------
                                                       
GNMA      $  23,216,175  $   548,034  $ (19,890)  $  23,744,319
FNMA         37,958,391      308,922   (244,978)     38,022,335
FHLMC        42,586,038      752,658   (104,912)     43,233,784
PRIVATE         551,977        6,041          0         558,018
-----------------------------------------------------------------
TOTAL     $ 104,312,581  $ 1,615,655  $(369,780)  $ 105,558,456
=================================================================

                             December 31, 1995
          ---------------------------------------------------------
                             Gross          Gross     
             Amortized     Unrealized    Unrealized    Estimated
               Cost          Gains         Losses    Market Value
-------------------------------------------------------------------
GNMA      $  15,225,124  $    426,254   $     (348) $  15,651,030
FNMA         41,506,743       549,696     (106,535)    41,949,904
FHLMC        54,039,337     1,233,442      (49,292)    55,223,487
Private         783,660         1,196       (4,477)       780,379
-------------------------------------------------------------------
Total     $ 111,554,864  $  2,210,588   $ (160,652) $ 113,604,800
===================================================================

     The Bank has the intent and ability to hold these  securities  to maturity.
At December 31, 1996,  neither a disposal,  nor a condition that could lead to a
decision not to hold these  securities  to maturity  were  reasonably  foreseen.
Mortgage-backed securities of $859 thousand and $1.1 million were used to secure
public funds on deposit at December 31, 1996 and 1995, respectively.

6. OFFICE PROPERTIES AND EQUIPMENT
     Office  properties  and  equipment  at  December  31,  1996  and  1995  are
summarized by major classification, as follows:

                                                DECEMBER 31,
                                       --------------------------------
                                            1996            1995
-----------------------------------------------------------------------
Land, buildings and
  improvements                         $  14,675,111  $   12,351,961
Furniture and equipment                    3,413,347       3,032,286
Computers                                  2,285,858       2,979,324
-----------------------------------------------------------------------
Total                                     20,374,316      18,363,571

Less accumulated depreciation             (5,618,078)     (5,590,092)
-----------------------------------------------------------------------
Office properties and equipment, net   $  14,756,238  $   12,773,479
=======================================================================

7. REAL ESTATE HELD FOR DEVELOPMENT
     The Bank,  through its wholly-owned  subsidiary,  Land Financial  Services,
Inc.,  has entered into several  real estate  investments.  Real estate held for
development is carried at the lower of cost or estimated net  realizable  value.
Intercompany  loans from the Bank are the  primary  sources of funding  and have
been eliminated in  consolidation.  Such  investments in real estate at December
31, 1996 and 1995, are summarized as follows:

                                DECEMBER 31,
                        ----------------------------
                             1996           1995
----------------------------------------------------
Real Estate held for
  development           $  4,898,782   $  4,898,782
Valuation allowance       (3,671,050)    (3,671,050)
----------------------------------------------------
Net                     $  1,227,732   $  1,227,732
====================================================

     During 1995, the Bank recorded an additional $200 thousand provision on the
real  estate held for  development.  The losses  were  reflected  as a charge to
income in the other income section of the consolidated statements of operations.

     Under the Financial  Institutions  Reform,  Recovery and Enforcement Act of
1989 ("FIRREA"),  the Bank is required to deduct from capital its investments in
and advances to subsidiaries  engaged in activities not permissible for national
banks (i.e. real estate development).

<PAGE>

8. REAL ESTATE OWNED

     Real estate owned, which was acquired through foreclosure and deeds in-lieu
of  foreclosure,  totaled $622 thousand and $669  thousand,  net at December 31,
1996 and 1995,  respectively.  Changes in allowance  for real estate owned is as
follows:

                                     YEARS ENDED DECEMBER 31,
                                ------------------------------------
                                   1996         1995        1994
--------------------------------------------------------------------

Balance at beginning of year    $ 313,192   $   79,000   $       0
Provisions charged
  to operations                   153,482      354,453     157,526
Charge-offs                       (29,717)    (120,261)    (78,526)
Recoveries                            550            0           0
--------------------------------------------------------------------
Balance at end of year          $ 437,507   $  313,192   $  79,000
====================================================================


9. DEPOSITS
     Deposits at December  31, 1996 and 1995  consisted of the  following  major
classifications and weighted average rates:

                                  DECEMBER 31, 1996
                           ----------------------------------
                           Weighted                 
                            Average                 Percent
                             Rate       Amount      Of Total
-------------------------------------------------------------
Non-interest checking         0.00%  $ 37,552,269     8.28 %
Checking accounts             1.57     46,750,659    10.31
Savings accounts              2.57     71,057,835    15.68
Money market accounts         2.65     56,961,349    12.57
Certificates                  5.30    240,954,422    53.16
-------------------------------------------------------------
Total                         3.77%  $453,276,534   100.00 %
=============================================================


                                   December 31, 1995
                            ----------------------------------
                            Weighted                 Percent
                          Average Rate   Amount      of Total
--------------------------------------------------------------
Non-interest checking         0.00%   $  28,678,611     6.69 %
Checking accounts             1.52       44,442,958    10.36
Savings accounts              2.59       68,710,447    16.02
Money market accounts         2.66       57,493,882    13.41
Certificates                  5.21      229,483,482    53.52
--------------------------------------------------------------
Total                         3.81%   $ 428,809,380   100.00 %
==============================================================

     A summary of certificates by maturity at December 31, 1996 is as follows:


YEAR ENDED DECEMBER 31,            AMOUNT
-----------------------------------------------
1997                           $ 141,382,229
1998                              42,370,029
1999                              24,325,661
Thereafter                        32,876,503
-----------------------------------------------
Total                          $ 240,954,422
===============================================


     A summary of interest expense on deposits is as follows:

                                  YEARS ENDED DECEMBER 31,
                          ------------------------------------------
                               1996           1995          1994
--------------------------------------------------------------------
Checking accounts           $   693,879    $   704,815  $   657,628
Savings accounts              1,816,081      1,750,873    2,102,620
Money market accounts         1,519,789      1,571,079    1,913,044
Certificates                 12,146,474     11,934,343    9,865,805
--------------------------------------------------------------------
Total interest expense      $16,176,223    $15,961,110  $14,539,097
====================================================================

10. ADVANCES FROM FEDERAL HOME LOAN BANK
     At December 31, 1996, the Bank had advances from the Federal Home Loan Bank
of New York  ("FHLB")  in the amount of $32.6  million  with a weighted  average
interest rate of 6.09%.  The advances are  scheduled to mature as follows:  $4.1
million  maturing in January  1997,  $5.0  million  maturing in June 1997,  $5.0
million  maturing in June 1998,  $2.0 million  maturing in October  1998,  $10.0
million  maturing in June 2000, $5.0 million  maturing in February 2001 and $1.5
million  maturing in October 2007. At December 31, 1996,  the Bank had an unused
credit line with the FHLB of $21.0  million.  Advances from FHLB at December 31,
1995 totaled  $24.5  million  with a weighted  average  interest  rate of 5.96%.
Advances are collateralized by FHLB stock and certain first mortgage loans.


11. ADVANCES FROM BANK
     At December 31, 1996, the Bank had advances from financial  institutions of
$6.7 million. These advances mature during January 1997 and will be used to fund
the acquisition of deposits.


12. SUBORDINATED DEBENTURES
     The  Corporation  completed the issuance of $10.0  million of  Subordinated
Debentures in a public  offering on July 28, 1994. The Debentures are unsecured,
bear  interest at a rate of 10% per annum and mature on July 28, 2004.  Interest
payments are due semiannually on February 1 and August 1 commencing  February 1,
1995.  The Debentures  are  redeemable,  in whole or in part, at any time at the
option of the  Corporation  at  specified  redemption  prices,  except  that the
debentures  may not be redeemed  prior to August 1, 1997.  The net proceeds from
the sale of the Debentures  totaled $9.4 million and were used for the expansion
of the Bank's  operations  through  branch  acquisitions  and general  corporate
purposes.  The  Corporation  is  required  to  retain at all  times  cash,  cash
equivalents  or  marketable  securities in an amount not less than the aggregate
amount of two  consecutive  semi-annual  interest  payments that will be due and
payable on the Debentures following such declaration date or redemption date.
<PAGE>

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

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

                                            DECEMBER 31,
                                       --------------------------
                                          1996         1995
-----------------------------------------------------------------
Deferred income tax assets:
  Allowance for possible loan losses   $  508,394  $   448,273
  Real estate losses                      339,600      286,597
  Deferred loan fees, net                  27,927       54,262
  Compensation and pension liability       78,652       60,869
  Amortization of deposit premium         201,791      116,338
  Post retirement benefits                185,000      185,000
  Capitalized interest                    540,411      466,821
  Unrealized (gain) loss on investments         0      (12,758)
  Other                                    44,829       85,654
-----------------------------------------------------------------
Gross deferred tax assets               1,926,604    1,691,056
Valuation allowance                             0    (289,588)
-----------------------------------------------------------------
                                        1,926,604    1,401,468

Deferred income tax liabilities:
  Prepaid deposit insurance premium         5,839      170,029
  Depreciation                            357,285      333,996
-----------------------------------------------------------------
Gross deferred tax liabilities:           363,124      504,025
-----------------------------------------------------------------
Deferred income tax assets, net        $1,563,480  $   897,443
=================================================================

     The net change in the valuation  allowance for the year ended  December 31,
1996 was a decrease of $290  thousand.  This change in the  valuation  allowance
resulted from a reassessment of the realizability of the existing net deductible
temporary  differences  which  give rise to the net  deferred  income tax asset.
There was no change in the valuation  allowance for the year ended  December 31,
1995.

     The following represents the components of income tax expense for the years
ended December 31, 1996, 1995 and 1994, respectively.

                                     1996        1995       1994
--------------------------------------------------------------------
Current Federal tax provision    $ 1,862,681 $2,305,857 $1,880,325
Current State tax provision          181,544    220,948    196,562
--------------------------------------------------------------------
       Total Current provision     2,044,225  2,526,805  2,076,887
--------------------------------------------------------------------
Deferred Federal tax provision
  (benefit)                        (725,109)   (51,078)    234,892
Deferred State tax provision
  (benefit)                         (39,617)    (4,646)     23,384
--------------------------------------------------------------------
       Total Deferred provision
  (benefit)                        (764,726)   (55,724)    258,276
--------------------------------------------------------------------
Total                            $ 1,279,499 $2,471,081 $2,335,163
====================================================================

    On August 20, 1996,  the Small  Business Job  Protection Act was signed into
law which repealed the favorable  reserve method available to savings banks. The
Bank was required to change its tax bad debt method to the  specific  charge-off
method  effective  for the fiscal year ended  December 31,  1996.  The change in
method resulted in taxable income of approximately $1.7 million representing the
excess of the Bank's tax bad debt  reserve at  December  31,  1996 over the base
year reserve  amount of $6.3 million  that arose in tax years  beginning  before
December 31, 1987. The income will be recognized for tax purposes ratably over a
six year period.
     The  Company  has not  provided  deferred  income  taxes for the Bank's tax
return reserve for bad debts that arose in tax years  beginning  before December
31, 1987 because it is not  expected  that this  difference  will reverse in the
foreseeable  future. The cumulative amount of temporary  differences  related to
the reserve for bad debts for which  deferred  taxes have not been  provided was
approximately  $6.3 million at December 31, 1996.  This potential  liability for
which no deferred income taxes have been provided was approximately $2.4 million
as of December 31, 1996. A deferred tax  liability has been  recognized  for the
portion of the tax bad debt reserves which arose in 1988 through 1995.

<PAGE>

     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>
                                             1996                     1995                     1994
                                    --------------------     ----------------------    ---------------------
                                      AMOUNT     PERCENT       AMOUNT       PERCENT      AMOUNT      PERCENT
                                    ----------   -------     ----------     -------    ----------    -------
<S>                                 <C>           <C>        <C>             <C>       <C>            <C>   
Tax at federal tax rate             $1,463,808    34.00%     $2,316,925      34.00%    $2,308,810     34.00%
Increase (Decrease) from:
  State income taxes, net
       of federal income tax
       benefit                          93,672    2.18          142,759       2.09        145,164      2.14 
  Change in valuation
       allowance                      (289,588)  (6.73)               0       0.00       (234,701)    (3.46)
  Other                                 11,607    0.27           11,397       0.17        115,890      1.71 
                                    ----------    -----      ----------      -----     ----------     ----- 
  Total                             $1,279,499    29.72%     $2,471,081      36.26%    $2,335,163     34.39%
                                    ==========    =====      ==========      =====     ==========     ===== 
</TABLE>

14. LEASES
     The Bank  leases a building  and land to operate two  branches  and certain
equipment under noncancelable  leases which expire over the next 25 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, 1996 are as follows:

FISCAL YEAR                AMOUNT
------------------------------------
1997                  $     72,035
1998                        55,245
1999                        55,245
2000                        55,245
2001 and beyond          1,068,065
------------------------------------
Total                 $  1,305,835
====================================

     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 $107 thousand,  $104 thousand and $97 thousand for
fiscal years 1996, 1995 and 1994, respectively.

15. 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. Furthermore, income appropriated to bad debt reserves and deducted for
federal income tax purposes  cannot be used to pay dividends  without payment of
federal income taxes on the amount of such income removed from reserves for such
purposes at the then current income tax rate.

      Under FIRREA the Bank must have core capital equal to 3%, tangible capital
equal to 1.5% and risk-based capital equal to 8%. At December 31, 1996, the Bank
exceeded all three regulatory  capital levels required under FIRREA.  The Bank's
regulatory  tangible and core  capital was $39.0  million or 7.23% of total bank
assets and  risk-based  capital  was $41.6  million  or 15.35% of  risk-weighted
assets.

<PAGE>

   The  following is a  reconciliation  of the Bank's  capital  under  generally
accepted  accounting  principles  ("GAAP") to regulatory capital at December 31,
1996:

                            Tangible          Core        Risk-Based
                             Capital        Capital         Capital
-------------------------------------------------------------------------
Bank's GAAP Capital      $  40,901,723      40,901,723     40,901,723
Add:
  Unrealized loss on
     investments AFS           166,152         166,152        166,152
Less:
  Subsidiary
     investments not
     eligible               (1,271,162)     (1,271,162)    (1,271,162)
  Goodwill                    (812,599)       (812,599)      (812,599)
Supplementary
  qualifying capital
  item:
     General valuation
     allowance                       0               0      2,573,216
-------------------------------------------------------------------------
Regulatory capital
  computed                  38,984,114      38,984,114     41,557,330
Minimum regulatory
  capital requirement        8,087,812      16,175,625     21,664,416
-------------------------------------------------------------------------
Regulatory capital
  excess                 $  30,896,302  $   22,808,489  $  19,892,914
=========================================================================

16. PENSION PLAN
     The Bank has a defined  benefit  pension  plan for  active  employees.  Net
pension  expense was $412  thousand,  $279  thousand and $239 thousand for years
ended  December 31, 1996,  1995 and 1994,  respectively.  The  components of net
pension cost are as follows:

                          YEARS ENDED DECEMBER 31,
                          ------------------------
                        1996         1995        1994
----------------------------------------------------------
Service Cost        $   397,001  $   253,640 $  218,797
Interest Cost           204,457      163,002    146,491
Return on Assets       (596,276)    (616,173)   (39,613)
Net Amortization
  and Deferral          406,357      478,773    (86,277)
----------------------------------------------------------
Net periodic
  pension cost      $   411,539  $   279,242 $  239,398
==========================================================


     The following table presents a  reconciliation  of the funded status of the
defined benefit pension plan at December 31, 1996 and 1995:

                                                            DECEMBER 31,
                                                     --------------------------
                                                         1996         1995
-------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
    Vested                                           $ 2,689,892    $ 2,084,446
    Nonvested                                            265,891        176,264
-------------------------------------------------------------------------------
Accumulated benefit obligation                         2,955,783      2,260,710
Projected benefit obligation                           3,959,973      2,941,106
Fair value of plan assets                              4,105,395      3,194,912
-------------------------------------------------------------------------------
Excess (Deficit) of plan assets over
  projected benefit obligation                           145,422        253,806
Unrecognized net (gain) loss                             (91,026)      (225,225)
Unrecognized prior service cost                           88,094         94,542
Unrecognized net transition
  obligation                                             224,381        255,287
-------------------------------------------------------------------------------
Prepaid pension liability
  included in the consolidated
  balance sheets                                     $   366,871    $   378,410
===============================================================================


<PAGE>

     Actuarial assumptions used in determining pension cost are as follows:
 
                         YEARS ENDED DECEMBER 31,
                         --------------------------
                          1996    1995      1994
---------------------------------------------------
Discount rate for
  benefit obligation      6.00%   6.00 %    6.00 %
Rate of increase in
  compensation levels
  and social security
  wage base               4.00%   4.00 %    4.00 %
Expected long-term
  rate of return on
  plan assets             7.00%   7.00 %    7.00 %
===================================================

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

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

                                             December 31,
                                       -----------------------
                                          1996        1995
--------------------------------------------------------------
Service Cost                           $      0     $      0
Interest Cost                            33,489       42,258
Amortization of prior service cost       (9,123)      (1,521)
Amortization of (Gain)/Loss              (3,677)      (9,045)
--------------------------------------------------------------
Net periodic post-retirement
  benefit cost                         $ 20,689     $ 31,692
==============================================================


     The  assumed  discount  rate  used  in the  calculation  for  net  periodic
post-retirement benefit cost was 7.0% and 8.25% for 1996 and 1995, respectively.
The  assumed  health care cost trend rate for 1996 was 7% and was graded down in
1% increments  per year to an ultimate  rate of 5% per year.  The impact of a 1%
increase in the assumed  health care cost trend for each future year would be as
follows:

                                              December 31, 1996
----------------------------------------------------------------
Accumulated post-retirement obligation
  at year end                                       $512,229
Service Cost                                        $      0
Interest Cost                                       $ 36,215
================================================================

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

                                         DECEMBER 31,
                                   -------------------------
                                      1996         1995
------------------------------------------------------------
Accumulated post-retirement
  benefit obligation               $(472,895)   $ (485,073)
Unrecognized prior service cost      (89,709)      (98,832)
Unrecognized net gain               (103,217)     (106,555)
------------------------------------------------------------
Accrued post-retirement benefit
  cost                             $(665,821)   $ (690,460)
============================================================

     The  assumed  discount  rate used in the  calculation  for the  accumulated
post-retirement benefit obligation as of December 31, 1996 and 1995 was 7.5% and
7.0%, respectively.

<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 AND SECURITIES  AVAILABLE FOR SALE: 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.

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
of similar remaining maturities.

SUBORDINATED DEBENTURES:  Fair value is estimated using the quoted average of
the broker bid and asked price at year end.

OTHER BORROWINGS:  Fair value is estimated using a discounted cash flow
analysis.

ADVANCES FROM BANK:  The carrying value is a reasonable estimate of fair value
due to the short term nature of these obligations.

COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT:  For commitments and
standby  letters of credit  expiring within 90 days or with a variable rate, the
settlement  amount is a reasonable  estimate of fair value.  For commitments and
standby letters of credit expiring beyond 90 days or with a fixed rate, the fair
value is the present value of the obligations based on current loan rates.

<PAGE>
     At December 31, 1996 and December  31,  1995,  the carrying  amount and the
estimated  market  value  of  the  Corporation's  financial  instruments  are as
follows:

<TABLE>
<CAPTION>
                                                             DECEMBER 31, 1996              DECEMBER 31, 1995
                                                       ------------------------------  ---------------------------

                                                         CARRYING         ESTIMATED      CARRYING      ESTIMATED
                                                          AMOUNT        MARKET VALUE      AMOUNT      MARKET VALUE
                                                       --------------   -------------  ------------- -------------

Financial assets:
<S>                                                    <C>              <C>            <C>           <C>          
 Cash and cash equivalents                             $    9,919,549   $   9,919,549  $   9,985,580 $   9,985,580
 Investment securities held to maturity and investment
  securities available for sale                        $   93,047,863   $  92,416,559  $  66,332,894 $  66,356,087
 Mortgage-backed securities                            $  104,312,581   $ 105,558,456  $ 111,554,864 $ 113,604,800
 FHLB Stock                                            $    3,620,600   $   3,620,600  $   4,058,100 $   4,058,100

 Loans, net of unearned income                         $  309,652,753   $ 311,325,000  $ 291,167,015 $ 297,704,000
  Less: Allowance for possible loan losses                (2,781,937)               0    (2,766,779)             0
 Net loan receivable and loans held for sale           $  306,870,816   $ 311,325,000  $ 288,400,236 $ 297,704,000


Financial liabilities:
 Deposits
  Checking, passbook, and money market accounts        $  212,322,112   $ 212,322,112  $ 199,325,898 $ 199,325,898
  Certificates                                         $  240,954,422   $ 238,005,000  $ 229,483,482 $ 229,200,000
 Subordinated debentures                               $   10,000,000   $  10,300,000  $  10,000,000 $  10,150,000
 Other borrowings                                      $   32,656,463   $  32,343,000  $  24,682,444 $  24,866,000
 Advances from Bank                                    $    6,691,758   $   6,691,758  $           0 $           0

Off-balance sheet financial instruments:
 Commitments to extend credit                          $   26,199,447   $  26,199,447  $  25,686,791 $  25,686,791
 Standby letters of credit                             $    1,094,381   $   1,094,381  $     935,673 $     935,673
</TABLE>
18. FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT ("FDICIA")
     The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA")  was enacted into law on December 19,  1991.  The statute  includes a
number of additional supervisory measures. The additional supervisory powers and
regulations mandated by FDICIA include a "Prompt Corrective Action" program that
permits regulators to take increasingly  harsh action against  associations that
fail to meet certain new capital-based  requirements.  Various other sections of
FDICIA impose substantial new audit and reporting requirements.
     FDICIA also requires each regulatory agency to institute non-capital safety
and  soundness  standards for each  institution  it regulates by August 1, 1993.
These standards must cover (1) internal controls,  (2) loan  documentation,  (3)
credit  underwriting,   (4)  interest  rate  exposure,  (5)  asset  growth,  (6)
compensation,  fees and benefits paid to employees,  officers and directors, (7)
operational and managerial standards, and (8) asset quality,  earnings and stock
valuation standards for preserving a minimum ratio of market value to book value
for publicly traded shares (if feasible).  Many of the  regulations  required by
FDICIA have been  promulgated  by federal  regulators.  As of December  31, 1996
management of the Bank believes  that it is in compliance  with the  regulations
adopted pursuant to FDICIA.

19.  COMMITMENTS AND CONTINGENCIES
     The Bank has outstanding  loan  commitments of $26.2 million as of December
31, 1996. Of these  commitments  outstanding,  the  breakdown  between fixed and
variable rate loans is as follows:

                                  December 31, 1996
                      -------------------------------------------
                          Fixed       Variable
                          Rate          Rate           Total
-----------------------------------------------------------------
Commitments to:
    fund loans        $ 3,484,776   $  1,745,950   $  5,230,726
Unused lines:
    Construction                0      2,597,733      2,597,733
    Equity line of
      credit loans              0     18,370,988     18,370,988
-----------------------------------------------------------------
                      $ 3,484,776   $ 22,714,671   $ 26,199,447
=================================================================

In addition to outstanding loan  commitments,  the Bank as of December 31, 1996,
issued $1.1 million in standby  letters of credit to guarantee  performance of a
customer to a third party.
     Commitments and standby letters of credit are issued in accordance with the
same loan  policies  and  underwriting  standards as settled  loans.  Since some
commitments  and standby  letters of credit are expected to expire without being
drawn down, these amounts do not necessarily represent future cash requirements.

<PAGE>

20. LITIGATION

     There are no  significant  pending legal  proceedings  at December 31, 1996
which will have a material  impact on the  Corporation's  financial  position or
results of operations.

21.  LOANS TO 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.  On  November  11,  1996,  Regulation  O was  amended  to allow
executive  officers to  participate  in any employee loan rate discount  benefit
program  available  to all  full-time  employees.  Since the Bank offers such an
employee benefit program,  the policy governing loans to executive  officers was
amended to allow the executive  officers to participate in this loan program and
thereby  receive rate  discounts.  These  changes went into effect on January 1,
1997. 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, 1996 and 1995,  loans made to  directors  and
officers whose indebtedness  exceeded $60 thousand amounted to $532 thousand and
$661  thousand,  respectively.  During  1996 and 1995 there were no new loans to
these  individuals  and  repayments  totaled  $18  thousand  and $187  thousand,
respectively.

22. EMPLOYEE STOCK OWNERSHIP PLAN
     In  connection   with  the  conversion  to  stock  form,  the   Corporation
established  an  Employee  Stock   Ownership  Plan  ("ESOP"),   which  purchased
approximately  $660  thousand  worth  of  common  stock.  In  order  to make the
purchase, the ESOP borrowed approximately $660 thousand on December 8, 1988 from
a commercial  bank.  The debt,  which accrues  interest at 80% of the commercial
bank's base rate,  has been  guaranteed by the  Corporation,  and is payable and
expensed in ten annual  installments of approximately  $66 thousand.  Additional
principal  payments may be made from cash dividends paid on the unallocated ESOP
shares.
     Annual  contributions  to the ESOP are made in  amounts  determined  by the
Board of  Directors.  Because the  Corporation's  loan  guarantee  represents  a
commitment  either  to make  future  contributions  to the  ESOP or to make  the
principal  payments when due, the  guarantee has been  reflected as a liability,
and an offsetting charge  equivalent to the future  contributions to be made has
been  reflected  as a  reduction  of  stockholders'  equity in the  accompanying
consolidated statements of financial condition.

23. STOCK OPTIONS
     The Corporation has established a stock  compensation plan (the "Plan") for
executive  officers and other selected  employees of the  Corporation.  The Plan
consists of incentive  stock  options  intended to qualify under Section 422A of
the Internal  Revenue Code of 1986.  These stock options may be surrendered  and
stock  appreciation  rights may be granted in their place,  with the approval of
the Corporation.
      A total  of 111,642 shares of authorized but unissued  common stock of the
Corporation  has been reserved for future  issuance  under the Plan.  The option
price per share for options  granted may not be less than the fair market  value
of the common  stock on the date of grant.  At  December  31,  1996,  the option
exercise  prices are $3.88 and $16.00.  Options are fully  vested at the date of
grant and must be exercised within ten years.
    A Summary of the status of the Bank's  Stock  Option Plan as of December 31,
1996,  1995 and 1994 and  changes  during  the years  ending  on those  dates is
presented below.

<TABLE>
<CAPTION>
                                               Years Ended December 31,
                           --------------------------------------------------------------------
                                    1996                  1995                   1994
-----------------------------------------------------------------------------------------------
                                       Weighted               Weighted               Weighted
                                       Average                 Average                Average
                                       Exercise                Exercise               Exercise
                              Shares    Price        Shares     Price      Shares      Price
-----------------------------------------------------------------------------------------------
<S>                          <C>         <C>         <C>         <C>       <C>        <C> 
Outstanding at the
  Beginning of the year        95,823    $ 5.40      100,958     $ 3.88    123,758    $ 3.88
Options granted                     -         -       12,000      16.00          -         -
Options exercised              (1,250)     3.88      (11,435)      3.88     (6,200)     3.88
Options surrendered           (12,422)     3.88       (5,700)      3.88    (16,600)     3.88
-----------------------------------------------------------------------------------------------
Outstanding at the
  End of the year              82,151    $ 5.65       95,823     $ 5.40    100,958    $ 3.88
===============================================================================================
</TABLE>

     On January 1, 1996,  the Bank adopted  Statement  of  Financial  Accounting
Standard No. 123,  "Accounting for Stock Based  Compensation" (SFAS No. 123). As
permitted  by SFAS No. 123, the Bank 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. If the Bank had adopted
the fair value method of accounting for stock based  compensation the Bank's net
income and net income per share would have been as follows:

                              December 31, 1995
----------------------------------------------------------
                          As Reported       Pro Forma
----------------------------------------------------------

Net Income                $ 4,343,404       $ 4,300,435

Net Income Per Share      $      1.69       $      1.68
==========================================================


     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:  dividend
yield of 2.35%,  expected  volatility  of 20.64%,  discount  rate of 6.0% and an
expected life of 10 years at December 31, 1995. There were no options granted in
1996.


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

      Most of the Bank's  lending  activity  is with  customers  located  within
southern New Jersey.  Generally, the loans are secured by real estate consisting
of single family residential  properties.  While this represents a concentration
of credit risk,  the credit  losses  arising  from this type of lending  compare
favorably  with the Bank's  credit loss  experience on its portfolio as a whole.
The ultimate  repayment  of these loans is dependent to a certain  degree on the
local economy and real estate market.
   The financial  statements of the  Corporation are prepared in conformity with
generally  accepted  accounting  principles  that  require  management  to  make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities and disclosures of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reported period. Actual results could differ from these estimates.
        Significant   estimates  are  made  by  management  in  determining  the
allowance for possible loan losses and carrying  values of real estate owned and
real estate held for development. Consideration is given to a variety of factors
in  establishing   these  estimates   including  current  economic   conditions,
diversification  of the  loan  portfolio,  delinquency  statistics,  results  of
internal loan reviews,  borrowers' perceived financial and managerial strengths,
the adequacy of underlying collateral, if collateral dependent, or present value
of future  cash  flows and  other  relevant  factors.  Since the  allowance  for
possible  loan losses and carrying  value of real estate  assets and real estate
held for development is dependent, to a great extent, on the general economy and
other  conditions  that  may  be  beyond  the  Bank's  control,  it is at  least
reasonably possible that the estimates of the allowance for possible loan losses
and the carrying values of the real estate assets could differ materially in the
near term.

25. SUBSEQUENT EVENTS
     On November 26, 1996, the Board of Directors of the Corporation  declared a
$.05  per  share  cash  dividend  which  is  payable  on  January  10,  1997  to
shareholders of record on January 2, 1997.

     On February 25, 1997, The Board of Directors of the Corporation  declared a
$.05 per share cash dividend which is payable on April 14, 1997 to  shareholders
of record on April 2, 1997.

<PAGE>

26.  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                               1996             1995
-----------------------------------------------------------------------------------------------------------------------
ASSETS:
<S>                                                                                 <C>               <C>           
 Cash                                                                               $      254,546    $       81,827
 Investment in subsidiary                                                               43,768,186        40,339,762
 Investment securities                                                                   1,000,000         1,000,000
 Intercompany receivable-net                                                             1,591,556         3,043,996
 Subordinated Debentures issue cost-net                                                    435,809           493,157
 Other                                                                                     168,843           168,157
                                                                                    ------------------------------------
TOTAL ASSETS                                                                        $   47,218,940    $   45,126,899
                                                                                    ------------------------------------

LIABILITIES:
 10% Subordinated Debentures due 2004                                               $   10,000,000    $   10,000,000
 Guarantee of employee stock ownership plan debt                                           106,463           182,444
 Dividends payable                                                                         119,636           125,288
 Accrued interest payable                                                                  416,667           416,667
                                                                                    ------------------------------------
TOTAL LIABILITIES                                                                       10,642,766        10,724,399
                                                                                    ------------------------------------



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 2,602,884 and 2,601,634 and shares outstanding 2,392,707 and 2,505,756 as
    of December 31, 1996 and 1995, respectively                                            260,288           260,163
 Paid-in capital in excess of par                                                        8,413,558         8,408,840
 Unrealized loss on securities available for sale,
    net of deferred income taxes                                                          (166,152)         (236,154)
 Guarantee of employee stock ownership plan debt                                          (106,463)         (182,444)
 Retained earnings                                                                      31,237,903        27,301,864
 Less:Treasury Stock (210,177 and 95,878 shares, at cost at December 31, 1996 and
    1995, respectively)                                                                 (3,062,960)       (1,149,769)
                                                                                    ------------------------------------
TOTAL STOCKHOLDERS' EQUITY                                                              36,576,174        34,402,500
                                                                                    ------------------------------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                          $   47,218,940    $   45,126,899
                                                                                    ====================================
</TABLE>
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                    YEARS ENDED DECEMBER 31,
                                                          ----------------------------------------------
FMS FINANCIAL CORPORATION STATEMENTS OF OPERATIONS            1996              1995           1994
--------------------------------------------------------------------------------------------------------
<S>                                                       <C>               <C>            <C>         
Intercompany interest income                              $     560,750     $     537,030  $    288,546
Interest expense                                             (1,057,348)       (1,049,013)     (456,306)
Equity in undistributed income of subsidiary                  3,353,576         4,687,233     4,566,175
--------------------------------------------------------------------------------------------------------
Income before taxes                                           2,856,978         4,175,250     4,398,415
Income tax benefit                                              168,843           168,154        57,040
--------------------------------------------------------------------------------------------------------
NET INCOME                                                $   3,025,821     $   4,343,404  $  4,455,455
========================================================================================================
</TABLE>

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

<PAGE>

<TABLE>
<CAPTION>

                                                                      FOR YEARS ENDED DECEMBER 31,
                                                           -----------------------------------------------------
FMS FINANCIAL CORPORATION STATEMENTS OF CASH FLOWS              1996                1995               1994
----------------------------------------------------------------------------------------------------------------

OPERATING ACTIVITIES
<S>                                                        <C>                 <C>               <C>              
Net income                                                 $   3,025,821       $   4,343,404     $   4,455,455
Adjustments to reconcile net income to net cash provided
   by operating activities:
Equity in undistributed earnings of the subsidiary            (3,353,576)         (4,687,233)       (4,566,175)
Amortization of bond issue costs                                  57,348              57,348            22,973
(Decrease) Increase in interest payable                                0             (16,666)          433,333
 Decrease (Increase) in intercompany receivable, net           1,452,440            (229,477)          792,981
Other operating activities                                        75,292             (35,136)           32,542
                                                           -------------       -------------     -------------    

 Net cash provided (used) by operating activities              1,257,325            (567,760)        1,171,109

INVESTING ACTIVITIES
Purchase of marketable security                                        0          (1,000,000)                0
                                                           -------------       -------------     ------------- 
 Net cash used by investing activities                                 0          (1,000,000)                0

FINANCING ACTIVITIES
Net proceeds from issuance of 10% subordinated debentures              0                   0         9,426,522
Purchase of treasury stock                                    (1,913,191)           (249,219)         (900,550)
Cash dividends received from subsidiary                        1,400,000           1,350,000                 0
Investment in subsidiary                                          (4,843)            (44,307)       (5,047,625)
Intercompany note receivable                                           0                   0        (3,607,500)
Cash dividends paid on common stock                             (495,434)           (375,213)                0
Principal repayment of employee stock ownership plan debt        (75,981)            (75,981)          (65,981)
Proceeds from issuance of stock                                    4,843              44,307            24,025
                                                           -------------       -------------     -------------

 Net cash (used) provided by financing activities             (1,084,606)            649,587          (171,109)
                                                           -------------       -------------     -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                 172,719            (918,173)        1,000,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                      81,827           1,000,000                 0
                                                           -------------       -------------     -------------
                                                                     
CASH AND CASH EQUIVALENTS, END OF YEAR                     $     254,546       $      81,827     $   1,000,000
                                                           =============       =============     =============
        
</TABLE>

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

<PAGE>

MANAGEMENT REPORT

FINANCIAL STATEMENTS
FMS  Financial   Corporation   ("the   Corporation")   is  responsible  for  the
preparation,   integrity  and  fair  presentation  of  its  published  financial
statements  as of December  31,  1996,  and the year then ended.  The  financial
statements have been prepared in accordance with generally  accepted  accounting
principles,  and as such, include amounts,  some of which are based on judgments
and estimates of management.

INTERNAL CONTROL STRUCTURE OVER FINANCIAL REPORTING AND COMPLIANCE WITH LAWS AND
REGULATIONS

The management of FMS Financial  Corporation is responsible for establishing and
maintaining an effective  internal  control  structure over financial  reporting
presented in conformity with both generally accepted  accounting  principles and
the Office of Thrift Supervision reporting instructions for the Thrift Financial
Report (TFR).  The  structure  contains a system of  monitoring  mechanisms  and
actions are taken to correct deficiencies identified.

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

Management assessed the Corporation's  internal control structure over financial
reporting presented in conformity with generally accepted accounting  principles
and the Office of Thrift Supervision  reporting  instructions as of December 31,
1996. 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  Organizations of the Treadway Commission.  Based
on this  assessment,  management  believes  that,  as of December 31, 1996,  FMS
Financial  Corporation  maintained an effective  internal control structure over
financial  reporting  presented  in  conformity  with  both  generally  accepted
accounting  and  the  Office  of  Thrift  Supervision  reporting   instructions.
Management  is  responsible  for  compliance  with  federal  and state  laws and
regulations concerning dividend restrictions and the federal law and regulations
concerning loans to insiders designated by the FDIC 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 Bank has complied,  in all  significant  respects,  with the designated
laws and  regulations  relating  to  safety  and  soundness  for the year  ended
December 31, 1996.







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

<PAGE>


REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF FMS FINANCIAL CORPORATION:

We have audited the accompanying  consolidated statements of financial condition
of FMS Financial  Corporation  and  subsidiary as of December 31, 1996 and 1995,
and the related consolidated statements of operations,  changes in stockholders'
equity,  and cash flows for each of the three years in the period ended December
31, 1996. These consolidated  financial statements are the responsibility of the
Corporation's  management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly in all material  respects,  the  consolidated  financial  position of FMS
Financial  Corporation  and  subsidiary as of December 31, 1996 and 1995 and the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity  with generally
accepted accounting principles.







/s/Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.




2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 10, 1997


<PAGE>





                             CORPORATE INFORMATION

ANNUAL MEETING
     The 1997 Annual Shareholders'  Meeting of FMS Financial Corporation will be
held at 10:00  a.m.,  Tuesday,  April 29,  1997 at the  Riverton  Country  Club,
Highland Avenue off of Route 130, Cinnaminson, 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
3, 1997 was approximately 809, 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 common bid prices,  as
reported by Nasdaq, for the periods ended December 31, 1996 and 1995:

                             1996
                      -----------------
QUARTER ENDED           HIGH      LOW
---------------------------------------
March 31,             $  17.50  $ 16.25
June 30,              $  17.50  $ 14.75
September 30,         $  16.50  $ 15.50
December 31,          $  18.25  $ 15.50
=======================================

                             1995
                      -----------------
QUARTER ENDED           HIGH      LOW
---------------------------------------
March 31,             $  12.25  $ 11.25
June 30,              $  13.28  $ 11.50
September 30,         $  16.50  $ 13.50
December 31,          $  17.00  $ 16.25
=======================================

    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.

     There are  regulatory  limitations  on the  ability of the Bank to pay cash
dividends to the Corporation which could, in turn, be used by the Corporation to
pay cash  dividends to its  stockholders.  Interest on savings  accounts must be
paid  by  the  Bank  prior  to  payment  of  dividends  on  the  common   stock.
Additionally,  the  Corporation  must pay interest to holders of its  debentures
before payment of cash dividends to its  stockholders.  Under the regulations of
the  OTS,  the  Bank is not  permitted  to pay  dividends  on its  stock  if its
regulatory   capital  would  be  reduced  below  the  amount  required  for  the
liquidation   account   established  in  connection  with  its   mutual-to-stock
conversion. The Bank will not be permitted to pay dividends on its capital stock
if its  regulatory  capital  would  be  reduced  below  the  regulatory  capital
requirements  prescribed for institutions regulated by the OTS. Further,  income
appropriated  to bad debt reserves and deducted for federal  income tax purposes
cannot be used to pay cash  dividends  without the  payments  of federal  income
taxes on the amount of such income removed from reserves for such purpose at the
then current income tax rate.

     The Bank's ability to pay dividends or make other capital  distributions to
the Corporation is also governed by OTS  regulations.  Under these  regulations,
"capital  distributions"  are  defined as cash  dividends,  payments  by savings
associations  to  repurchase  or  otherwise  acquire  its  shares,  payments  to
shareholders  of another entity in a cash-out  merger,  and other  distributions
charged against capital.  An institution that has regulatory  capital that is at
least equal to its fully  phased-in  capital  requirement  and that has not been
notified  that  it "is in need of more  than  normal  supervision,"  is a Tier 1
institution.  A Tier 1 institution  is permitted  under OTS  regulations,  after
prior  notice to (and no objection  by) the OTS, to make  capital  distributions
during a calendar  year up to 100% of its net income to date during the calendar
year plus the amount that would reduce by one-half its "surplus  capital ratio",
which is the percentage by which the ratio of its  regulatory  capital to assets
exceeds the ratio of its fully  phased-in  capital  requirement to assets at the
beginning  of the calendar  year.  As of December 31, 1996 the Bank was a Tier 1
institution  and had available  $14.3 million for dividends to the  Corporation,
subject to no objection 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,  although the source of such dividends
is dependent  upon dividends  received by it from the Bank.  The  Corporation is
subject,  however,  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.

<PAGE>


BOARD OF DIRECTORS

CHARLES B. YATES
Chairman of the Board

WAYNE H. PAGE
Vice Chairman

GEORGE J. BARBER

DOMINIC W. FLAMINI

VINCENT R. FARIAS

JAMES C. LIGNANA

EDWARD J. STAATS, JR.

CRAIG W. YATES



DIRECTORS EMERITUS

ADOLPH N. BRIGHT

KAREN S. OLEKSA

HILYARD S. SIMPKINS




BANK OFFICERS

CHARLES B. YATES*
Chairman of the Board

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

DOUGLAS B. HALEY
Vice President, Consumer Lending

KAREN R. KOENIG
Vice President, Business Development

NANCY L. PARKER
Vice President, Human Resources

PETER S. SCHOENFELD
Vice President, Investments

KAREN D. SHINN
Vice President,  Operations

MICHAEL J. HAGELGANS
Assistant Vice President, Commercial Lending

AMY J. HANNIGAN
Controller

MARCELLA F. HATCHER*
Assistant Secretary




* Officers of Bank and Holding Company

<PAGE>

MARKET MAKERS
The following  companies were making a market in the Corporation's  common stock
at December 31, 1996:

HERZOG, HEINE, GEDULD, INC.                  ROBERT W. BAIRD & CO., INC.
26 Broadway                                  4300 W. Cypress Street
First Floor                                  Tampa, FL 33607
New York, NY 10004                           (813) 877-4000
(212) 908-4000

MERRILL LYNCH, PIERCE, FENNER                RYAN BECK & CO.
& SMITH, INC.                                80 Main St.
World Financial Center                       W. Orange, NJ  07052
250 Vesey Street                             (201) 325-3000
New York, NY 10281
(212) 449-1000



FORM 10-K AND OTHER FINANCIAL INQUIRIES
The Corporation's  Annual Report on Form 10-K for the fiscal year ended December
31, 1996, 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
Administrative Offices.

TRANSFER AGENT AND REGISTRAR                 AUDITORS
American Stock Transfer and Trust Company    Coopers & Lybrand L.L.P.
40 Wall Street                               2400 Eleven Penn Center
New York, NY  10005                          Philadelphia, PA 19103


SPECIAL COUNSEL
Malizia, Spidi, Sloane & Fisch, P.C.
One Franklin Square
1301 K Street, N.W.
Suite 700 East
Washington, D.C. 20005

<PAGE>


                                OFFICE LOCATIONS

                      EXECUTIVE AND ADMINISTRATIVE OFFICES
                       3 Sunset Road and 811 Sunset Road
                              Burlington, NJ  08016
                                 (609) 386-2400


     MAIN BRANCH                        LUMBERTON
     3 Sunset Road & Route 541          1636-61 Route 38 & Eayrestown Road
     Burlington,  NJ  08016             Lumberton, NJ 08048
     (609) 386-2400                     (609) 267-6811

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

     BURLINGTON CITY                    MEDFORD  
     352 High Street                    200 Tuckerton Road
     Burlington, NJ 08016               Medford, NJ 08055
     (609) 386-4643                     (609) 596-4300

     BORDENTOWN                         MEDFORD LAKES  
     335 Farnsworth Ave.                712 Stokes Road
     Bordentown, NJ  08505              Medford, NJ 08055
     (609) 291-8200                     (609) 654-6373
                    
     DELRAN                             MOORESTOWN
     3002 Route 130 North               53 East Main Street
     Delran, NJ 08075                   Moorestown, NJ 08057
     (609) 764-3740                     (609) 235-0544

     EASTAMPTON                         MOUNT LAUREL   
     1191 Woodlane Road                 4522 Church Road
     Eastampton, NJ 08060               Mount Laurel, NJ 08054
     (609) 261-6400                     (609) 235-4445

     EDGEWATER PARK                     RIVERTON  
     1149 Cooper Street                 604 Main Street
     Edgewater Park, NJ 08010           Riverton, NJ 08077
     (609) 387-0046                     (609) 786-5333

     LARCHMONT                          SOUTHAMPTON    
     3320 Route 38                      1841 Route 70
     Mount Laurel, NJ 08054             Southampton, NJ 08088
     (609) 235-6666                     (609) 859-2700

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

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

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