<PAGE>

                                CORPORATE PROFILE

   FMS  Financial  Corporation  is the  holding  company for Farmers & Mechanics
   Bank.  Farmers & Mechanics  Bank,  with total assets of $692 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  twenty-three  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.


                                       1
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Financial Condition: (In Thousands)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------

December 31,                                    1998        1997         1996 (a)    1995       1994

------------------------------------------------------------------------------------------------------

<S>                                             <C>        <C>         <C>        <C>        <C>       
Assets                                           $691,812   $628,403    $541,710   $501,550   $483,776  

Loans receivable and loans held for sale, net     298,603    302,831     306,871    288,400    283,260

Deposits                                          536,310    489,440     453,277    428,809    429,431

Stockholders' equity                               43,469     38,916      33,826     33,053     29,159
</TABLE>

Operations: (In Thousands, except earnings per share
data)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
                                                         
Year Ended December 31,                         1998        1997      1996 (a)      1995       1994
                                                         
----------------------------------------------------------------------------------------------------
<S>                                           <C>        <C>         <C>        <C>        <C>     
Interest income                                $46,563    $40,813     $36,841    $35,201    $32,270 
                                                         
Interest expense                                24,869     20,879      18,978     18,041     15,336
                                                         
Net interest income                             21,694     19,934      17,863     17,160     16,934
                                                         
Net income                                       5,271      5,491       3,026      4,343      4,455
                                                         
Basic earnings per common share                   0.73       0.77        0.41       0.58       0.58
                                                         
Diluted earnings per common share                 0.72       0.75        0.40       0.56       0.56
                                                         
Dividends declared per common share               0.11       0.08        0.07       0.07          0
                                                         
Weighted average common shares outstanding       7,204      7,165       7,411      7,512      7,728
                                                         
Weighted average common shares and common                
stock equivalents outstanding                    7,314      7,346       7,573      7,695      7,926
</TABLE>
                                                      
<TABLE>
<CAPTION>
Other Selected Data:

-----------------------------------------------------------------------------------
Year Ended December 31,           1998       1997      1996 (a)     1995      1994
-----------------------------------------------------------------------------------
<S>                               <C>       <C>         <C>       <C>       <C>  
Net interest rate spread           3.50%     3.60%       3.50%     3.49%     3.64%

Net interest margin                                                          3.72
                                   3.48      3.72        3.66      3.66

Return on average assets           0.85      0.98        0.60      0.89      0.94

Dividend payout ratio             15.28     10.67       17.50     12.43      0.00

Equity-to-asset ratio              6.28      6.19        6.24      6.59      6.03

</TABLE>

(a) Includes $2.7 million for the one-time assessment to recapitalize the SAIF.

                                       2
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------



To Our Shareholders:



         Farmers & Mechanics Bank had  satisfactory  financial  results for 1998
and  continued to make  progress in expanding  our branch  system and  improving
customer service.


         Deposits  and assets  continued  to  increase,  but  operating  results
declined  moderately  due to the lower  interest  rate  environment  and  higher
operating  costs.  We have continued to achieve  significant  growth in our core
deposit base of checking  and savings  accounts.  Business and local  government
deposits have also increased.


         During December,  1998 we changed our computer system from a main frame
system which was once again  approaching  capacity limits to a new client-server
PC based system.  This "conversion"  required a year long process of preparation
and  training.  This change was  virtually  seamless to our  customers but there
continues to be further work for our staff on changes and enhancements.  The new
system will give us greater  flexibility and allow further program additions and
improvements in the future.


         We are  continuing  to improve our  coverage of the  Burlington  County
market area.  During 1998 we increased  our branches to 22 with the opening of a
temporary   branch  in  Browns  Mills  and  construction  of  a  new  branch  in
Cinnaminson,  New Jersey.  Early in 1999 we have opened  additional  branches in
Medford Village and Chesterfield, in facilities purchased from larger banks that
were  consolidating.  During April, we will open a temporary branch in Riverside
in a  recently  purchased  old bank  building  that will get  extensive  further
renovation.  Later in the year, we plan to begin construction of new branches in
Burlington  and  Pemberton,  and  remodel and open a branch in Mt.  Holly.  More
branch locations,  combined with our long hours and seven day banking,  increase
our cost of operations  and reduce current  profitability,  but are an important
investment in the growth of our franchise.


         Once  again,  we  wish to  thank  our  customers,  our  staff,  and our
shareholders for their continued support.




         Sincerely,


         /s/ Craig W. Yates                       /s/ Charles B. Yates
         -------------------------                ------------------------------
         Craig W. Yates                           Charles B. Yates
         President                                Chairman



                                       3
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS



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

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

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

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

Market Risk
         Market  risk is the risk of loss from  adverse  changes in market  risk
prices and rates.  The Bank's  market risk arises  primarily  from interest rate
risk inherent in its lending,  investment  and deposit  taking  activities.  The
Bank's profitability is affected by fluctuations in interest rates. A sudden and
substantial  increase in interest rates may adversely impact the Bank's earnings
to the extent that the  interest  rates borne by assets and  liabilities  do not
change at the same speed,  to the same extent or on the same basis. To that end,
management  actively  monitors and manages its interest rate risk exposure.  The
Bank does not  participate  in hedging  programs,  interest  rate swaps or other
activities   involving  the  use  of  off-balance  sheet  derivative   financial
instruments,  but may do so in the future to mitigate  interest  rate risk.  The
Bank's policy allows  investment only in securities which have a rating of AA or
better.  The Bank holds a substantial  component of its investment  portfolio in
mortgage-backed    securities   and    collateralized    mortgage    obligations
(collectively,  "MBS"). At the end of 1998, the total investment in MBS amounted
to  $229  million,   or  68%  of  total   investments.   These  are  instruments
collateralized  by pools of residential  and commercial  mortgages  which return
interest and principal payments to the investor. Approximately 39% of the Bank's
MBS holdings are U.S. Government Agency securities (GNMA, FNMA and FHLMC), which
carry either direct government or quasi-government  guarantees and are rated AAA
in  terms of  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.  MBS of $1.7 million and $1.2 million were used
to secure 
                                       4
<PAGE>




public funds on deposit at December 31, 1998 and 1997, respectively.

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

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

         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.

                                       4
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
GAP Table
         The following table sets forth the amounts of  interest-earning  assets
and  interest-bearing  liabilities  and  borrowings  outstanding at December 31,
1998, 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)
<S>                             <C>        <C>         <C>         <C>          <C>         <C>    
Interest-earning assets:
Investment securities            $  19,641  $  104,399  $   24,110  $    11,736  $   95,980  $    255,866   
Loans                                8,007      56,178      93,860       70,386      74,956       303,387
Mortage-backed securities           15,564      26,236      18,015       11,842      18,936        90,593

                                ----------  ----------- ----------- ------------ ----------- --------------

    Total                           43,212     186,813     135,985       93,964     189,872       649,846

                                ----------  ----------- ----------- ------------ ----------- --------------


Interest-bearing liabilities:
Now, Super Now, Passbook and
    Club accounts                   12,563      27,388      50,179       27,070      53,675       170,875
Money market accounts               11,719      31,393      17,397        3,522       3,659        67,690
Certificates of Deposit             51,580     107,367      51,868       17,594           0       228,409
Borrowings                               0           0      75,000       20,000       4,568        99,568

                                ----------  ----------- ----------- ------------ ----------- --------------

    Total                           75,862     166,148     194,444       68,186      61,902       566,542

                                ----------  ----------- ----------- ------------ ----------- --------------

Interest Rate Sensitivity GAP     (32,650)      20,665  $ (58,459)  $    25,778  $  127,970  $     83,304  

                                ==========  =========== =========== ============ =========== ==============

Cumulative Interest Rate
 Sensitivity GAP                  (32,650)     (11,985) $ (70,444)  $   (44,666)  $  83,304                

                                ==========  ===========  ========== ============ ===========

Ratio of Interest Rate 
    Sensitive Assets to       
    Interest Rate Sensitive 
    Liabilities                     56.96%     112.44%      69.94%       137.81%     306.73%       114.70%
                                ==========  ===========   ========= ============ =========== ==============

Ratio of Cumulative GAP 
    to Total Bank Assets            -4.72%      -1.73%     -10.19%        -6.46%      12.05%

                                ==========  ===========   ========= ============ ===========
     
</TABLE>
 
                                       5
<PAGE>



         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 in the GAP table:
adjustable-rate   mortgage  loans  have  a  constant  prepayment  rate  of  21%;
fixed-rate  mortgage loans have a prepayment rate that is constant  through time
at 18%; 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
16%; mortgage-backed  securities and CMOs and REMICs have a prepayment rate that
is constant  over time at 21%.  Core  savings and NOW checking  deposits  have a
decay rate of 17% and money  market  accounts  have a decay  rate of 80%.  These
decay  rates  are  based on FHLB  assumption  rates  using  industry  experience
adjusted  by the Bank as  needed  to  reflect  our  individual  experience.  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.

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

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

                                       5
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
         The Bank also  measures  its  interest  rate  risk  using the OTS's NPV
method. NPV is calculated based on the net present value of estimated cash flows
utilizing market prepayment assumptions and market rates of interest provided by
independent  broker  quotations  and  other  public  sources.  An  institution's
Interest  rate  risk is  measured  as the  change  to its NPV as a  result  of a
hypothetical immediate 200 basis point change in market interest rates. Based on
this analysis at December 31, 1998,  the Bank would  experience a 75 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 121 basis  point  decrease in NPV if
rates decline 200 basis points.

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

Results of Operations
Net Interest Income

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

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

                                       6
<PAGE>



Average Balances, Interest and
Yields/Rates
<TABLE>
<CAPTION>

                                                                          Years Ended
                                                                          December 31,
                                ------------------------------- --------------------------------  ----------------------------------
                                                  1998                       1997                              1996
                                ------------------------------- --------------------------------  ----------------------------------
                                 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            $ 303,330  $ 24,316     8.02%   $ 310,540  $ 25,038   8.06%      $ 296,276    $ 23,797     8.03%
    Mortgage-backed securities     88,339     6,376     7.22%      97,013     7,062   7.28%        107,268       7,499     6.99%
    Investment securities         231,610    15,871     6.85%     127,937     8,713   6.81%         84,762       5,545     6.54%
                                ---------- --------- --------- ----------- --------- -------    ----------- ----------- --------- 
Total interest-earning
      assets                      623,279    46,563     7.47%     535,490    40,813   7.62%        488,306      36,841     7.54%
                                 --------- --------- --------- ----------- --------- -------    ----------- ----------- ---------

Interest-bearing
 liabilities:
    Deposits                      518,023    18,091     3.49%     474,258    17,755   3.74%        429,413      16,176     3.77%
    Borrowings                     98,459     5,721     5.81%      34,776     2,067   5.94%         29,450       1,745     5.93%
    Subordinated debentures        10,000     1,057    10.57%      10,000     1,057  10.57%         10,000       1,057    10.57%
                                ---------- --------- --------- ----------- --------- -------  ------------- ----------- ---------
Total interest-bearing
      liabilities               $ 626,482    24,869     3.97%   $ 519,034    20,879   4.02%        468,863      18,978     4.05%
                                 ========= --------- --------- =========== --------- -------    =========== ----------- ---------
Net interest income                        $ 21,694                        $ 19,934                         $   17,863
                                           =========                       =========                        ===========
Interest rate spread                                    3.50%                         3.60%                                3.50%
                                                     =========                       =======                            =========

Net yield on average                                                                                                       
 interest-earning assets                                3.48%                         3.72%                                3.66%
                                                     =========                       =======                            =========
Ratio of average interest-
 earning assets to average
 interest-bearing liabilities                          99.49%                         103.17%                            104.15%
                                                     =========                       =========                         ==========
</TABLE>
                                       6
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
Rate Volume Analysis

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

<TABLE>
<CAPTION>


                                                                     Years Ended December 31,
                                     ------------------------------------------------------------------------------------------
                                                    1998 vs. 1997                                  1997 vs. 1996
                                     ------------------------------------------      ------------------------------------------
                                                 Increase (Decrease)                             Increase (Decrease)
                                                  Due to change in                                Due to change in
                                     ------------------------------------------      ------------------------------------------
                                        Rate            Volume         Total            Rate           Volume          Total
                                     -----------     -----------     ----------      -----------    -----------     -----------
                                                                           (In Thousands)
<S>                                 <C>            <C>             <C>             <C>             <C>            <C>       
Interest income:
     Loans                            $    (141)      $   (581)      $   (722)        $     95       $  1,146        $  1,241  
     Mortgage-backed securities             (55)          (631)          (686)             280           (717)           (437)
     Investment securities                   97           7,061         7,158              344          2,824           3,168
                                       --------        -------        -------          -------        -------         -------
     Total change - interest     
      income                                (99)         5,849          5,750              719          3,253           3,972
                                       --------        -------        -------          -------        -------         -------
Interest expense:                                                                                                     
     Deposits                            (1,302)         1,638            336             (110)         1,689           1,579
     Borrowings                            (131)         3,785          3,654                6            316             322
     Subordinated debentures                  0              0              0                0              0               0
                                       --------        -------        -------          -------        -------         -------
     Total change - interest 
      expense                            (1,433)         5,423          3,990             (104)         2,005           1,901
                                       --------        -------        -------          -------        -------         -------
     Net change in net interest
      income                          $   1,334       $    426       $  1,760         $    823       $  1,248        $  2,071
                                       ========        =======        =======          =======        =======         =======
                                                                                                                
</TABLE>
                                       7
<PAGE>

Comparisons of Years Ended December 31, 1998 and 1997.
Net Income

         The Corporation and its subsidiary  recorded net income of $5.3 million
for the year ended  December  31, 1998,  or $.72  diluted  earnings per share as
compared to net income of $5.5 million,  or $.75 diluted  earnings per share for
the year ended December 31, 1997. Net interest  income was $21.7 million in 1998
compared to $19.9 million in 1997. Provisions for loan losses were $240 thousand
in 1998 compared to $400 thousand in 1997.  Other income totaled $2.4 million in
1998  compared  to $2.1  million for the same  period in 1997.  Total  operating
expenses  for the year ended  December 31, 1998 were $15.6  million  compared to
$13.0  million in the previous  year.  During  1998,  the  Corporation  declared
dividends which totaled $.11 per share which resulted in a dividend payout ratio
of 15.28%.  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 $5.8 million to $46.6 million in 1998
from $40.8  million in 1997.  The  increase  is  attributable  to  increases  in
interest income on investment securities of $7.2 million,  partially offset by a
decrease  in  interest  income  on loans of $722  thousand  and  mortgage-backed
securities of $686 thousand.

         The increase in interest  income on investment  securities was due to a
$103.7  million  increase in the average  balance of  investment  securities  to
$231.6 million in 1998 from $127.9  million in 1997.  The  investment  portfolio
increased  primarily  due to the  net  purchase  in 1998 of  $131.3  million  in
collateralized mortgage obligations (CMOs), partially offset by $65.1 million in
principal  paydowns and $9.6 million net  reductions in U.S.  Agency notes.  The
increases  in the  average  balance  of  investment  securities  resulted  in an
increase  in interest  income of $7.1  million in 1998 from the  previous  year.
Average yields  increased to 6.85% in 1998 from 6.81% in 1997, which resulted in
an increase in interest income of $97 thousand.

         The average  balance of the loan  portfolio  decreased  $7.2 million to
$303.3  million in 1998 from $310.5  million in 1997. The decline in loan volume
during 1998  resulted in a decrease in  interest  income of $581  thousand.  The
average  yield on the loan  portfolio  decreased  to 8.02% in 1998 from 8.06% in
1997 which resulted in a decrease in interest income of $141 thousand.

         Interest income on mortgage-backed  securities  decreased $686 thousand
in 1998 primarily due to volume decreases in the portfolio.  The average balance
of the  portfolio  decreased  $8.7  million to $88.3  million in 1998 from $97.0
million in 1997,  resulting in a decrease in interest  income of $631  thousand.
The  decline  in the  average  balance  is due to  principal  paydowns  of $32.8
million,  partially  offset by purchases of $31.1 million  during the year.  The
average  yield on the  portfolio  decreased to 7.22% in 1998 from 7.28% in 1997,
which resulted in a decrease in interest income of $55 thousand.

Interest Expense

         Total interest expense  increased $4.0 million to $24.9 million in 1998
from $20.9  million in 1997.  The  increase  was due to an  increase in interest
expense on borrowings and deposits.

                                       7
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
         Interest  expense on borrowings  increased $3.7 million to $5.7 million
in 1998 from $2.1 million in 1997.  This  increase was due to an increase in the
average  balance of  borrowings,  partially  offset by a decline in the  average
rate. The average balance of borrowings increased $63.7 million to $98.5 million
in 1998 from $34.8  million in 1997,  resulting  in a $3.8  million  increase in
interest expense due to volume. This was primarily the result of a $70.7 million
increase in the average  balance of repurchase  agreements  during the year. The
average  rate on  borrowings  decreased  to  5.81% in 1998  from  5.94% in 1997,
resulting in a $131 thousand decrease in interest expense due to rate.

         Interest  expense on deposits  increased $336 thousand to $18.1 million
in 1998 from $17.8 million in 1997.  The average  balance of deposits  increased
$43.8 million to $518.0 million in 1998 from $474.3  million in 1997,  resulting
in an increase in interest  expense of $1.6  million.  Increases  in deposits in
1998 are  primarily  due to an  increase  in the  average  balances  of checking
accounts  of $38.2  million and savings  accounts  of $11.5  million,  partially
offset by a decline in the average  balance of  certificates  of deposit of $8.9
million.  These increases were partially offset by a decline in the average rate
paid on  deposits  of 25  basis  points  to 3.49%  in 1998  from  3.74% in 1997,
resulting in a decrease in interest expense of $1.3 million. The lowering of the
average  rate on deposits in 1998 was due to an increase in the average  balance
of non-interest  "Free Personal  Checking" and "Free Business Checking" accounts
of $19.7 million.

Provision For Loan Losses

         The provision for loan losses  decreased $160 thousand to $240 thousand
in 1998 from $400 thousand in 1997. 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.  The Corporation will
continue to monitor its allowance for loan losses and make future adjustments to
the  allowance  through the  provision  for loan  losses as economic  conditions
dictate.  Although the Corporation  maintains its allowance for loan losses at a
level that it considers to be adequate to provide for the inherent  risk of loss
in its loan  portfolio,  there can be no assurance  that future  losses will not
exceed estimated amounts or that additional  provisions for loan losses will not
be  required  in future  periods  due to the higher  degree of credit risk which
might result form the change in the mix of the loan portfolio.

                                       8
<PAGE>

Other Income (Expense)

         Other income from operations increased $280 thousand to $2.4 million in
1998 compared with $2.1 million in 1997.

         Loss on  disposal  of fixed  assets  of $210  thousand  relates  to the
write-off of obsolete  computer hardware and software due to the computer system
conversion completed during 1998.

         Real estate  owned  operations,  net in 1998  resulted in a loss of $64
thousand,  which was  comprised of $57  thousand in real estate owned  operating
expenses,  $108  thousand  of  provisions  for  loss  on  real  estate,  net  of
charge-offs,  and  realized  gains of $101  thousand  on the sale of real estate
owned properties.

         Service charges on accounts  increased $165 thousand to $2.4 million in
1998 from $2.2 million in 1997. The increase is the result of additional  retail
banking fees due to higher transaction volume during the year.

Operating Expenses

         Total  operating  expenses  increased  $2.6 million to $15.6 million in
1998 from $13.0 million in 1997.

         Salaries  and benefits  increased  $1.7 million to $9.0 million in 1998
from $7.3 million in 1997.  The increase was due to additional  staff in the new
branches  opened  during  the year as well as an  increase  in branch  staff for
extended  weekday hours until 9:00 p.m.  Average full time equivalent  employees
during 1998 were 335 as compared to 299 during 1997.

         Occupancy and equipment expense increased $281 thousand to $3.0 million
in  1998  from  $2.7  million  in  1997.  This  increase  is due  to  additional
depreciation and occupancy  expenses on two new branches opened in 1998, as well
as other facility and equipment additions and improvements during the year.

         Purchased  services expense  increased $232 thousand to $1.3 million in
1998 from $1.1 million in 1997.  Check  processing costs increased $101 thousand
and MAC charges increased $94 thousand due to higher transaction volume in 1998.

         Advertising  expense increased by $77 thousand to $206 thousand in 1998
from $129  thousand in 1997.  The Bank has  engaged in a  newspaper  advertising
campaign  emphasizing our  twenty-three  branch locations and increased hours of
operations.

Comparisons of Years Ended December 31, 1997 and 1996.
Net Income

         The Corporation and its subsidiary  recorded net income of $5.5 million
for the year ended  December  31, 1997,  or $.75  diluted  earnings per share as
compared to net income of $3.0 million,  or $.40 diluted  earnings per share for
the year ended December 31, 1996. Net interest  income was $19.9 million in 1997
compared to $17.9 million in 1996. Provisions for loan losses were $400 thousand
in 1997 compared to $120 thousand in 1996.  Other income totaled $2.1 million in
1997  compared  to $2.3  million for the same  period in 1996.  Total  operating
expenses  for the year ended  December 31, 1997 were $13.0  million  compared to
$15.7 million in the previous year which  included $2.7 million for the one-time
special  assessment to  recapitalize  the Savings  Association  Insurance  Fund.
During 1997, the  Corporation  declared  dividends  which totaled $.08 per share
which  resulted  in a  dividend  payout  ratio of  10.67%.  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.

                                       8
<PAGE>

Interest Income

         Total interest  income  increased $4.0 million to $40.8 million in 1997
from $36.8  million in 1996.  The  increase  is  

                                       8
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
attributable  to increases in interest  income on investment  securities of $3.2
million and loans of $1.2  million,  partially  offset by a decrease in interest
income on mortgage-backed securities of $437 thousand.

         The increase in interest  income on investment  securities was due to a
$43.1 million increase in the average balance of investment securities to $127.9
million in 1997 from $84.8 million in 1996. The investment  portfolio  increased
primarily  due to the net  purchase in 1997 of $59.0  million in  collateralized
mortgage  obligations  (CMOs),  partially  offset by $10.3  million in principal
paydowns,  $35.4  million  in U.S.  Agency  notes and $10.2  million  in reverse
repurchase  agreements.  The  increases  in the  average  balance of  investment
securities  resulted in an increase in interest  income of $2.8  million in 1997
from the previous year.  Average yields increased to 6.81% in 1997 from 6.54% in
1996, which resulted in an increase in interest income of $344 thousand.

         The average  balance of the loan portfolio  increased  $14.2 million to
$310.5  million in 1997 from  $296.3  million in 1996.  In August  1996 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 1997 increase in loan volume
resulted in a $1.1 million increase in interest income. The average yield on the
loan  portfolio  increased to 8.06% in 1997 from 8.03% in 1996 which resulted in
an increase in interest income of $95 thousand.

         Interest income on mortgage-backed  securities  decreased $437 thousand
in 1997 due to volume decreases in the portfolio,  partially offset by increases
in the yield on the portfolio.  The average  balance of the portfolio  decreased
$10.3 million to $97.0 million in 1997 from $107.3 million in 1996, resulting in
a decrease  in  interest  income of $717  thousand.  The  decline in the average
balance is  primarily  due to  principal  paydowns of $21.6  million,  partially
offset by purchases of $9.4 million  during the year.  The average  yield on the
portfolio  increased to 7.28% in 1997 from 6.99% in 1996,  which  resulted in an
increase in interest income of $280 thousand.

Interest Expense

         Total interest expense  increased $1.9 million to $20.9 million in 1997
from $19.0  million in 1996.  The  increase  was due to an  increase in interest
expense on deposits and borrowings.

                                       9
<PAGE>

         Interest expense on deposits increased $1.6 million to $17.8 million in
1997 from $16.2 million in 1996. The average balance of deposits increased $44.8
million to $474.2 million in 1997 from $429.4  million in 1996,  resulting in an
increase in interest expense of $1.7 million.  Increases in deposits in 1997 are
primarily due to increases in the average balances of checking accounts of $17.2
million,  certificates of deposit accounts of $14.4 million and savings accounts
of $11.0 million.  These  increases  were  partially  offset by a decline in the
average  rate paid on deposits of 3 basis  points to 3.74% in 1997 from 3.77% in
1996, resulting in a decrease in interest expense of $110 thousand. The lowering
of the  average  rate on  deposits in 1997 was due to an increase in the average
balance of non-interest "Free Checking" accounts of $12.7 million.

         Interest expense on borrowings  increased $322 thousand to $2.1 million
in 1997 from $1.7 million in 1996.  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 borrowings  increased  $5.3 million to $34.8 million in 1997
from $29.5 million in 1996,  resulting in a $316  thousand  increase in interest
expense due to volume.  This was primarily the result of a $8.9 million increase
in the average  balance of repurchase  agreements  during the year.  The average
rate on borrowings increased to 5.94% in 1997 from 5.93% in 1996, resulting in a
$6 thousand increase in interest expense due to rate.

Provision For Loan Losses

         The provision for loan losses  increased $280 thousand to $400 thousand
in 1997 from $120 thousand in 1996. 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 decreased $152 thousand to $2.1 million in
1997 compared with $2.3 million in 1996.

         Loss from real estate held for  development  of $200  thousand  was the
result of an increase in the valuation allowance for the loss on the sale of one
of the land development properties in 1997.

         Real estate owned  operations,  net in 1997  resulted in a loss of $180
thousand,  which was  comprised of $48  thousand in real estate owned  operating
expenses,  $123  thousand  of  provisions  for  loss  on  real  estate,  net  of
charge-offs, and realized gains of $11 thousand on the sale of real estate owned
properties.

         Service charges on accounts  increased $258 thousand to $2.2 million in
1997 from $1.9 million in 1996. The increase is the result of additional  retail
banking fees due to higher transaction volume during the year.

                                       9
<PAGE>

Operating Expenses

         Total  operating  expenses  decreased  $2.7 million to $13.0 million in
1997 from  $15.7  million  in 1996.  The  decrease  in  operating  expenses  was
primarily due to the absence in 1997 of the one-time special  assessment of $2.7
million in 1996 charged in connection with the federal legislation requiring the
recapitalization of the Savings Association Insurance Fund (SAIF).

         Salaries and benefits  increased  $276 thousand to $7.3 million in 1997
from $7.0 million in 1996.  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"  and  extended
weekday hours until 9:00 p.m. Average full time equivalent employees during 1997
were 299 as compared to 236 during 1996.

                                       9
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
         Occupancy and equipment expense increased $174 thousand to $2.7 million
in  1997  from  $2.5  million  in  1996.  This  increase  is due  to  additional
depreciation and occupancy  expenses on two new branches opened in 1997, as well
as other facility and equipment additions and improvements during the year.

         Federal  deposit  insurance  premiums  decreased  $714 thousand to $233
thousand in 1997 from $947 thousand in 1996. The decrease reflects the reduction
in rates charged by the FDIC to $.065 per $100 of deposits during 1997 from $.23
per $100 in 1996,  partially  offset by an increase  in average  deposits of the
Bank.

         Purchased  services expense  increased $155 thousand to $1.1 million in
1997 from $917  thousand in 1996.  This  increase is primarily  the result of an
increase  in check  processing  costs of $59  thousand  and MAC  charges  of $53
thousand.

         Advertising  expense increased by $86 thousand to $129 thousand in 1997
from $43  thousand  in 1996.  The Bank has  engaged in a  newspaper  advertising
campaign emphasizing our branch locations and increased hours of operations.

Impact of Inflation and Changing Prices

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

Year 2000

         The Year 2000 issue concerns the potential impact of historic  computer
software code that only utilizes two digits to represent the calendar year (e.g.
"99"  for  "1999").   Software  so  developed   could   produce   inaccurate  or
unpredictable  results  upon the change to January 1,  2000,  when  current  and
future  dates  represent  a lower two digit year  number than dates in the prior
century.  The Bank,  similar to most financial  institutions,  is  significantly
subject to the  potential  impact of the "Year 2000  issue" due to the nature of
financial  information.  Potential  impact to the Bank may arise from  software,
hardware, and equipment both within the Bank's direct control and outside of the
Bank's  ownership,  yet with  which  the Bank  electronically  or  operationally
interfaces (e.g.  vendors providing credit bureau  information).  The Bank has a
year 2000 compliance  program in place to ensure that all software  applications
will be year 2000 certified compliant. The program includes Year 2000 committees
consisting of directors and executive  officers of the Bank.  The purpose of the
committees are to oversee and manage the year 2000 compliance  program providing
regular reports to the Board of Directors  detailing progress with the Year 2000
issue.  Management  expects that it will be able to satisfy year 2000 compliance
issues by the end of 1999.  Management intends to perform testing on all systems
throughout 1999.

         The Bank replaced its core bank processing  systems in December 1998 as
the existing  systems had reached their limit in capacity and function.  The new
systems provide Year 2000 compliance.

                                       10
<PAGE>


         The Bank has established a written Year 2000  Contingency  Plan for all
vital mission  critical  applications.  It states both the plans in the event of
non-compliance  and the dates in which the  contingency  plans  will be put into
effect.  The  scope of the  plan  includes  five  phases.  They are as  follows:
Awareness, Assessment, Renovation, Validation, and Implementation. As defined by
the  Federal  Financial   Institutions   Examination  Council  and  the  banking
regulatory agencies which regulate the Bank.

         The  Assessment  of the  impact of the Year 2000  issues on the  Bank's
computer  systems  has  been  completed.  Based on the  assessment  the Bank has
identified and prioritized  those Systems deemed to be mission critical or those
that have significant impact on normal operations.

         The Bank has contacted all significant  vendors and suppliers regarding
their Year 2000  readiness.  These third party  vendors have  delivered  written
assurance  that they are or  expect  to be Year  2000  prior to the end of 1999.
Their progress in meeting their targeted scheduled  readiness is being monitored
for any indication that they may not be able to address their Year 2000 problems
in a timely  fashion.  Management  testing on all banking systems is progressing
according to plan.  Mission critical testing began in the second quarter of 1998
and will  continue  through  the first  quarter  of 1999.  At the  current  time
management  estimates  its Year  2000  readiness  is 80%.  The  following  table
provides a summary of the current status of the five phases involved in our Year
2000 readiness Plan.

                         Percent     Projected Date    
Project Phase            Complete    of Completion    Comments
--------------------------------------------------------------
Awareness                  100%       Complete
Assessment                  85%       March 1999     On Schedule
Renovation                  85%       March 1999     On Schedule
Validation                  85%       June 1999      On Schedule
Implementation              80%       June 1999      On Schedule
Overall Completion          80%       June 1999      On Schedule

         The Bank has thus far  primarily  used and  expects to  continue to use
internal  resources to implement  its readiness  plan.  At this time  management
currently  estimates Year 2000 compliance  costs at between $50,000 and $150,000
of which $48,000 was expensed in 1998.  The Bank does not expect that these cost
will  be  material  to  its   financial   condition  or  results  of  operation.
Non-compliance  with the Year 2000 issue  could  have an  adverse  affect on the
operation of the  business.  Successful  and timely  completion of the Year 2000
compliance are based upon management's best estimates,  which were derived 

                                       10
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
using  numerous  assumptions  of future  events which are  inherently  uncertain
including  the continued  availability  of certain  resources,  the progress and
results of the Bank's  testing  plans,  and all vendors,  suppliers and customer
readiness.

         Based upon current information  management has determined that the year
2000 issues will not pose significant operational problems for its Systems. This
is based  on the  ability  of the Bank to  renovate,  in a  timely  manner,  the
products  and  services  on which  the  Bank's  Systems  rely.  Bank  management
believes,  based on information  and testing  results from our mission  critical
vendors,  that these  systems  are and it is  anticipated  will remain Year 2000
compliant.  The will  continue to monitor  compliance  of the  mission  critical
systems.

         The Bank is in the  process  of  updating  contingency  plans  for each
critical  system,  in the  event one of those  systems  fail,  despite  our best
efforts. The Bank's contingency plans to provide resources during the weekend of
December 31, 1999 and for a period of time afterward. It is anticipated that the
Bank,  and or its  vendors  will be able to  overcome  any  unforeseen  problems
associated with the millennium change.

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 securities sold under
agreements to repurchase  (repurchase  agreements) and advances from the Federal
Home Loan  Bank of New York  (FHLB).  At  December  31,  1998 the Bank had $80.0
million in repurchase  agreements and $16.4 million in advances from the FHLB of
New  York.  While  loan  payments,   maturing  investments  and  mortgage-backed
securities are relatively  predictable sources of funds,  deposit flows and loan
prepayments  are  greatly   influenced  by  general  interest  rates,   economic
conditions and competition. The Bank's liquidity is also influenced by the level
of demand for funding loan originations.  Liquidity may be adversely affected by
unexpected  deposit  outflows,  excessive  interest  rates paid by  competitors,
adverse  publicity  relating  to  the  Banking  industry  and  similar  matters.
Management   monitors  projected   liquidity  needs  and  determines  the  level
desirable,  based  in  part  on the  Company's  commitment  to  make  loans  and
management's  assessment of the Company's ability to generate funds. The Company
is also  subject to federal  regulations  that impose  certain  minimum  capital
requirements.

                                       11
<PAGE>


         The Bank is required under applicable federal regulations to maintain a
specified  level 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 4% of its withdrawable accounts plus short-term borrowings.  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
the required  level.  The Office of Thrift  Supervision  ("OTS") on November 24,
1997 changed the definition and calculation of liquidity.  The December 31, 1998
regulatory liquidity number of 31.35% reflects these changes.

         The amount of certificate accounts which are scheduled to mature during
the twelve months ending December 31, 1999 is approximately $158 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, 1998,  the Bank had loan  commitments  outstanding  of
$29.8 million, of which $6.6 million were for fixed-rate loans and $23.2 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 4% of assets,  of
which 2% 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, 1998,  the Bank  exceeded all
three  required  regulatory  capital  levels.  At December 31, 1998,  the Bank's
regulatory  tangible and core  capital was $48.4  million or 7.02% of total bank
assets and  risk-based  capital  was $51.5  million  or 18.13% of  risk-weighted
assets.



                                       11
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
Consolidated Summary of Quarterly Earnings (Unaudited)

The following table presents summarized quarterly data for 1998 and 1997:


<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------
                                                1st          2nd          3rd         4th         Total
1998                                          Quarter      Quarter       Quarter       Quarter      Year
-----------------------------------------------------------------------------------------------------------
                                                     (In Thousands, except per share amounts)
<S>                                       <C>          <C>          <C>          <C>          <C>       
Total interest income                      $    11,424  $    11,805  $    11,748  $    11,586  $   46,563
Total interest expense                           6,136        6,365        6,290        6,078      24,869
                                          ------------- ------------ ------------ ------------ -----------
Net interest income                              5,288        5,440        5,458        5,508      21,694
Provision for loan losses                           60           60           60           60         240
                                          ------------- ------------ ------------ ------------ -----------
Net interest income after provision
    for loan losses                              5,228        5,380        5,398        5,448      21,454
Total other income                                 605          536          590          650       2,381
Total operating expenses                         3,892        3,820        3,814        4,054      15,580
                                          ------------- ------------ ------------ ------------ -----------
Income before income taxes                       1,941        2,096        2,174        2,044       8,255
Federal and state income taxes                     700          761          785          738       2,984
                                          ------------- ------------ ------------ ------------ -----------

Net income                                 $     1,241  $     1,335  $     1,389  $     1,306  $    5,271
                                          ============= ============ ============ ============ ===========

Basic earnings per common share            $      0.17  $      0.19  $      0.19  $      0.18  $     0.73
                                          ============= ============ ============ ============ ===========

Diluted earnings per common share          $      0.17  $      0.18  $      0.19  $      0.18  $     0.72
                                          ============= ============ ============ ============ ===========
</TABLE>



<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------
                                                1st          2nd          3rd          4th        Total
1997                                          Quarter      Quarter      Quarter      Quarter       Year
----------------------------------------------------------------------------------------------------------
                                                     (In Thousands, except per share amounts)
<S>                                       <C>          <C>          <C>          <C>          <C>       
Total interest income                      $     9,744  $    10,080  $    10,267  $    10,722  $   40,813
Total interest expense                           4,978        5,092        5,184        5,625      20,879
                                          ------------- ------------ ------------ ------------ -----------
Net interest income                              4,766        4,988        5,083        5,097      19,934
Provision for loan losses                           30           50           60          260         400
                                          ------------- ------------ ------------ ------------ -----------
Net interest income after provision
    for loan losses                              4,736        4,938        5,023        4,837      19,534
Total other income                                 582          569          542          408       2,101
Total operating expenses                         3,204        3,221        3,384        3,208      13,017
                                          ------------- ------------ ------------ ------------ -----------
Income before income taxes                       2,114        2,286        2,181        2,037       8,618
Federal and state income taxes                     766          829          787          745       3,127
                                          ------------- ------------ ------------ ------------ -----------

Net income                                 $     1,348  $     1,457  $     1,394  $     1,292  $    5,491
                                          ============= ============ ============ ============ ===========

Basic earnings per common share            $      0.19  $      0.20  $      0.19  $      0.19  $     0.77
                                          ============= ============ ============ ============ ===========

Diluted earnings per common share          $      0.18  $      0.20  $      0.19  $      0.18  $     0.75
                                          ============= ============ ============ ============ ===========

</TABLE>


                                       12
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,                                                       1998                   1997
--------------------------------------------------------------------------------------------------
ASSETS
--------------------------------------------------------------------------------------------------
<S>                                                     <C>                   <C>              
     Cash and amounts due from depository institutions    $       18,142,316    $      11,637,181
     Interest-bearing deposits                                             0              826,823
     Short term funds                                             11,754,075              167,618
                                                         --------------------   ------------------
        Total cash and cash equivalents                           29,896,391           12,631,622
     Investment securities held to maturity                      129,417,826          112,349,476
     Investment securities available for sale                    109,833,133           80,338,661
     Loans, net                                                  298,603,223          302,831,031
     Mortgage-backed securities held to maturity                  90,592,647           92,020,517
     Accrued interest receivable:
        Loans                                                      1,839,217            1,750,966
        Mortgage-backed securities                                   633,667              715,981
        Investments                                                2,371,410            1,934,925
     Federal Home Loan Bank stock                                  4,861,410            3,630,800
     Real estate held for development, net                           644,487              644,487
     Real estate owned, net                                          167,541              446,361
     Office properties and equipment, net                         19,292,247           15,692,055
     Deferred income taxes                                         2,015,772            1,507,307
     Excess cost over fair value of net assets acquired              164,969              469,444
     Prepaid expenses and other assets                             1,156,573            1,061,125
     Subordinated debentures issue costs, net                        321,113              378,460

                                                         --------------------     ----------------
TOTAL ASSETS                                              $      691,811,626    $     628,403,218
                                                         ====================   ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------------------------------------
Liabilities:
     Deposits                                             $      536,309,623    $     489,439,980
     Securities sold under agreements to repurchase               80,000,000           60,000,000
     Advances from the Federal Home Loan Bank                     16,368,321           24,496,476
     10% Subordinated debentures, due 2004                        10,000,000           10,000,000
     Guarantee of employee stock ownership plan debt                       0               33,481
     Advances by borrowers for taxes and insurance                 2,259,435            2,192,541
     Accrued interest payable                                      1,304,742            1,114,304
     Dividends payable                                               216,953              167,154
     Other liabilities                                             1,883,887            2,043,465
                                                          -------------------   ------------------
     Total liabilities                                           648,342,961          589,487,401
                                                          -------------------   ------------------

Commitments and contingencies
Stockholders' Equity:
     Preferred stock - $.10 par value 5,000,000
     shares  authorized;  none issued
     Common stock - $.10 par value 10,000,000 shares 
      authorized; shares issued 7,897,191* and 2,604,370, 
      and shares outstanding 7,231,767* and 2,387,916 as 
      of December 31, 1998 and 1997, respectively                    789,719              260,437
     Paid-in capital  in excess of par*                            8,216,820            8,419,167
     Unrealized (loss)gain on securities available for
     sale - net of deferred income taxes                             (21,793)              53,955
     Guarantee of employee stock ownership plan debt                       0              (33,481)
     Retained earnings                                            37,860,291           33,406,060
     Less:  Treasury stock (665,424* and 216,454 shares,
      at cost,  as of December 31, 1998 and 1997, 
      respectively)                                               (3,376,372)          (3,190,321)
                                                         --------------------   ------------------
Total stockholders' equity                                        43,468,665           38,915,817
                                                         --------------------   ------------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                $      691,811,626    $     628,403,218
                                                         ====================   ==================
</TABLE>

 * Common stock, paid-in capital in excess of par and treasury stock at December
   31, 1998 reflect a three-for-one stock split paid in July 1998.

See notes to consolidated financial statements.
                                       13
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Years Ended December 31,                                    1998            1997            1996
--------------------------------------------------------------------------------------------------
<S>                                               <C>             <C>             <C>          
INTEREST  INCOME:
Interest income on:
     Loans                                          $   24,315,646  $   25,037,855  $  23,797,512
     Mortgage-backed securities                          6,375,729       7,062,459      7,499,231
     Investments                                        15,871,239       8,712,928      5,544,668
                                                    --------------- --------------- --------------
Total interest income                                   46,562,614      40,813,242     36,841,411
                                                    --------------- --------------- --------------
INTEREST EXPENSE:
Interest expense on:
     Deposits                                           18,090,683      17,754,531     16,176,223
     Borrowings                                          5,720,876       2,066,929      1,745,032
     Subordinated debentures                             1,057,348       1,057,348      1,057,348
                                                    --------------- --------------- --------------
Total interest expense                                  24,868,907      20,878,808     18,978,603
                                                    --------------- --------------- --------------
NET INTEREST INCOME                                     21,693,707      19,934,434     17,862,808
PROVISION FOR LOAN LOSSES                                  240,000         400,000        120,000
                                                    --------------- --------------- --------------
NET INTEREST INCOME AFTER PROVISION
    FOR LOAN LOSSES                                     21,453,707      19,534,434     17,742,808
                                                    --------------- --------------- --------------
OTHER INCOME (EXPENSE):
     Loan service charges and other fees                   147,080         170,766        219,639
     Gain on sale of loans                                   5,423           9,804          8,432
     Gain on sale of investment securities                       0           1,711         54,406
     Loss on disposal of fixed assets                     (209,935)              0              0
     Loss from real estate held for development                  0        (200,000)             0
     Real estate owned operations, net                     (64,215)       (179,879)      (174,503)
     Service charges on accounts                         2,369,112       2,204,167      1,946,307
     Other income                                          133,584          94,664        199,097
                                                    --------------- --------------- --------------
Total other income (expense)                             2,381,049       2,101,233      2,253,378
                                                    --------------- --------------- --------------
OPERATING EXPENSES:
     Salaries and employee benefits                      8,971,707       7,319,822      7,043,584
     Occupancy and equipment                             2,996,435       2,715,513      2,541,296
     Purchased services                                  1,303,637       1,071,697        916,803
     Federal deposit insurance premiums                    294,912         232,739        946,594
     SAIF recapitalization assessment                            0               0      2,720,765
     Professional fees                                     369,987         331,436        285,972
     Advertising                                           206,120         129,278         42,956
     Other                                               1,436,937       1,216,951      1,192,896
                                                    --------------- --------------- --------------
Total operating expenses                                15,579,735      13,017,436     15,690,866
                                                    --------------- --------------- --------------
INCOME BEFORE INCOME TAXES                               8,255,021       8,618,231      4,305,320
INCOME TAXES:
Current                                                  3,293,115       3,195,477      2,044,225
Deferred                                                  (309,582)        (68,400)      (764,726)
                                                    --------------- --------------- --------------
Total income taxes                                       2,983,533       3,127,077      1,279,499

NET INCOME                                          $    5,271,488  $    5,491,154  $   3,025,821
                                                    =============== =============== ==============
 BASIC EARNINGS PER COMMON SHARE*                            $0.73           $0.77          $0.41
                                                    =============== =============== ==============
 DILUTED EARNINGS PER COMMON SHARE*                          $0.72           $0.75          $0.40
                                                    =============== =============== ==============
Weighted average common shares outstanding*              7,203,862       7,165,455      7,411,083
Potential dilutive effect of the exercise 
 of stock options*                                         109,779         180,864        161,862
                                                    --------------- --------------- --------------
Adjusted weighted average common shares outstanding*     7,313,641       7,346,319      7,572,945
                                                    =============== =============== ==============
</TABLE>
*    Basic and diluted earnings per common share, weighted average common shares
     outstanding  and the  potential  dilutive  effect of the  exercise of stock
     options were restated to reflect a  three-for-one  stock split paid in July
     1998.

See notes to consolidated financial statements.
                                       14
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                                       1998                  1997                 1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>                 <C>                <C>              
OPERATING ACTIVITIES:
Net income                                                              $  5,271,488       $   5,491,154      $   3,025,821
Adjustments  to  reconcile   net  income  to  
  net  cash  provided  by  operating
  activities:
Provision for loan losses                                                    240,000             400,000            120,000
Depreciation and amortization                                              1,999,005           1,876,773          1,639,469
Provision for real estate owned                                              108,102             142,630            124,315
Provision for real estate held for development                                     0             200,000                  0
Realized (gains) and losses on:
    Sale of loans and loans held for sale                                     (5,423)             (9,804)            (8,432)
    Sale of investments available for sale                                         0              (1,711)           (54,406)
    Disposal and sale of fixed assets                                        209,935               7,122              7,240
    Sale of real estate owned                                               (101,349)            (10,630)             8,235
Proceeds from sale of loans held for sale                                          0             101,625            112,226
Loans originated for sale                                                          0            (100,000)          (110,000)
Increase in accrued interest receivable                                     (442,422)           (770,837)           (24,702)
Increase in prepaid expenses and other assets                                (95,448)           (171,226)          (120,213)
Increase (Decrease) in accrued interest payable                              190,438             253,759           (27,911)
(Decrease) Increase in other liabilities                                     (61,539)            (46,544)           241,148
Provision for deferred income taxes                                         (465,972)            (67,530)          (705,382)
Other                                                                         33,481              72,982             75,981
                                                                         ------------       -------------      ------------
    Net cash provided by operating activities                              6,880,296           7,367,763          4,303,389
                                                                         ------------       -------------      ------------
INVESTING ACTIVITIES:
Proceeds from sale of:
    Education loans                                                        1,658,700             953,442            846,443
    Real estate held for development                                               0             333,245                  0
    Real estate owned                                                        603,095              75,630            396,519
    Office property and equipment                                                  0                   0              1,700
Principal collected and proceeds from maturities of investment 
  investment securities held to maturity                                 294,889,937         265,776,982        157,566,650
Proceeds from maturities of investment
  securities available for sale                                           86,593,751          11,942,666         16,327,791
Principal collected and proceeds from 
  maturities of mortgage-backed securities                                32,754,399          33,458,783         32,335,567
Principal collected on loans, net                                         60,258,471          53,020,808         52,372,663
Longer-term loans originated or acquired, net                            (58,185,394)        (50,305,474)       (72,113,495)
Purchase of investment securities and mortgage-
  backed securities held to maturity                                    (343,502,524)       (320,005,763)      (199,107,774)
Purchase of investment securities available for sale                    (116,472,554)        (78,570,231)       (26,797,361)
(Purchase) Redemption of Federal Home Loan Bank stock                     (1,230,610)            (10,200)           437,500
Purchase of office property and equipment                                 (4,912,791)         (2,077,581)        (3,271,960)
Net cash received from deposit and branch purchase, net                            0                   0          9,044,846
                                                                         ------------       -------------      ------------
    Net cash used by investing activities                                (47,545,520)        (85,407,693)       (31,960,911)
                                                                         ------------       -------------      ------------
FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts                      61,509,157          27,376,384          3,813,048
Net (decrease) increase in time deposits                                 (14,639,514)          2,095,304         11,470,940
Net (decrease) increase in FHLB advances and advances from Bank           (8,128,155)         (8,053,524)        14,741,758
Proceeds from securities sold under agreement to repurchase               20,000,000          60,000,000                  0
Principal repayment of employee stock ownership plan debt                    (33,481)            (72,982)           (75,981)
Increase in advances from borrowers for taxes and insurance                   66,894              53,903             45,508
Purchase of treasury stock                                                  (186,051)           (127,361)        (1,913,191)
Dividends paid on common stock                                              (767,461)           (525,479)          (495,434)
Net proceeds from issuance of common stock                                   108,604               5,758              4,843
                                                                         ------------       -------------      ------------
    Net cash provided by financing activities                             57,929,993          80,752,003         27,591,491
                                                                         ------------       -------------      ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                          17,264,769           2,712,073            (66,031)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                              12,631,622           9,919,549          9,985,580
                                                                         ------------       -------------      ------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                  $ 29,896,391       $  12,631,622      $   9,919,549
                                                                         ============       =============      ============
Supplemental Disclosures:
    Cash paid for:
       Interest on deposits, advances, and other borrowings             $ 24,678,469       $  20,625,049      $  19,006,514
       Income taxes                                                        2,906,347           3,456,506          1,647,476
    Non cash investing and financing activities:
       Dividends declared and not paid at year end                           216,953             167,154            119,636
       Non-monetary transfers from loans to real estate acquired
         through foreclosure                                                 331,028              32,435            481,833
</TABLE>
See notes to consolidated financial statements.
                                       15
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------------------------------------
                                                                                     Guarantee of
                                                                                       employee
                                                                         Accumulated    stock                               Total
                                    Common shares   Common   Paid-in    comprehensive ownership   Retained    Treasury Stockholders'
                                     outstanding    stock    capital       income     plan debt   earnings      stock      Equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>         <C>      <C>        <C>        <C>         <C>         <C>           <C>       
Balances at December 31, 1995          2,505,756   $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
Other comprehensive income, net of tax
  Unrealized gain on securities 
    available for sale                                                     70,002                                            70,002
                                                                                                                          ---------
Total comprehensive income                                                                                                3,095,823

Dividends declared                                                                               (489,782)                 (489,782)
Decrease in guarantee of employee
    stock ownership plan debt                                                         75,981                                 75,981
Exercise of stock options                  1,250        125      4,718                                                        4,843
Purchase of common stock                (114,299)                                                          (1,913,191)   (1,913,191)

------------------------------------------------------------------------------------------------------------------------------------

Balances at December 31, 1996          2,392,707    260,288  8,413,558   (166,152)  (106,463)  28,487,903  (3,062,960)   33,826,174
Net Income                                                                                      5,491,154                 5,491,154
Other comprehensive income, net of tax
  Unrealized gain on securities
    available for sale                                                    220,107                                           220,107
                                                                                                                          ---------
Total comprehensive income                                                                                                5,711,261

Dividends declared                                                                               (572,997)                 (572,997)
Decrease in guarantee of employee
    stock ownership plan debt                                                         72,982                                 72,982
Exercise of stock options                  1,486        149      5,609                                                        5,758
Purchase of common stock                  (6,277)                                                            (127,361)     (127,361)

------------------------------------------------------------------------------------------------------------------------------------

Balances at December 31, 1997          2,387,916    260,437  8,419,167     53,955    (33,481) $33,406,060  (3,190,321)   38,915,817
Net Income                                                                                      5,271,488                 5,271,488
Other comprehensive income, net of tax
  Unrealized gain (loss) on securities 
  available for sale                                                      (75,748)                                          (75,748)
                                                                                                                          ---------
Total comprehensive income                                                                                                5,195,740

Dividends declared                                                                               (817,257)                 (817,257)
Decrease in guarantee of
    employee stock ownership plan debt                                                33,481                                 33,481
Exercise of stock options                 47,451      4,745    103,859                                                      108,604
Tax benefit from gains on stock
     options exercised                                         218,331                                                      218,331
Purchase of common stock                  (5,354)                                                            (186,051)     (186,051)
Three-for-one stock split              4,801,754    524,537   (524,537)                                                           0
------------------------------------------------------------------------------------------------------------------------------------

Balances at December 31, 1998          7,231,767   $789,719 $8,216,820 $  (21,793)$        0  $37,860,291 $(3,376,372)   43,468,665
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

                                       16
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, and 1996
--------------------------------------------------------------------------------

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, 1998 and
1997 were $11.0 million and $6.8 million, respectively.  These requirements were
satisfied  through the  balance of vault cash and a balance at the Federal  Home
Loan Bank.

                                       17
<PAGE>

Investments and Mortgage-Backed Securities

         In accordance with Statement of Financial  Accounting Standards No. 115
(SFAS  No.  115),  "Accounting  for  Certain  Investments  in  Debt  and  Equity
Securities" the Corporation  classifies  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
until  realized.  Gains and  losses  on the sale of  investment  securities  are
recognized utilizing the specific identification method.

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

Securities Purchased under Agreements to Resell

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

Allowance for 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 

                                       17
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
estimated  future  cash  flows.  While  management  uses  the  best  information
available  to make  evaluations  about the  adequacy of the  allowance  for loan
losses,  future  adjustments  to the  allowance  may be necessary if  conditions
differ substantially from the assumptions used in making evaluations.

Loans Held for Sale

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

Interest on Loans

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

Real Estate Owned

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

Real Estate Held for Development

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

Office Properties and Equipment

         Office  properties and equipment are recorded at cost.  Depreciation is
computed using the  straight-line  method over the expected  useful lives of the
assets.  The 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 capitalized and amortized as a
yield adjustment over the life of the loan using the interest method.

Loans Serviced for Others

         Servicing loans for others  generally  consists of collecting  mortgage
payments,  disbursing  payments to investors and processing  foreclosures.  Loan
servicing  income is recorded  upon  receipt and  includes  servicing  fees from
investors and certain  charges  collected from  borrowers,  such as late payment
fees.  The total  amount of loans being  serviced  for the benefit of others was
$20.4  million and $25.6  million at December  31, 1998

                                       18
<PAGE>

and  1997,  respectively.  Loan  servicing  fee  income  was  approximately  $70
thousand,  $83 thousand and $98 thousand for the years ended  December 31, 1998,
1997 and 1996, respectively.

Excess Cost over Fair Value of Net Assets Acquired

         The  excess  costs  over the fair  value of assets  acquired  are being
amortized over a five year period using the straight-line method.

Income Taxes

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

Reclassifications

         Certain items in the 1997 and 1996  consolidated  financial  statements
have been reclassified to conform with the presentation in the 1998 consolidated
financial statements.

Earnings Per Share

         Statement of  Financial  Accounting  Standards  No. 128 (SFAS No. 128),
"Earnings per Share", requires the dual presentation of basic and diluted EPS on
the  face  of the  income  statement  for  all  entities  with  complex  capital
structures and requires a reconciliation of the numerator and denominator of the
basic EPS  computation  to the  numerator  and  denominator  of the  diluted EPS
computation.  Basic EPS  excludes  dilution  and is computed by dividing  income
available to common stockholders by the weighted-average number of common shares
outstanding  for the period.  Diluted EPS reflects the  potential  dilution that
could  occur  if  securities  or other  contracts  to 

                                       18
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
issue common stock were  exercised or converted into common stock or resulted in
the  issuance of common  stock that then  shared in the  earnings of the entity.
Diluted EPS is computed  similarly to fully  diluted EPS pursuant to Opinion 15.
The Corporation has presented both basic and diluted  earnings per share as well
as the  reconciliation  of the  denominator  in the  consolidated  statement  of
operations.

         Basic and diluted earnings per 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 the  three-for-one
stock split that was paid to shareholders on July 14, 1998. A total of 5,245,370
additional shares were issued in conjunction with the stock split. The par value
of the  Corporation's  stock  remained  unchanged.  As a  result,  $524,537  was
transferred from paid-in capital in excess of par to common stock.

2. INVESTMENT SECURITIES HELD TO MATURITY

     A comparison  of amortized  cost and  estimated  market value of investment
securities held to maturity at December 31, 1998 and 1997 are as follows:

                                            December 31, 1998
                      ---------------------------------------------------------
                                       Gross            Gross        Estimated
                       Amortized    Unrealized       Unrealized       Market
                         Cost          Gains          (Losses)         Value
--------------------------------------------------------------------------------
U.S. Gov't Agencies  $   78,291,686 $    151,165  $  (201,073)  $   78,241,778
Municipal bonds           3,823,802        2,833            0        3,826,635
CMOs                     47,302,338       53,888      (59,017)      47,297,209
-------------------------------------------------------------------------------
Total                $  129,417,826 $    207,886  $  (260,090)  $  129,365,622
-------------------------------------------------------------------------------

                                           December 31, 1997
                       ---------------------------------------------------------
                                       Gross         Gross        Estimated
                       Amortized    Unrealized    Unrealized       Market
                         Cost          Gains       (Losses)         Value
--------------------------------------------------------------------------------
U.S. Gov't Agencies  $   79,347,265 $    220,876  $   (70,550)  $   79,497,591
Reverse Repos            30,185,402            0            0       30,185,402
Municipal bonds           2,801,809       14,609            0        2,816,418
U.S. Treasury                15,000            0         (500)          14,500
-------------------------------------------------------------------------------
Total                $  112,349,476 $    235,485  $   (71,050)  $  112,513,911
-------------------------------------------------------------------------------

         The Bank  has the  intent  and  ability  to hold  these  securities  to
maturity.  During  December  1997 the Bank  purchased  $30.2  million of reverse
repurchase  agreements  with Paine  Webber and  Merrill  Lynch,  with an average
maturity of 29 days and a weighted average yield of 6.17%.


                                       19
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
         The amortized cost and estimated  market value of  investments  held to
maturity  at  December  31,  1998,  by  contractual  maturity  are  shown in the
following table.  Expected  maturities may differ as borrowers have the right to
call certain obligations.  CMOs are shown separately due to the amortization and
prepayment of principal occurring throughout the life of these instruments.

                                           December 31,1998 
                                   ----------------------------------
                                      Amortized           Estimated
                                        Cost             Market Value   
---------------------------------------------------------------------
Due one year or less               $   3,594,071       $   3,596,635
Due one to five years                  5,000,000           4,960,000 
Due five to ten years                 53,387,121          53,371,278    
Due after ten years                   20,134,296          20,140,500
CMO's                                 47,302,338          47,297,209  
---------------------------------------------------------------------
Total                                129,417,826         129,365,622
---------------------------------------------------------------------

3. INVESTMENT SECURITIES AVAILABLE FOR SALE

     The  amortized  cost and estimated  market value of  investment  securities
available for sale at December 31, 1998 and 1997 are as follows:

                                               December 31, 1998
                       ---------------------------------------------------------
                                       Gross        Gross       Estimated
                       Amortized    Unrealized   Unrealized       Market
                         Cost          Gains      (Losses)        Value

--------------------------------------------------------------------------------

U.S. Gov't Agencies  $   18,492,035 $     26,683 $   (18,102) $    18,500,616
CMOs                     91,377,435      206,435    (251,353)      91,332,517

------------------------------------------------------------------------------

Total                $  109,869,470 $    233,118 $  (269,455) $   109,833,133

------------------------------------------------------------------------------



                                               December 31, 1997
                       ---------------------------------------------------------
                                       Gross        Gross       Estimated
                       Amortized    Unrealized   Unrealized       Market
                         Cost          Gains      (Losses)        Value

--------------------------------------------------------------------------------


U.S. Gov't Agencies  $    7,850,135 $     21,646 $    (1,200) $     7,870,581
CMOs                     72,406,623      284,720    (223,263)      72,468,080

------------------------------------------------------------------------------

Total                $   80,256,758 $    306,366 $  (224,463) $    80,338,661

------------------------------------------------------------------------------

                                       19
<PAGE>


         The amortized cost and estimated market value of investments  available
for  sale at  December  31,  1998,  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  are  shown  separately  due to the
amortization and prepayment of principal occurring  throughout the life of these
instruments.

                                          December 31, 1998
                                --------------------------------------
                                   Amortized            Estimated
                                      Cost             Market Value
----------------------------------------------------------------------
Due five to ten years         $       17,492,036   $       17,502,717
Due after ten years                    1,000,000              997,900
CMOs                                  91,377,434           91,332,516
----------------------------------------------------------------------
Total                         $      109,869,470   $      109,833,133
----------------------------------------------------------------------

         There were no sales  during  1998.  During  1997,  FNMA-mortgage-backed
securities  available  for sale were sold which  resulted in realized gain of $2
thousand. During 1996, Common Stock and FHLMC-REMICs were sold which resulted in
realized gains of $51 thousand and $3 thousand, respectively.


                                       19
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
4. LOANS, NET

         Loans, net at December 31, 1998 and 1997 consist of the following:

                                       1998                1997
----------------------------------------------------------------------
Mortgage Loans                 $      246,071,511  $      253,000,504
Construction Loans                      1,410,456           3,257,798
Commercial Construction                 2,609,315           2,385,192
Consumer Loans                          3,237,176           3,609,033
Commercial Real Estate                 45,937,998          42,974,261
Commercial Business                     4,120,967           1,712,099
----------------------------------------------------------------------
Subtotal                              303,387,423         306,938,887
Less:
     Deferred loan fees                 1,441,926             970,075
     Allowance for
       possible loan losses             3,342,274           3,137,781
----------------------------------------------------------------------
Total loans, net               $      298,603,223  $      302,831,031
----------------------------------------------------------------------

         At December  31,  1998 and 1997 the  recorded  investment  in loans for
which  impairment had been  recognized in accordance  with SFAS Nos. 114 and 118
totaled  $3.2  million and $3.6  million,  respectively.  At December  31, 1998,
impaired loans of $1.6 million related to loans that were individually  measured
for impairment  with a valuation  allowance of $363 thousand and $1.6 million of
loans that were collectively  measured for impairment with a valuation allowance
of $69 thousand.  At December 31, 1997 impaired loans of $1.6 million related to
loans that were individually  measured for impairment with a valuation allowance
of $319 thousand and $2.0 million of loans that were  collectively  measured for
impairment  with a  valuation  allowance  of $97  thousand.  For the years ended
December 31, 1998 and 1997,  the average  recorded  investment in impaired loans
was approximately $3.4 million and $3.5 million, respectively.  During the years
ended December 31, 1998 and 1997 the  Corporation  recognized  $125 thousand and
$192 thousand,  respectively,  of interest on impaired  loans,  all of which was
recognized on the cash basis.

                                       20
<PAGE>

         Loans which are 90 days delinquent as to principal  and/or interest are
placed on a non-accrual  status and all previously accrued interest is reversed.
The principal amount of non-accrual loans at December 31, 1998 and 1997 was $3.2
million and $3.6 million,  respectively.  Interest  income on non-accrual  loans
that would have been recorded in 1998 under the original terms of such loans was
$266  thousand,  and the interest  income  actually  recognized in 1998 for such
loans was $119 thousand.  Interest  income on non-accrual  loans that would have
been recorded in 1997 under the original  terms of such loans was $354 thousand,
and the  actual  interest  income  recognized  in 1997 for such  loans  was $185
thousand.

         The Bank  originates and purchases  both  adjustable and fixed interest
rate loans. At December 31, 1998, the composition of these loans is as follows:

                                    Maturing  Maturing
                                     during   from 2000    Maturing
(In Thousands)                        1999   through 2003 after 2003   Total
-------------------------------------------------------------------------------
Mortgage Loans (1-4 dwelling)    $   1,715   $  15,811   $  228,546  $ 246,072
Construction Loans                   1,264           0          146      1,410
Commercial Construction              1,640          24          945      2,609
Consumer Loans                       1,635       1,201          401      3,237
Commercial Real Estate               5,829      18,233       21,876     45,938
Commercial Business                  1,892       1,740          489      4,121
-------------------------------------------------------------------------------
                Total            $  13,975   $  37,009   $  252,403  $ 303,387
-------------------------------------------------------------------------------

Interest sensitivity on the 
  above loans:
  Loans with predetermined rates $   8,281   $  30,331   $  173,568  $ 212,180
  Loans with adjustable or
    floating rates                   5,695       6,678       78,834     91,207
-------------------------------------------------------------------------------
                Total            $  13,976   $  37,009   $  252,402  $ 303,387
-------------------------------------------------------------------------------

         Construction,  commercial  and land loans are generally  indexed to the
prime rate plus a percentage  (generally 1% to 2%). The adjustable rate mortgage
loans have interest rate adjustment limitations and are generally indexed to the
one year U.S. Treasury constant maturity yield. Future market factors may affect
the  correlation of the interest rate adjustment with the rates the Bank pays on
the short-term deposits that have been primarily utilized to fund these loans.

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

                                   Years ended December 31,
                         -------------------------------------------
                             1998            1997            1996
---------------------------------------------------------------------
Balance at beginning
     of year           $  3,137,781   $   2,781,937  $     2,766,779
Provision charged to
     operations             240,000         400,000          120,000
Charge-offs                 (37,876)        (49,042)        (115,253)
Recoveries                    2,369           4,886           10,411
---------------------------------------------------------------------
Balance at end of year $  3,342,274   $   3,137,781  $     2,781,937
---------------------------------------------------------------------
                                       20
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
5. MORTGAGE-BACKED SECURITIES

         Mortgage-backed  securities  held to maturity at December  31, 1998 and
1997 are summarized as follows:

                               December 31, 1998
        --------------------------------------------------------------
                           Gross           Gross
         Amortized      Unrealized      Unrealized       Estimated
            Cost           Gains         (Losses)       Market Value
----------------------------------------------------------------------
GNMA    $  31,716,739  $      599,765  $      (3,615)  $   32,312,889
FNMA       37,531,455         597,103        (49,100)      38,079,458
FHLMC      21,255,729         524,392           (476)      21,779,645
Private        88,724           1,610            (33)          90,301
----------------------------------------------------------------------
Total   $  90,592,647  $    1,722,870  $     (53,224)  $   92,262,293
----------------------------------------------------------------------

                              December 31, 1997
        --------------------------------------------------------------
                           Gross           Gross
         Amortized      Unrealized      Unrealized       Estimated
            Cost           Gains         (Losses)       Market Value
----------------------------------------------------------------------
GNMA    $  22,586,373  $      785,155  $          (6)  $   23,371,522
FNMA       35,648,943         604,826        (54,848)      36,198,921
FHLMC      33,379,272         968,264        (23,500)      34,324,036
Private       405,929           6,221              0          412,150
----------------------------------------------------------------------
Total   $  92,020,517  $    2,364,466  $     (78,354)  $   94,306,629
----------------------------------------------------------------------

         The Bank  has the  intent  and  ability  to hold  these  securities  to
maturity.  At December 31, 1998, neither a disposal,  nor a condition that could
lead to a decision  not to hold these  securities  to maturity  were  reasonably
foreseen.

6. OFFICE PROPERTIES AND EQUIPMENT, NET

         Office  properties  and  equipment  at  December  31, 1998 and 1997 are
summarized by major classification, as follows:

                                                  December 31,
                                       ---------------------------------
                                            1998               1997
------------------------------------------------------------------------
Land, buildings and improvements       $   18,900,216    $   16,269,867
Furniture and equipment                     4,153,118         3,665,361
Computers                                   3,629,926         2,316,398
------------------------------------------------------------------------
Total                                      26,683,260        22,251,626
Less accumulated depreciation              (7,391,013)       (6,559,571)
------------------------------------------------------------------------
Office properties and equipment, net   $   19,292,247    $   15,692,055
------------------------------------------------------------------------

                                       21
<PAGE>

7. REAL ESTATE HELD FOR DEVELOPMENT, NET

         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, 1998 and 1997, are summarized as follows:

                                                 December 31,
                                       ---------------------------------
                                           1998               1997
------------------------------------------------------------------------
Real Estate held for development        $ 933,256           $ 933,256
Valuation allowance                      (288,769)           (288,769)
------------------------------------------------------------------------
Net                                     $ 644,487           $ 644,487   
------------------------------------------------------------------------

         During 1997, 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).

8. REAL ESTATE OWNED, NET

         Real estate owned, which was acquired through  foreclosure and deeds in
lieu of  foreclosure,  totaled $168 thousand and $446 thousand,  net at December
31, 1998 and 1997,  respectively.  Changes in allowance for real estate owned is
as follows:
                                        Years ended December 31,
                            -------------------------------------------------
                                 1998              1997              1996
-----------------------------------------------------------------------------
Balance at
     beginning of year      $     560,137     $     437,507     $    313,192
Provisions charged
     to operations                108,102           142,630          153,482
Charge-offs                             0           (20,000)         (29,717)
Recoveries                              0                 0              550
-----------------------------------------------------------------------------
Balance at end
     of year                $     668,239     $     560,137     $    437,507
-----------------------------------------------------------------------------

                                       21
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
9. DEPOSITS

         Deposits at December 31, 1998 and 1997 consisted of the following major
classifications and weighted average rates:

                                        December 31, 1998
                         ----------------------------------------------
                            Weighted                        Percent
                          Average Rate        Amount        of Total
-----------------------------------------------------------------------
Non-interest checking          0.00 %    $   69,336,887      12.93 %
Checking accounts              1.89          75,280,395      14.04
Savings accounts               2.83          95,591,907      17.82
Money market accounts          2.64          67,690,222      12.62
Certificates                   5.35         228,410,212      42.59
-----------------------------------------------------------------------
Total                          3.49 %    $  536,309,623     100.00 %
-----------------------------------------------------------------------

                                         December 31, 1997
                         ----------------------------------------------
                            Weighted                        Percent
                          Average Rate         Amount       of Total
-----------------------------------------------------------------------
Non-interest checking          0.00 %    $   49,875,981      10.19 %
Checking accounts              1.69          54,688,332      11.17
Savings accounts               2.87          83,824,897      17.13
Money market accounts          2.72          58,001,044      11.85
Certificates                   5.32         243,049,726      49.66
-----------------------------------------------------------------------
Total                          3.74 %    $  489,439,980     100.00 %
-----------------------------------------------------------------------

         A summary of  certificates  by  maturity  at  December  31,  1998 is as
follows:

                    Years ended December 31,            Amount
                    ------------------------------------------------
                    1999                         $      157,821,422
                    2000                                 37,135,760
                    2001                                 15,754,388
                    Thereafter                           17,698,642
                    ------------------------------------------------
                    Total                        $      228,410,212
                    ------------------------------------------------
                    
                                       22
<PAGE>

         A summary of interest expense on deposits is as follows:

                                         Years ended December 31,
                        -----------------------------------------------
                            1998              1997           1996
-----------------------------------------------------------------------
Checking accounts       $    1,263,105    $     825,672   $    693,879
Savings accounts             2,591,626        2,347,193      1,816,081
Money market accounts        1,697,154        1,629,248      1,519,789
Certificates                12,538,798       12,952,418     12,146,474
-----------------------------------------------------------------------
Total interest expense  $   18,090,683    $  17,754,531   $ 16,176,223
-----------------------------------------------------------------------

10. ADVANCES FROM FEDERAL HOME LOAN BANK

         At December 31, 1998,  the Bank had advances from the Federal Home Loan
Bank of New York (FHLB) in the amount of $16.4  million with a weighted  average
interest rate of 6.00%.  Advances are  collateralized  by certain first mortgage
loans.

                         Years ended December 31,
------------------------------------------------------------
              1998                            1997
------------------------------------------------------------
               Weighted                    Weighted
                Average Maturity            Average Maturity
     Amount      Rate    Date    Amount       Rate     Date
----------------------------------------------------------
                                $  2,100,000  7.13%   1/2/98
                                   1,000,000  4.95% 10/13/98
                                   5,000,000  6.14%   6/8/98
   $ 10,000,000  6.32%  6/6/00    10,000,000  6.32%   6/6/00
      5,000,000  5.62% 2/15/01     5,000,000  5.62%  2/15/01
      1,368,321  5.00% 10/9/07     1,396,476  5.00%  10/9/07
-------------------------------------------------------------
   $ 16,368,321  6.00%          $ 24,496,476  6.08%
-------------------------------------------------------------

                                       22
<PAGE>

11. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

         At December 31, 1998, the Bank had securities sold under the agreements
to repurchase (repurchase  agreements) in the aggregate amount of $80.0 million.
The repurchase  agreements are collateralized by U.S. Agency Notes and CMOs with
a market value of $80.4 million.  Accrued interest payable totaled $446 thousand
at December 31, 1998.

                           Year ended December 31, 1998
------------------------------------------------------------------------------
       1998
------------------------------------------------------------------------------
                                       Weighted       Maturity       Call
Counterparty           Amount        Average Rate       Date       Feature
------------------------------------------------------------------------------
Merrill Lynch          $20,000,000       5.79%           9/19/02      9/19/00
FHLB                    20,000,000       5.65%          11/18/02     11/18/00
FHLB                    20,000,000       5.72%          12/19/07     12/19/02
FHLB                    20,000,000       5.13%           1/14/08      1/14/01
------------------------------------------------------------------------------
Total                  $80,000,000       5.57%
------------------------------------------------------------------------------

                           Year ended December 31, 1997
------------------------------------------------------------------------------
                                       Weighted       Maturity       Call
Counterparty           Amount        Average Rate       Date       Feature
------------------------------------------------------------------------------
Merrill Lynch          $20,000,000       5.79%           9/19/02      9/19/00
FHLB                    20,000,000       5.65%          11/18/02     11/18/00
FHLB                    20,000,000       5.72%          12/19/07     12/19/02
------------------------------------------------------------------------------
Total                  $60,000,000       5.72%
------------------------------------------------------------------------------


                                       22
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
12. 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 give rise to  significant  portions of
deferred tax assets and deferred tax liability are as follows:

                                                 December 31,
                                       ------------------------------
                                          1998            1997
---------------------------------------------------------------------
Deferred income tax assets:
  Allowance for possible loan losses   $     924,040  $      677,181
  Real estate losses                         482,409         435,010
  Deferred loan fees, net                     (2,225)        (11,113)
  Compensation and pension liability          49,822          49,822
  Amortization of deposit premium            274,034         259,723
  Post retirement benefits                   185,000         185,000
  Capitalized interest                       284,690         274,951
  Other                                      155,340          61,287
---------------------------------------------------------------------
Gross deferred tax assets                  2,353,110       1,931,861
Deferred income tax liabilities:
  Prepaid deposit insurance premium           48,912          26,936
  Depreciation                               288,426         397,618
---------------------------------------------------------------------
Gross deferred tax liabilities:              337,338         424,554
---------------------------------------------------------------------
Deferred income tax assets, net        $   2,015,772  $    1,507,307
---------------------------------------------------------------------

                                       23
<PAGE>

     The following represents the components of income tax expense for the years
ended December 31, 1998, 1997 and 1996, respectively.

                                      1998           1997          1996
--------------------------------------------------------------------------
Current Federal tax provision    $  3,008,922  $  2,903,256   $ 1,862,681
Current State tax provision           284,193       292,221       181,544
--------------------------------------------------------------------------
         Total Current provision    3,293,115     3,195,477     2,044,225
--------------------------------------------------------------------------
Deferred Federal tax benefit         (283,771)      (62,697)     (725,109)
Deferred State tax benefit            (25,811)       (5,703)      (39,617)
--------------------------------------------------------------------------
         Total Deferred benefit      (309,582)      (68,400)     (764,726)
--------------------------------------------------------------------------
Total                            $  2,983,533  $  3,127,077   $ 1,279,499
--------------------------------------------------------------------------

         On August 21, 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  $2.4  million
representing  the excess of the Bank's tax bad debt reserve at December 31, 1995
over the base year  reserve  amount  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. A deferred tax liability has been recognized for the portion
of the tax bad debt reserves which arose in years 1988 through 1995.


                                       23
<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>
                                             1998                            1997                           1996
                                  --------------------------      -------------------------      -------------------------


                                    Amount          Percent          Amount       Percent           Amount       Percent
                                  ------------    ----------      -----------    ----------      ------------   ----------
<S>                              <C>                <C>         <C>                <C>          <C>               <C>   
Tax at federal tax rate           $ 2,806,707        34.00%      $ 2,930,199        34.00%       $ 1,463,808       34.00%
Increase (Decrease) from:
     State income taxes, net
         of federal income tax
         benefit                      170,531         2.07           189,102         2.19             93,672        2.18
     Change in valuation
         allowance                          0         0.00                 0            0           (289,588)      -6.73

     Other                              6,295         0.00             7,776         0.09             11,607        0.27%
                                  ------------    ----------      -----------    ----------      ------------   ----------
     Total                        $ 2,983,533        36.15%      $ 2,127,077        36.28%       $ 1,279,499       29.72%
                                  ============    ==========      ===========    ==========      ============   ==========
</TABLE>

                                       23
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
13. LEASES

         The Bank leases two buildings and land to operate three  branches 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, 1998 are as follows:

                Fiscal Year                                    Amount       
                ----------------------------------------------------------
                1999                                     $        127,202
                2000                                               76,826
                2001                                               76,826
                2002                                               76,826
                2003 and beyond                                 1,133,643
                ----------------------------------------------------------
                Total                                    $      1,491,323
                ----------------------------------------------------------

         The leases for the buildings  contain cost of living  adjustments based
on changes in the consumer  price index.  The minimum lease payments shown above
include base rentals exclusive of any future adjustments. Total rent expense for
all operating leases amounted to $105 thousand,  $104 thousand and $107 thousand
for fiscal years 1998, 1997 and 1996, respectively.

14. STOCKHOLDERS' EQUITY

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

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

         Under  FIRREA  the Bank must have core  capital  equal to 4%,  tangible
capital  equal to 2% and  risk-based  capital equal to 8%. At December 31, 1998,
the Bank exceeded all three regulatory capital levels required under FIRREA. The
Bank's regulatory  tangible and core capital was $48.4 million or 7.02% of total
bank assets and risk-based  capital was $51.5 million or 18.13% of risk-weighted
assets.

                                       24
<PAGE>

         The following is a reconciliation of the Bank's capital under generally
accepted  accounting  principles  ("GAAP") to regulatory capital at December 31,
1998:

                            Tangible        Core       Risk-based
                            Capital        Capital       Capital
-------------------------------------------------------------------
Bank's GAAP Capital        $ 49,695,061   49,695,061    49,695,061
Add:
    Unrealized loss on
       investments AFS           21,793       21,793        21,793
Less:
    Subsidiary
       investments not
       eligible                (965,474)    (965,474)     (965,474)
    Goodwill                   (164,969)    (164,969)     (164,969)
    REO greater than
       5 years                 (149,541)    (149,541)     (149,541)
Supplementary
    qualifying capital
    item
       General valuation
       allowance                      0            0     3,092,524
-------------------------------------------------------------------
Regulatory capital
    computed                 48,436,870   48,436,870    51,529,394
Minimum regulatory
    capital requirement      13,800,280   27,600,560    22,741,729
-------------------------------------------------------------------
Regulatory capital
    excess                 $ 34,636,590 $ 20,836,310  $ 28,787,665
-------------------------------------------------------------------

15. PENSION PLAN

         The Bank has a defined benefit pension plan for active  employees.  Net
pension  expense was $371  thousand,  $385  thousand and $412 thousand for years
ended  December 31, 1998,  1997 and 1996,  respectively.  The  components of net
pension cost are as follows:
                                   Years ended December 31,
                     ------------------------------------------------------
                         1998                 1997                1996
---------------------------------------------------------------------------
Service Cost       $       435,047     $        401,818     $      397,001
Interest Cost              270,772              232,376            204,457
Return on Assets          (359,216)            (286,070)          (596,276)
Net Amortization
     and Deferral           23,921               37,140            406,357
---------------------------------------------------------------------------
Net periodic
     pension cost  $       370,524     $        385,264     $      411,539
---------------------------------------------------------------------------

                                       24
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
     The following table presents a  reconciliation  of the funded status of the
defined benefit pension plan at December 31, 1998 and 1997:

                                                   December 31,
                                        -----------------------------------
                                             1998                 1997
---------------------------------------------------------------------------
Projected benefit obligation                 5,200,545           4,419,723
Fair value of plan assets                    5,895,741           5,171,488
---------------------------------------------------------------------------
Excess of plan assets over
     projected benefit obligation              695,196             751,765
Unrecognized net gain                       (1,153,817)           (876,493)
Unrecognized prior service cost                 76,135              81,860
Unrecognized net transition
     obligation                                162,569             193,475
---------------------------------------------------------------------------
(Accrued) Prepaid pension cost
     included in the consolidated
     balance sheet                     $      (219,917)      $     150,607
---------------------------------------------------------------------------

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

                                                     December 31,
                                        --------------------------------------
Change in Project Benefit Obligation           1998                 1997
------------------------------------------------------------------------------
Projected Benefit Obligation
  at Beginning of Year                      $4,419,723           $3,959,973
Service Cost                                   435,047              401,818
Interest Cost                                  270,772              232,376
Amendments                                           0                    0
Actuarial loss (gain)                          133,501              (48,603) 
Benefits Paid                                  (58,498)            (125,841)
------------------------------------------------------------------------------
Projected Benefit Obligation 
  at End of Year                            $5,200,545           $4,419,723
------------------------------------------------------------------------------
Change in Plan Assets
------------------------------------------------------------------------------
Fair Value of Plan Assets             
  at Beginnning of Year                     $5,171,488           $4,105,395
Actual Return of Plan Assets                   782,751            1,022,934
Employer Contribution                                0              169,000
Plan Participants' Contributions                     0                    0
Benefits Paid                                  (58,498)            (125,841)
------------------------------------------------------------------------------
Fair Value of Plan Assets
  at End of Year                            $5,895,741           $5,171,488
------------------------------------------------------------------------------

         Actuarial assumptions used in determining pension cost are as follows:

                                      Years ended December 31,
                                  -------------------------------------
                                   1998         1997          1996
-----------------------------------------------------------------------
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 %
-----------------------------------------------------------------------

                                       25
<PAGE>


         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,
                                          -----------------------------------
                                              1998                  1997
-----------------------------------------------------------------------------
Service Cost                            $           0        $            0
Interest Cost                                  30,514                31,938
Amortization of prior service cost            (14,499)              (10,854)
Amortization of Gain                           (1,763)               (5,229)
-----------------------------------------------------------------------------
Net periodic post-retirement
     benefit cost                       $      14,252        $       15,855
-----------------------------------------------------------------------------

         The assumed  discount  rate used in the  calculation  for net  periodic
post-retirement benefit cost was 7.0% and 7.5% for 1998 and 1997,  respectively.
The  assumed  health care cost trend rate for 1998 was 6% 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, 1998
--------------------------------------------------------------------------
Accumulated post-retirement obligation                         
     at year end                                                 $487,849
Service and Interest Cost                                         $32,847
--------------------------------------------------------------------------

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

                                                     December 31,
                                          -----------------------------------
                                              1998                 1997
-----------------------------------------------------------------------------
Accumulated post-retirement
     benefit obligation                 $    (451,181)       $     (435,729)
Unrecognized prior service cost               (99,076)             (113,575)
Unrecognized net gain                         (59,101)              (89,205)
-----------------------------------------------------------------------------
Accrued post-retirement benefit
     cost                               $    (609,358)       $     (638,509)
-----------------------------------------------------------------------------

         The assumed  discount rate used in the  calculation for the accumulated
post-retirement  benefit  obligation  as of December 31, 1998 and 1997 was 6.75%
and 7.0%, respectively.

                                       25
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
16. SUBORDINATED DEBENTURES

         The Corporation  issued $10.0 million of subordinated  debentures.  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  could 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.

17. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

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

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

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

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

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

                                       26
<PAGE>

At  December  31,  1998 and  December  31,  1997,  the  carrying  amount and the
estimated  market  value  of  the  Corporation's  financial  instruments  are as
follows:

<TABLE>
<CAPTION>

                                                                 December 31, 1998                     December 31, 1997
                                                       -------------------------------------- -------------------------------------
                                                           Carrying            Estimated          Carrying           Estimated
                                                            Amount            Market Value         Amount           Market Value
                                                       ------------------   ----------------- -----------------   -----------------
<S>                                                   <C>                  <C>               <C>                 <C>             
Financial assets:
     Cash and cash equivalents                         $      29,896,391    $     29,896,391  $     12,631,622    $     12,631,622
     Investment securities held to maturity and
     investment securities available for sale          $     239,250,959    $    239,198,755  $    192,688,137    $    192,852,572
     Mortgage-backed securities                        $      90,592,647    $     92,262,293  $     92,020,517    $     94,306,629
     FHLB Stock                                        $       4,861,410    $      4,861,410  $      3,630,800    $      3,630,800

     Loans, net of unearned income                     $     301,945,497    $    309,708,000  $    305,968,812    $    310,340,000
        Less: Allowance for possible loan losses              (3,342,274)         (3,342,274)       (3,137,781)         (3,137,781)
     Loans, net                                        $     298,603,223    $    306,365,726  $    302,831,031    $    307,202,219


Financial liabilities:
     Deposits
        Checking, passbook, and money market accounts  $     307,899,411    $    307,899,411  $    246,390,254    $    246,390,254
        Certificates                                   $     228,410,212    $    229,028,000  $    243,049,726    $    241,393,000
     Securities sold under agreements to repurchase    $      80,000,000    $     83,705,000  $     60,000,000    $     58,560,000
     Subordinated debentures                           $      10,000,000    $     10,500,000  $     10,000,000    $     10,600,000
     Other borrowings                                  $      16,368,321    $     16,467,000  $     24,529,957    $     23,941,238

Off-balance sheet financial instruments:
     Commitments to extend credit                      $      29,758,602    $     29,758,602  $     25,528,246    $     25,528,246
     Standby letters of credit                         $       1,301,772    $      1,301,772  $        761,522    $        761,522

</TABLE>


                                       26
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
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.

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  institutions 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.  These
standards  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, 1998 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  $29.8  million  as of
December 31, 1998. Of these commitments outstanding, the breakdown between fixed
and variable rate loans is as follows:
                                           December 31, 1998
                             ----------------------------------------
                              Fixed         Variable
                              Rate            Rate           Total
---------------------------------------------------------------------
Commitments to:
         fund loans        $  6,566,280 $   6,203,400   $ 12,769,680
Unused lines:
         Construction                 0     1,796,435      1,796,435
         Equity line of
            credit loans              0    15,192,487     15,192,487
---------------------------------------------------------------------
                           $  6,566,280 $  23,192,322   $ 29,758,602
---------------------------------------------------------------------

                                       27
<PAGE>

         In addition to outstanding  loan  commitments,  the Bank as of December
31,  1998,  issued  $1.3  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.

20. LITIGATION

         There are no significant pending legal proceedings at December 31, 1998
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, 1998 and 1997,  loans made to  directors  and
executive  officers whose  indebtedness  exceeded $60 thousand  amounted to $1.5
million  and  $764  thousand,  respectively.  During  1998  new  loans  to these
individuals totaled $785 thousand and repayments totaled $33 thousand.

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.

                                       27
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
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 241,926  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,  1998,  the option
exercise prices are $1.292,  $5.333 and $10.00.  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,
1998,  1997 and 1996 and  changes  during  the years  ending  on those  dates is
presented below.

<TABLE>
<CAPTION>

                                                       Years Ended December 31,
-----------------------------------------------------------------------------------------
                                    1998                1997                1996
-----------------------------------------------------------------------------------------
                                        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       235,995   $1.91     246,453   $1.88     287,469   $1.80
Options granted                93,000   10.00           0       0           0       0
Options exercised             (84,081)   1.29      (4,458)   1.29      (3,750)   1.29
Options surrendered           (34,296)   1.29      (6,000)   1.29     (37,266)   1.29
-----------------------------------------------------------------------------------------
Outstanding at the
  End of the Year             210,618   $6.83     235,995   $1.91     246,453   $1.88
-----------------------------------------------------------------------------------------
</TABLE>

                                       28
<PAGE>


     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, 1998              
              -----------------------------------------------------------
                                           As Reported      Pro Forma
              -----------------------------------------------------------
              Net Income                     $ 5,271,488    $  5,042,974
              Basic Earnings per share             $0.73           $0.70
              Diluted Earnings per share           $0.72           $0.69
              -----------------------------------------------------------

         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 .86%, expected volatility of 26.11%, discount rate of 6.0% and
an expected life of 10 years at December 31, 1998. There were no options granted
in 1997 or 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 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.

                                       28
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
25.  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            1998            1997
----------------------------------------------------------------------------------------------
<S>                                                              <C>             <C>        
Assets:
  Cash                                                             $   499,293     $   397,911
  Investment in Subsidiary                                          49,913,393      45,662,960
  Investment Securities                                              1,000,000       1,000,000
  Intercompany receivable, net                                       2,199,643       1,924,945
  Subordinated debentures issue costs, net                             321,113         378,460
  Other                                                                168,843         168,843   
                                                                    ----------      ----------   
Total Assets                                                       $54,102,285     $49,533,119
                                                                    ==========      ==========

Liabilities:
  10% Subordinated debentures due 2004                             $10,000,000     $10,000,000
  Guarantee of employee stock ownership plan debt                            0          33,481
  Dividends payable                                                    216,953         167,154
  Accrued interest payable                                             416,667         416,667
                                                                    ----------      ----------
Total Liabilities                                                  $10,633,620     $10,617,302
                                                                    ==========      ==========

Stockholder's Equity:
  Preferred stock -$.10 par value 5,000,000 shares authorized; none issued
  Common stock - $.10 par value 10,000,000 shares authorized; shares 
    issued 7,897,191* and 2,604,370 and shares outstanding 7,231,916
    as of December 31, 1998 and 1997, respectively                     789,719         260,437
  Paid-in capital in excess of par*                                  8,216,719       8,419,167
  Unrealized (loss) gain on securities available for sale,
    net of deferred income taxes                                       (21,793)         53,955  
  Guarantee of employee stock ownership plan debt                            0         (33,481)
  Retained earnings                                                 37,860,291      33,406,060
  Less: Treasury stock (665,424* and 216,454 shares, at
    cost at December 31, 1998 and 1997, respectively)               (3,376,372)     (3,190,321)
                                                                    ----------      ---------- 
Total Stockholder's equity                                          43,468,665      38,915,817
                                                                    ----------      ----------
Total Liabilities and Stockholder's Equity                         $54,102,285     $49,533,119
                                                                    ==========      ==========
</TABLE>

*    Common  stock,  paid-in  capital  in  excess of par and  treasury  stock at
     December 31, 1998 reflect a three-for-one stock split paid in July 1998.



--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                   Years Ended December 31,
                                                      --------------------------------------------------------
FMS Financial Corporation Statements of Operations           1998               1997                1996
--------------------------------------------------------------------------------------------------------------
<S>                                                   <C>                <C>                 <C>               
Intercompany interest income                           $      560,750     $       560,750     $       560,750   
Interest expense                                           (1,057,348)         (1,057,348)         (1,057,348)
Dividends from subsidiary                                   1,600,000           1,400,000           1,400,000
Equity in undistributed income of subsidiary                3,999,243           4,418,909           1,953,576
--------------------------------------------------------------------------------------------------------------
Income before taxes                                         5,102,645           5,322,311           2,856,978
Income tax benefit                                            168,843             168,843             168,843
--------------------------------------------------------------------------------------------------------------
Net Income                                             $    5,271,488     $     5,491,154     $     3,025,821
--------------------------------------------------------------------------------------------------------------

</TABLE>

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

                                       29
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                            For Years Ended December 31,
                                                           ----------------------------------------------------------------
FMS Financial Corporation Statements of Cash Flows                1998                   1997                   1996
---------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>                      <C>                     <C>           
Operating Activities
Net income                                                 $        5,271,488       $       5,491,154       $    3,025,821
Adjustments to reconcile net income to net cash provided
   by operating activities:
Equity in undistributed earnings of the subsidiary                 (3,999,243)             (4,418,909)          (1,953,576)
Amortization of bond issue costs                                       57,347                  57,349               57,348
Decrease in interest payable                                                0                       0                    0
 Decrease (Increase) in intercompany receivable, net                 (274,698)               (333,389)           1,452,440
Other operating activities                                             33,481                  72,982               75,292
                                                           -------------------      ------------------      ---------------
     Net cash  provided by operating activities                     1,088,375                 869,187            2,657,325


Financing Activities
Purchase of treasury stock                                           (186,055)               (127,361)          (1,913,191)
Investment in subsidiary                                             (108,603)                 (5,758)              (4,843)
Cash dividends paid on common stock                                  (767,457)               (525,479)            (495,434)
Principal repayment of employee stock ownership plan debt             (33,481)                (72,982)             (75,981)
Proceeds from issuance of stock                                       108,603                   5,758                4,843
                                                           -------------------      ------------------      ---------------
     Net cash used by financing activities                           (986,993)               (725,822)          (2,484,606)
                                                           -------------------      ------------------      ---------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                      101,382                 143,365              172,719
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                          397,911                 254,546               81,827
                                                           -------------------      ------------------      ---------------
CASH AND CASH EQUIVALENTS, END OF YEAR                     $          499,293       $         397,911       $      254,546
                                                           -------------------      ------------------      ---------------
</TABLE>

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


                                       30
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
                                MANAGEMENT REPORT

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

FINANCIAL STATEMENTS

Management of FMS Financial  Corporation and Subsidiary  ("the  Corporation") is
responsible  for  the  preparation,  integrity,  and  fair  presentation  of its
published consolidated  financial statements,  and Thrift Financial Report (TFR)
filed with the Office of Thrift  Supervision,  as of December 31, 1998,  and for
the year then ended. The published  consolidated  financial statements have been
prepared in accordance with generally accepted  accounting  principles,  and the
Thrift  Financial  Report has been  prepared  in  accordance  with the Office of
Thrift Supervision  reporting  instructions,  and, as such, include some amounts
that are based upon judgments and estimates of management.

INTERNAL CONTROL STRUCTURE OVER FINANCIAL REPORTING

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

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

Management  assessed its internal control structure over financial  reporting as
of December  31,  1998.  This  assessment  was based on criteria  for  effective
internal   control   over   financial    reporting    described   in   "Internal
Control-Integrated Framework" issued by the Committee of Sponsoring Organization
of the Treadway Commission.  Based on this assessment,  management believes that
the  Corporation   maintained  an  effective  internal  control  structure  over
financial reporting as of December 31, 1998.

COMPLIANCE WITH LAWS AND REGULATIONS

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

Management  assessed its  compliance  with the designated  laws and  regulations
relating to safety and soundness. Based on this assessment,  management believes
that  the  Corporation  has  complied,  in all  significant  respects,  with the
designated  laws and  regulations  related to safety and  soundness for the year
ended December 31, 1998.




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

FMS Financial Corporation
Burlington, New Jersey
February 16, 1999


                                       31
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------

PRICEWATERHOUSECOOPERS   [LOGO]

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of FMS Financial Corporation:

In our  opinion,  the  accompanying  consolidated  balance  sheets  and  related
consolidated statements of operations, changes in stockholders' equity, and cash
flows present fairly, in all material  respects,  the financial  position of FMS
Financial  Corporation  and Subsidiary  ("the Company") at December 31, 1998 and
1997,  and the  results of its  operations  and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity  with generally
accepted   accounting   principles.   These   financial   statements   are   the
responsibility of the Company's management;  our responsibility is to express an
opinion on these  financial  statements  based on our audits.  We conducted  our
audits of these  statements  in  accordance  with  generally  accepted  auditing
standards which require that we plan and perform the audit to obtain  reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.


/s/ PricewaterhouseCoopers LLP


2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 16, 1999

                                       32
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------

                              CORPORATE INFORMATION


ANNUAL MEETING

         The 1999 Annual Shareholders' Meeting of FMS Financial Corporation will
be held at 10:00 a.m., on the 29th day of April, 1999 at the Burlington  Country
Club, Burrrs Road, Westampton, New Jersey.

STOCK MARKET INFORMATION

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

         The number of record  holders of common stock of the  Corporation as of
March 1, 1999 was  approximately  788, not including those shares  registered in
names of various investment brokers held in account for their customers.

     The following table sets forth the range of closing prices,  as reported by
Nasdaq, for the periods ended December 31, 1998 and 1997:

                                   1998
                             ---------------------------------
QUARTER ENDED                      HIGH             LOW
--------------------------------------------------------------
March 31,                            $  12.167       $ 11.167
June 30,                             $  17.000       $ 12.201
September 30,                        $  15.500       $  9.500
December 31,                         $  10.625       $  6.875
--------------------------------------------------------------

                                   1997
                             ---------------------------------
QUARTER ENDED                      HIGH             LOW
--------------------------------------------------------------
March 31,                            $   6.917       $  6.125
June 30,                             $   8.500       $  6.250
September 30,                        $  10.500       $  7.833
December 31,                         $  11.833       $  9.083
--------------------------------------------------------------

         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.

                                       33
<PAGE>

         The  Bank's  ability  to pay  cash  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 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 year to date net income 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, 1998 the Bank was a Tier 1 institution and
had  available  $18.3  million  for  dividends  to the  Corporation,  subject to
nonobjection by the OTS. It is not likely that the  Corporation  would request a
dividend of that magnitude.

         The  Corporation is not subject to OTS regulatory  restrictions  on the
payment of dividends to its stockholders,  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.

                                       33

<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
BOARD OF DIRECTORS

CHARLES B. YATES
Chairman of the Board

WAYNE H. PAGE
Vice Chairman

GEORGE J. BARBER

DOMINIC W. FLAMINI

VINCENT R. FARIAS

RUPERT A. HALL, JR.

JAMES C. LIGNANA

EDWARD J. STAATS, JR.

MARY WELLS

CRAIG W. YATES

DIRECTORS EMERITUS

ADOLPH N. BRIGHT

KAREN S. OLEKSA

HILYARD S. SIMPKINS
                                       34

<PAGE>

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

FRANK E. SMITH
Vice President, Facilities and Design

MERLE A. BROWN
Security Officer

AMY J. HANNIGAN
Controller

MARCELLA F. HATCHER*
Assistant Secretary


* Officers of Bank and Holding Company



                                       34

<PAGE>

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

MARKET MAKERS
The following  companies were making a market in the Corporation's  common stock
at December 31, 1998:

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

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


FORM 10-K AND OTHER FINANCIAL INQUIRIES

The Corporation's  Annual Report on Form 10-K for the fiscal year ended December
31, 1998, as filed with the Securities and Exchange Commission will be furnished
to  shareholders  of  the  Corporation  upon  written  request  without  charge.
Shareholders,   analysts  and  others   seeking  this  and  other  requests  for
information relating to stock, annual shareholders'  meeting and related matters
on FMS Financial  Corporation,  should  contact the  Corporate  Secretary at the
Executive Offices.

Transfer Agent and Registrar                        Auditors
American Stock Transfer and Trust Company           PricewaterhouseCoopers LLP
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

                                       35
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
                                OFFICE LOCATIONS

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

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

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

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

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

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

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

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

         CINNAMINSON
         1703 Highland Avenue
         Cinnaminson, NJ 08077
         (609) 303-1870 *

         DELRAN
         3002 Route 130 North
         Delran, NJ 08075
         (609) 764-3740 *

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

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

         LARCHMONT
         3220 Route 38
         Mount Laurel, NJ 08054
         (609) 235-6666 *

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



                                       36
<PAGE>

         MEDFORD
         200 Tuckerton Road
         Medford, NJ 08055
         (609) 596-4300 *

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

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

         MOORESTOWN
         53 East Main Street
         Moorestown, NJ 08057
         (609) 235-0544 *

         MOUNT LAUREL
         4522 Church Road
         Mount Laurel, NJ 08054
         (609) 235-4445 *

         RIVERSIDE
         Scott Street & Pavilion Avenue
         Riverside, NJ 08075
         (609) 461-4333 *

         RIVERTON
         604 Main Street
         Riverton, NJ 08077
         (609) 786-5333 *

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

         TABERNACLE
         1507 Route 206
         Tabernacle, NJ 08088
         (609) 268-5993

         WILLINGBORO
         John F. Kennedy Way & Charleston Rd.
         Willingboro, NJ 08046
         (609) 877-2888

         WILLINGBORO EAST
         611 Beverly-Rancocas Road
         One East Ridge Shopping Center
         Willingboro, NJ 08046
         (609) 871-4900

         WILLINGBORO WEST
         1 Rose Street & Beverly-Rancocas Road
         Willingboro, NJ 08046
         (609) 835-4700
         (609) 654-6373


         *  Effective  6/12/99 the area code for these  branches will be changed
            to #856.

                                       36