FMS FINANCIAL CORPORATION
FARMERS & MECHANICS BANK


                               CORPORATE PROFILE

Originally  founded in 1871 under the name of Farmers' and  Mechanics'  Building
and Loan  Association,  Farmers & Mechanics Bank is a wholly owned subsidiary of
FMS Financial  Corporation.  The  Corporation  is listed on the Nasdaq  National
Market  System  under the  trading  symbol of FMCO.  With  total  assets of $1.1
billion,  the Corporation  employs 321 full-time and 214 part-time employees who
service over 156 thousand deposit accounts.  The Bank, which currently  operates
39 branches in Burlington,  Camden and Mercer County,  is open seven days a week
and offers free on-line banking,  bill pay, telephone banking and coin counting.
We continue to strive for  convenient,  personal,  full service banking so as to
remain your "Hometown Bank".


ABOUT OUR COVER-
Shown on our cover are two advertisements used by the Bank during the year.

<PAGE>

To Our Shareholders:

     Success in community banking can be measured in a variety of ways.  Assets,
deposits and earnings  growth are the standard  measures.  Just as important are
the  underlying  activities  of  expanding  our  branch  system,   managing  the
complexity of back-office operations,  upgrading our computer and communications
capabilities  and  improving  our  policies  and  services.   Most  importantly,
community banking is directed at building long term  relationships with loan and
deposit customers in the communities we serve.

     The financial report for 2002 was exceptionally good. Deposits increased to
$800 million and assets exceeded a billion dollars for the first time.  Earnings
were  substantially  higher  than in  prior  years.  The  bank's  cost of  funds
decreased  because of the rapid  decline in short term rates during the year and
our  continued  greater  reliance  on  transaction  accounts  which have  higher
operating costs and lower interest costs. Our income on loans and investments is
based on longer term interest rates which  declined more slowly.  The result was
record income for 2002.

     Net interest income for any one year is the result of a portfolio of assets
and liabilities which changes slowly over time. While the lower short term rates
helped a lot in 2002, loan and investment  returns have continued to decline and
it appears that earnings for 2003 will be somewhat lower than in 2002.

     We are working hard at the other  aspects of success in community  banking.
We added new branches in Delanco and at the Burlington  Wal-Mart during 2002. In
early  2003,  we are  opening a new branch in  Willingboro  and  branches in the
Cinnaminson  and Hamilton  Wal-Marts.  At the end of March we are taking over an
operating  branch  in  Florence,  with $20  million  in  deposits,  which we are
acquiring from a commercial  bank. At the same time, we are continuing to invest
in  improved  back-office   operations  and  more  computer  and  communications
equipment. During 2002 we implemented internet banking including an on-line bill
paying system. We have switched to a check imaging system,  which simplifies our
sorting of checks,  improves our ability to retrieve  information  and see check
images from any computer, and provides image statements to our customers,  which
are convenient and reduce mailing costs.

     We continue to believe that a community bank can compete very  successfully
with the larger  institutions  because it is closer to the people it serves. Our
organization  has grown to more than 500 people  working  together  to serve the
financial needs of our neighbors. We are working to give good services today and
building relationships for the future.


                                                         Sincerely,

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

                                      -1-
<PAGE>
FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Financial Condition: (In Thousands)
-------------------------------------------------------------------------------------------------------------------------
December 31,                  2002      2001      2000      1999      1998      1997     1996     1995      1994     1993
-------------------------------------------------------------------------------------------------------------------------

<S>                    <C>         <C>       <C>       <C>       <C>       <C>      <C>      <C>       <C>      <C>
Assets                  $1,126,557  $966,537  $839,076  $772,501  $691,812  $628,403 $541,710 $501,550  $483,776 $445,029

Loans receivable, net      361,674   336,544   290,179   299,695   298,603   302,831  306,871  288,400   283,260  269,264

Deposits                   800,340   729,506   648,539   603,892   536,310   489,440  453,277  428,809   429,431  406,017

Stockholders' equity        57,638    52,203    47,410    46,097    43,469    38,916   33,826   33,053    29,159   25,906
</TABLE>

<TABLE>
<CAPTION>
Operations: (In Thousands, except per share data)
---------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,     2002      2001      2000      1999      1998      1997        1996       1995     1994     1993
---------------------------------------------------------------------------------------------------------------------------

<S>                     <C>       <C>       <C>       <C>       <C>       <C>         <C>        <C>      <C>      <C>
Interest income          $57,748   $55,300   $52,349   $47,863   $46,563   $40,813     $36,841    $35,201  $32,270  $31,510

Interest expense          24,756    28,752    27,398    24,742    24,869    20,879      18,978     18,041   15,336   16,100

Net interest income       32,992    26,548    24,951    23,120    21,694    19,934      17,863     17,160   16,934   15,410

Net income                 7,961     5,459     5,112     5,114     5,271     5,491       3,026(a)   4,343    4,455    4,215

Basic earnings
  per common share          1.22      0.81      0.74      0.71      0.73      0.77        0.41       0.58     0.58     0.54

Diluted earnings
  per common share          1.21      0.81      0.74      0.70      0.72      0.75        0.40       0.56     0.56     0.53

Dividends declared
  per common share          0.12      0.12      0.12      0.12      0.11      0.08(b)     0.07(b)    0.07(b)  0.00     0.00

Weighted average
  common shares
  outstanding              6,548     6,701     6,888     7,210     7,204     7,165       7,411      7,512    7,728    7,739

Weighted average
  common shares
  and common stock
  equivalents
  outstanding              6,577     6,714     6,947     7,292     7,314     7,346       7,573      7,695    7,952    7,978
</TABLE>

<TABLE>
<CAPTION>
Other Selected Data:
--------------------------------------------------------------------------------------------------------------------
Year Ended December 31,      2002     2001     2000     1999     1998      1997     1996     1995     1994     1993
--------------------------------------------------------------------------------------------------------------------
<S>                        <C>      <C>      <C>      <C>      <C>       <C>      <C>      <C>      <C>      <C>
Net interest rate spread     3.44%    3.24%    3.40%    3.28%    3.50%     3.60%    3.50%    3.49%    3.64%    3.49%

Net interest margin          3.40     3.22     3.42     3.36     3.48      3.72     3.66     3.66     3.72     3.62

Return on average assets     0.77     0.56     0.66     0.61     0.79      0.98     0.60     0.89     0.94     0.96

Return on average equity    14.61    10.02    11.16    10.93    12.86     15.11     8.99    14.00    16.01    17.80

Dividend payout ratio        9.92    14.81    16.22    17.14    15.28     10.67    17.50    12.43     0.00     0.00

Equity-to-asset ratio        5.12     5.40     5.65     5.97     6.28      6.19     6.24     6.59     6.03     5.82

Number of employees
  (full-time equivalents)     480      439      427      382      335       299      236      209      196      183
</TABLE>

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

                                      -2-
<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 and Liquidity Risk
     Market risk is the risk of loss from adverse  changes in market  prices and
rates.  The Bank's market risk arises primarily from interest rate risk inherent
in  its  lending,   investment  and  deposit  taking   activities.   The  Bank's
profitability  is  affected by  fluctuations  in  interest  rates.  A sudden and
substantial  increase in interest rates may adversely impact the Bank's earnings
to the extent that the  interest  rates borne by assets and  liabilities  do not
change at the same speed,  to the same extent or on the same basis. To that end,
management  actively  monitors and manages its interest rate risk exposure.  The
Bank does not  participate  in hedging  programs,  interest  rate swaps or other
activities   involving  the  use  of  off-balance  sheet  derivative   financial
instruments.The  Bank's policy allows investment only in securities which have a
rating of AA or better. The Bank holds a substantial component of its investment
portfolio in mortgage-backed  securities and collateralized mortgage obligations
(collectively,  "MBS and CMO"). At the end of 2002, the total  investment in MBS
and CMO amounted to $559.2  million,  or 87.8% of total  investments.  These are
instruments  collateralized  by pools of residential  and  commercial  mortgages
which return interest and principal  payments to the investor when performing in
accordance with their terms.  Approximately 61.1% of the Bank's MBS holdings are
U.S.  Government Agency  securities  (GNMA, FNMA and FHLMC),  which carry either
direct government or  quasi-government  guarantees and are rated AAA in terms of
credit quality.  The Bank also owns non-agency  CMOs,  issued by major financial
institutions,  which are rated AAA or AA. CMOs are generally  very liquid issues
with major brokerage houses providing ready markets.  However,  CMOs are subject
to  prepayment  and extension  risk which can adversely  affect their yields and
expected  average life.  MBS and CMOs of $5.8 million and $5.1 million were used
to secure public funds on deposit at December 31, 2002 and 2001, respectively.

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

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

                                      -4-
<PAGE>
FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------

     The  difference,   or  the  interest  rate  repricing  "GAP",  provides  an
indication of the extent to which an institution's  interest rate spread will be
affected by changes in interest rates over a period of time. A GAP is considered
positive when the amount of interest-rate sensitive assets maturing or repricing
over a specified  period of time exceeds the amount of  interest-rate  sensitive
liabilities  maturing or repricing within that period and is considered negative
when the amount of  interest-rate  sensitive  liabilities  maturing or repricing
over a specified  period of time exceeds the amount of  interest-rate  sensitive
assets maturing or repricing within that period.  Generally,  during a period of
rising  interest  rates,  a  negative  GAP  within a given  period of time would
adversely affect net interest income, while a positive GAP within such period of
time may  result  in an  increase  in net  interest  income;  during a period of
falling  interest rates, a negative GAP within a given period of time may result
in an increase in net interest income while a positive GAP within such period of
time may have the opposite effect.  At December 31, 2002 the Bank's GAP position
for net assets repricing for one year cumulative totaled $9.5 million.

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

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

     The Bank  measures  its  interest  rate  risk  using  the  Office of Thrift
Supervision's (OTS) NPV method. NPV is calculated based on the net present value
of estimated cash flows utilizing market prepayment assumptions and market rates
of interest provided by independent  broker quotations and other public sources.
An  institution's  interest  rate risk is measured as the change to its NPV as a
result of a  hypothetical  immediate  200 basis point change in market  interest
rates.  Based on this analysis at December 31, 2002, the Bank would experience a
250 basis point  decrease in its NPV as a percent of assets if rates rise by 200
basis points in comparison to a flat rate  scenario.  Due to the  abnormally low
interest  rate  environment  decreases of 200 points or more have been  omitted.

Changes in Market            Net Portfolio Value
Market                ----------------------------------------------

Interest Rates
(basis points)        $ Amount     $ Change     % Change   NPV Ratio (a)
                      --------     --------     --------   -------------

    +300               $31,186      (59,184)      (65%)       2.83%
    +200                58,513      (31,857)      (35%)       5.15%
    +100                81,135       (9,235)      (10%)       6.97%
       0               $90,370            -         -         7.65%
    (100)               80,256      (10,115)      (11%)       6.79%

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

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

Financial Condition
     Total assets of the Corporation  increased  $160.0 million or 16.6% to $1.1
billion  at  December  31,  2002 from  $966.5  million  at  December  31,  2001.
Mortgage-backed  securities held to maturity increased $69.6 million or 25.5% to
$342.1  million  during the year ended  December 31, 2002 from $272.5 million at
December  31,  2001,  as a  result  of  purchases  of  $114.6  million  in  FNMA
securities,  $73.0  million  in  GNMA  securities  and  $5.0  million  in  FHLMC
securities,  partially offset by principal  paydowns on MBS's of $125.4 million.
Investment  securities  available for sale increased  $66.6 million or 128.2% to
$118.6  million  during the year ended  December 31, 2002 from $52.0  million at
December 31, 2001, as a result of purchases of $62.6 million in MBS's  available
for sale,  $44.3  million  in U.S.  Agency  notes and  $30.2  million  in CMO's,
partially offset by calls and maturities of $34.3 million and principal paydowns
of $39.4 million.  Loans  receivable  increased  $25.2 million or 7.5% to $361.7
million at December  31, 2002 from $336.5  million at  December  31,  2001.  The
increase in loans receivable  during the year ended December 31, 2002 was due to
$115.1  million  of loans  originated,  partially  offset  by $89.5  million  of
principal collected on loans.  Short-term funds increased $16.0 million or 51.9%
to $46.9  million at December  31, 2002 from $30.9  million at December 31, 2001
primarily due to an increase in  short-term  money market  accounts.  Investment
securities  held to maturity  decreased $32.4 million or 16.5% to $164.2 million
at December 31, 2002 from $196.6  million at December 31, 2001.  The decrease in
investment  securities  held to  maturity  during the year is due to  investment
calls and maturities of $110.7 million and principal paydowns of $104.1 million,
partially offset by purchases of $181.3 million.

                                      -5-
<PAGE>
FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------

     Total  liabilities  increased  $154.6  million or 16.9% to $1.1  billion at
December 31, 2002 from $914.3 million at December 31, 2001.  Deposits  increased
$70.8 million or 9.7% to $800.3 million at December 31, 2002 from $729.5 million
at December  31,  2001.  The  increase  in  deposits  during the year was due to
increases in savings  accounts of $29.9 million,  money market accounts of $37.9
million and checking  accounts of $35.1 million,  partially offset by a decrease
in certificates of $32.2 million. Securities sold under agreements to repurchase
increased  $60.0  million or 36.4% to $225.0  million at December  31, 2002 from
$165.0  million at December 31,  2001.  The  increase in  securities  sold under
agreements to repurchase is a result of the Bank's opportunity this past year to
borrow at rates that were well below  comparable  certficate  of deposit  market
rates.  These  monies  were used to fund asset  growth  and will be repaid  when
called  or at  maturity  with  deposit  growth  or new  borrowings,  if  needed.
Securities sold under  agreements to repurchase have a weighted  average rate of
4.08% and are  collateralized by U.S. Agency Notes, MBSs and CMOs. Trust capital
securities  of $25.0 million were issued during the year with a variable rate of
LIBOR plus 360 basis points at an initial rate of 5.59%.The  proceeds  were used
for the early redemption of $10.0 million 10% subordinated debentures, expansion
of the Bank's operations and general corporate purposes.

    Stockholders'  equity  increased  $5.4 million or 10.4% to $57.6 million  at
December 31, 2002 from $52.2 million at December 31, 2001.  The increase was due
to net income of $8.0  million  and an increase  in the net  unrealized  gain on
available  for sale  securities  of $1.1  million,  offset by $783  thousand  of
dividends declared on common stock and $2.8 million of treasury stock purchased.

Results of Operations
Net Interest Income
     The  earnings of the  Corporation  depend  primarily  upon the level of net
interest  income,  which  is  the  difference  between  interest  earned  on its
interest-earning assets, such as loans and investments, and the interest paid on
interest-bearing  liabilities,  such as deposits including  non-interest bearing
checking  accounts  and  borrowings.  Net  interest  income is a function of the
interest rate spread, which is the difference between the weighted average yield
earned  on  interest-earning  assets  and  the  weighted  average  rate  paid on
interest-bearing liabilities, as well as the average balance of interest-earning
assets as compared to interest-bearing  liabilities.Net  income is also affected
by  non-interest  income,  such as  gains  (losses)  on the  sale of  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  interest income or expense by the average balance
of interest-earning assets or interest-bearing liabilities, respectively for the
periods presented.

<TABLE>
<CAPTION>
Average Balances, Interest and Yield/Rates
                                                                        Years Ended December 31,
                                      ----------------------------------------------------------------------------------------------
                                                2002                             2001                            2000
                                      -----------------------------  --------------------------------  -----------------------------
                                      Average             Average     Average               Average    Average            Average
                                      Balance  Interest  Yield/Rate   Balance   Interest   Yield/Rate  Balance Interest  Yield/Rate
                                      -------  --------  ----------   -------   --------   ----------  ----------------  ----------
                                                                              (Dollars in Thousands)
<S>                                <C>       <C>           <C>     <C>         <C>          <C>     <C>       <C>         <C>
Interest-ernings assets:
  Loans receivable                   $361,734  $25,659       7.09%   $315,189    $23,920      7.59%   $301,199  $23,445     7.78%
  Interest-bearing deposits            48,169      932       1.93%     41,298      1,695      4.10%     22,569    1,461     6.47%
  Mortgage-backed securities          332,892   18,526       5.57%    213,301     13,728      6.44%    118,435    8,063     6.81%
  Investment securities               226,161   12,632       5.59%    254,783     15,957      6.26%    287,989   19,380     6.73%
                                     --------  -------     -------   --------    -------    -------   --------  -------   -------
Total interest-earning assets         968,956   57,749       5.96%    824,571     55,300      6.71%    730,192   52,349     7.17%
                                     --------  -------     -------   --------    -------    -------   --------  -------   -------
Interest-bearing lliabilities:
  Checking deposits                   262,153    1,621        .62%    229,597      2,712      1.18%    199,378    3,509     1.76%
  Savings deposits                    143,476    1,921       1.34%    118,698      2,644      2.23%    112,274    3,045     2.71%
  Money Market deposits               109,124    2,033       1.86%     75,490      1,926      2.55%     67,512    1,864     2.76%
  Time deposits                       233,975    8,370       3.58%    248,637     12,791      5.14%    242,063   12,474     5.15%
  Borrowings                          207,351    9,069       4.37%    146,753      7,622      5.19%     95,774    5,449     5.69%
  Long-term debt                       25,510    1,743       6.83%     10,000      1,057     10.57%     10,000    1,057    10.57%
                                     --------  -------     -------   --------    -------    -------   --------  -------   -------
Total interest-bearing liabilities   $981,589   24,757       2.52%   $829,175     28,752      3.47%   $727,001   27,398     3.77%
                                     ========  -------     -------   ========    -------    -------   ========  -------   -------
Net interest income                            $32,992                           $26,548                        $24,951
                                               =======                           =======                        =======
Interest rate spread                                         3.44%                            3.24%                         3.40%
                                                           =======                          =======                       =======
Net yield on average
  interest-earnings assets                                   3.40%                            3.22%                         3.42%
                                                           =======                          =======                       =======
Ratio of average interest-earning
  assets to average interest-
  bearing liabilities                                       98.71%                           99.44%                       100.44%
                                                           =======                          =======                       =======
</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,
                                       --------------------------------------------------------------
                                              2002 vs. 2001                   2001 vs. 2000
                                       -----------------------------    -----------------------------
                                            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                             $(1,793)   $ 3,532    $ 1,739    $  (615)   $ 1,089    $   474
     Interest-bearing deposits          (1,044)       282       (762)      (978)     1,212        234
     Mortgage-backed securities         (2,900)     7,697      4,797       (792)     6,458      5,666
     Investment securities              (1,532)    (1,793)    (3,325)    (1,188)    (2,235)    (3,423)
                                       -------    -------    -------    -------    -------    -------

     Total change - interest income     (7,269)     9,718      2,449     (3,573)     6,524      2,951
                                       -------    -------    -------    -------    -------    -------
Interest expense:
     Checking deposits                  (1,476)       385     (1,091)    (1,329)       532       (797)
     Savings deposits                   (1,275)       552       (723)      (575)       174       (401)
     Money market accounts                (751)       858        107       (158)       220         62
     Time deposits                      (3,667)      (754)    (4,421)       (22)       339        317
     Borrowings                         (1,700)     3,147      1,447       (727)     2,900      2,173
     Long-term debt                       (953)     1,639        686          0          0          0
                                       -------    -------    -------    -------    -------    -------
     Total change - interest expense    (9,822)     5,827     (3,995)    (2,811)     4,165      1,354
                                       -------    -------    -------    -------    -------    -------
Net change in net interest income      $ 2,553    $ 3,891    $ 6,444    $  (762)   $ 2,359    $ 1,597
                                       =======    =======    =======    =======    =======    =======
</TABLE>

Comparisons of Years Ended December 31, 2002 and 2001.

Net Income
     The Corporation and its subsidiary  recorded net income of $8.0 million for
the year ended  December 31, 2002,  or $1.21 diluted  earnings per share,  after
extraordinary loss of $134 thousand or $.02 per share, as compared to net income
of $5.5 million,  or $.81 diluted earnings per share for the year ended December
31,  2001.  Net  interest  income was $33.0  million in 2002  compared  to $26.5
million in 2001.  Provisions for loan losses were $149 thousand in 2002 and $221
thousand in 2001.  Other income  totaled  $4.5 million in 2002  compared to $4.2
million for the same period in 2001. Total operating expenses for the year ended
December 31, 2002 were $24.4  million  compared to $22.1 million in the previous
year.  During 2002, the  Corporation  declared cash dividends which totaled $.12
per share which resulted in a dividend payout ratio of 9.92%.

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

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

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

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

                                      -7-
<PAGE>
FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------

to 5.59% in 2002 from 6.26% in 2001,  which  resulted  in a decrease in interest
income of $1.5 million on investment securities.

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

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

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

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

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

Critical Acounting Estimate-Provision For Loan Losses
     A  critical  accounting  estimate  of the  Bank is the  provision  for loan
losses. The provision for loan losses decreased $72 thousand to $149 thousand in
2002 from $221 thousand in 2001.  Based on current  economic  conditions and the
decrease in  non-performing  loans, the Bank reduced the loan loss provision for
2002.  The  amount of the  allowance  for loan  losses is based on  management's
analysis of risk characteristics of various  classifications of loans,  previous
loan loss  experience,  estimated  fair value of the  underlying  collateral and
current economic conditions. The Bank will continue to monitor its allowance for
loan losses and make future  adjustments to the allowance  through the provision
for loan losses as economic conditions dictate.  Management continues to offer a
wider variety of loan products  coupled with the continued  change in the mix of
the products  offered in the loan portfolio from lower yielding loans (i.e., one
to four family loans) to higher  yielding  loans (i.e.,  commercial  real estate
mortgage, commercial construction, consumer, and commercial business) which have
a  higher  degree  of risk  than one to four  family  loans.  Although  the Bank
maintains  its  allowance  for loan  losses at a level that it  considers  to be
adequate to provide for the probable existing loss in the loan portfolio,  there
can be no assurance that future losses will not exceed estimated amounts or that
additional provisions for loan losses will not be required in future periods due
to the higher  degree of credit risk which  might  result from the change in the
mix of the loan portfolio.

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

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

     Gain on sale of fixed assets of $101  thousand in 2002 is primarily  due to
the  sale of the old  Medford  branch  building.  The  gain on the sale of fixed
assets of $51  thousand in 2001  relates to the county  condemnation  of land in
Chesterfield.

     Service charges on accounts increased $631 thousand to $4.0 million in 2002
from $3.4  million in 2001.  The  increase  is the result of higher  transaction
volume on retail accounts during the year.

Operating Expenses
     Total  operating  expenses  increased $2.3 million to $24.4 million in 2002
from $22.1 million in 2001.

     Salaries and benefits  increased $1.7 million to $14.2 million in 2002 from
$12.5  million in 2001.  The  increase  was due to  additional  staff in two new
branch  offices  opened  during the year and an  increase  of $484  thousand  in
retirement  and health  insurance  costs in 2002.  Average full time  equivalent
employees  during  2002  were 480 as  compared  to 439  during  2001.  Operating
expenses  are  expected to  continue  increasing  in future  periods as the Bank
pursues its branch expansion strategy.

                                      -8-
<PAGE>
FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------

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

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

Comparisons of Years Ended December 31, 2001 and 2000.

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

Interest Income
     Total interest income  increased $3.0 million to $55.3 million in 2001 from
$52.3  million in 2000.  The increase is  attributable  to increases in interest
income on mortgage-backed securities of $5.7 million and loans of $474 thousand,
partially  offset by a decrease in interest  income on investment  securities of
$3.4 million.

     Interest  income on  mortgage-backed  securities  increased $5.7 million in
2001 primarily due to volume increases in the portfolio.  The average balance of
the  portfolio  increased  $94.9  million to $213.3  million in 2001 from $118.4
million in 2000,  resulting in an increase in interest  income of $6.5  million.
The increase in the average balance was due to the purchase of $217.1 million in
FHLMC, FNMA and GNMA securities in 2001,  partially offset by principal paydowns
of $90.2 million.  The average yield on the portfolio decreased to 6.44% in 2001
from 6.81% in 2000,  which  resulted in a decrease  in  interest  income of $792
thousand.

     The average balance of the loan portfolio increased $14.0 million to $315.2
million in 2001 from  $301.2  million in 2000.  The  increase in the loan volume
during 2001  resulted in an increase  in interest  income of $1.1  million.  The
increase in the average  balance is primarily due to $25.0 million of CloverBank
loans  acquired  through  the merger  which was  completed  in June 2001.  Loans
originated totaled $71.4 million and principal  collected on loans totaled $49.6
million in 2001. The average yield on the loan  portfolio  decreased to 7.59% in
2001 from 7.78% in 2000 which resulted in a decrease in interest  income of $615
thousand.

     The decrease in interest income on investment securities was due to a $33.2
million  decrease  in the average  balance of  investment  securities  to $254.8
million in 2001 from $288.0 million in 2000. The investment  portfolio decreased
prmiarily due to calls of $49.1  million of U.S.  Government  Agency notes,  and
$71.9 million in principal paydowns of CMO's, partially offset by an increase of
$19.4  million of CMO's.  The  decrease  in the  average  balance of  investment
securities  resulted in a decrease in  interest  income of $2.2  million in 2001
from the previous year.  Average  investment  yields  decreased to 6.26% in 2001
from 6.73% in 2000,  which  resulted in a decrease  in  interest  income of $1.2
million on investment securities.

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

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

     Interest  expense on all deposits  decreased $819 thousand to $20.1 million
in 2001 from $20.9 million in 2000. The rate paid on checking deposits decreased
58 basis  points  to 1.18% in 2001  from  1.76% in 2000,  which  resulted  in an
decrease in interest expense of $1.3 million.  The rate paid on savings deposits
decreased 48 basis points to 2.23% in 2001 from 2.71% in 2000, which resulted in
an decrease in interest  expense of $575  thousand.  The decrease of the average
rate on deposits  was due to overall  lower  average  interest  rates on deposit
products  in  2001.The  average  balance of checking  deposits  increased  $30.2
million to $229.6 million in 2001 from $199.4  million in 2000,  resulting in an
increase in interest  expense of $532 thousand.  The average  balance of savings
accounts increased $6.4 million,  certificates of deposit increased $6.6 million
and money  market  accounts  increased  $8.0  million in 2001. A portion of this
increase was due to the  inclusion  of  CloverBank's  deposit  balances of $28.1
million acquired through the merger.

Critical Accounting Estimate-Provision For Loan Losses
     A  critical  accounting  estimate  of the  Bank is the  provision  for loan
losses. The provision for loan losses decreased $19 thousand to $221 thousand in
2001 from $240 thousand in 2000.

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

                                      -9-
<PAGE>
FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------

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

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

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

     Salaries and benefits increased $864 thousand to $12.5 million in 2001 from
$11.6  million in 2000.  The increase was due to  additional  staff in three new
branch offices opened during the year.  Average full time  equivalent  employees
during 2001 were 439 as compared to 427 during 2000.

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

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

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

Liquidity and Capital Resources
     The Bank's liquidity is a measure of its ability to fund loans, withdrawals
of deposits  and other cash  outflows  in a cost  effective  manner.  The Bank's
primary sources of funds are deposits and scheduled amortization and prepayments
of loan  principal.  The Bank also  obtains  funds from the sale and maturity of
investment  securities  and  short-term  investments  as well as the maturity of
mortgage-backed  securities and funds  provided by  operations.  During the past
several  years,  the Bank has used  such  funds  primarily  to meet its  ongoing
commitments  to fund  maturing time  deposits and savings  withdrawals,  to fund
existing and continuing  loan  commitments and to maintain  liquidity.  The Bank
periodically supplements its funding needs with securities sold under agreements
to repurchase  (repurchase  agreements)  and advances from the Federal Home Loan
Bank of New York  (FHLB).  At December  31, 2002 the Bank had $225.0  million in
repurchase  agreements  and $11.2 million in advances from the FHLB of New York.
While loan payments,  maturing  investments and  mortgage-backed  securities are
relatively  predictable sources of funds, deposit flows and loan prepayments are
greatly   influenced  by  general  interest  rates,   economic   conditions  and
competition.  The Bank's liquidity is also influenced by the level of demand for
funding loan  originations.  Liquidity  may be adversely  affected by unexpected
deposit  outflows,  excessive  interest  rates  paid  by  competitors,   adverse
publicity  relating to the Banking  industry  and  similar  matters.  Management
monitors projected liquidity needs and determines the level desirable,  based in
part on the Company's  commitment to make loans and  management's  assessment of
the Company's  ability to generate funds. The Company is also subject to federal
regulations that impose certain minimum capital requirements.

     The amount of certificate accounts which are scheduled to mature during the
twelve months ending December 31, 2003 is approximately  $168.6 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, 2002,  the Bank had loan  commitments  outstanding of $48.7
million, of which $15.5 million were for fixed-rate loans and $33.2 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.

                                      -10-
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------

Consolidated Summary of Quarterly Earnings (Unaudited)

The following table presents summarized quarterly data for 2002 and 2001:

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

<S>                                   <C>       <C>       <C>        <C>       <C>
Total interest income                  $14,311   $14,839   $14,510    $14,088   $57,748
Total interest expense                   6,307     6,475     6,115      5,859    24,756
                                       -------   -------   -------    -------   -------
Net interest income                      8,004     8,364     8,395      8,229    32,992
Provision for loan losses                    3        26        60         60       149
                                       -------   -------   -------    -------   -------
Net interest income after provision
  for loan losses                        8,001     8,338     8,335      8,169    32,843
Total other income                         970     1,181     1,131      1,223     4,505
Total operating expenses                 5,796     5,914     6,108      6,547    24,365
                                       -------   -------   -------    -------   -------
Income before income taxes               3,175     3,605     3,358      2,845    12,983
Federal and state income taxes           1,123     1,268     1,274      1,223     4,888
                                       -------   -------   -------    -------   -------
Net income before extraordinary loss   $ 2,052   $ 2,337   $ 2,084    $ 1,622   $ 8,095
Extraordinary loss (net of tax)              0         0      (134)         0      (134)
                                       -------   -------   -------    -------   -------
Net Income                             $ 2,052   $ 2,337   $ 1,950    $ 1,622   $ 7,961
                                       =======   =======   =======    =======   =======
Basic earnings per common share        $  0.31   $  0.36   $  0.30    $  0.25   $  1.22
                                       =======   =======   =======    =======   =======
Diluted earnings per common share      $  0.30   $  0.36   $  0.30    $  0.25   $  1.21
                                       =======   =======   =======    =======   =======
---------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
                                         1st       2nd      3rd         4th      Total
                 2001                  Quarter   Quarter   Quarter    Quarter     Year
---------------------------------------------------------------------------------------
                                           (In Thousands, except per share amounts)

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

                                      -11-
<PAGE>
FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------

FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
December 31,                                                                      2002              2001
------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>               <C>
ASSETS
------------------------------------------------------------------------------------------------------------
  Cash and amounts due from depository institutions                        $   41,497,691    $    32,336,279
  Interest-bearing deposits                                                        12,252            153,133
  Short term funds                                                             46,900,403         30,869,712
                                                                           --------------    ---------------
    Total cash and cash equivalents                                            88,410,346         63,359,124
  Investment securities held to maturity                                      164,227,126        196,571,299
  Investment securities available for sale                                    118,612,961         51,969,422
  Loans, net                                                                  361,674,400        336,544,004
  Mortgage-backed securities held to maturity                                 342,122,678        272,494,220
  Accrued interest receivable:
    Loans                                                                       1,560,272          1,591,276
    Mortgage-backed securities                                                  2,175,776          1,757,572
    Investments                                                                 1,543,610          2,194,252
  Federal Home Loan Bank stock                                                 12,061,720          8,313,620
  Real estate held for development, net                                            87,926             87,926
  Real estate owned, net                                                          291,200            214,249
  Office properties and equipment, net                                         29,092,970         26,364,980
  Deferred income taxes                                                         2,972,572          3,158,402
  Prepaid expenses and other assets                                             1,005,822          1,767,694
  Trust capital securities issue costs, net                                       717,999                  0
  Subordinated debentures issue costs, net                                              0            149,069
                                                                           --------------    ---------------
TOTAL ASSETS                                                               $1,126,557,378    $   966,537,109
                                                                           ==============    ===============
LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
  Deposits                                                                 $  800,340,222    $   729,505,729
  Securities sold under agreements to repurchase                              225,000,000        165,000,000
  Advances from the Federal Home Loan Bank                                     11,232,103          1,270,313
  10% Subordinated debentures, due 2004                                                 0         10,000,000
  Trust capital securities-FMS Statutory Trust 1                               25,000,000                  0
  Advances by borrowers for taxes and insurance                                 2,049,813          2,247,002
  Accrued interest payable                                                      1,383,054          1,782,508
  Dividends payable                                                               193,914            201,531
  Other liabilities                                                             3,720,453          4,326,845
                                                                           --------------    ---------------
  Total liabilities                                                         1,068,919,559        914,333,928
                                                                           --------------    ---------------
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 7,949,809 and 7,948,884, and shares outstanding 6,463,811
    and 6,717,705 as of December 31, 2002 and 2001, respectively                  794,981            794,888
  Paid-in capital in excess of par                                              8,279,525          8,278,423
  Accumulated comprehensive income- net of deferred income taxes                1,216,053            147,496
  Retained earnings                                                            58,233,840         51,055,818
  Less:  Treasury stock (1,485,998 and 1,231,179 shares, at cost, as of
    December 31, 2002 and 2001, respectively)                                 (10,886,580)        (8,073,444)
                                                                           --------------    ---------------
Total stockholders' equity                                                     57,637,819         52,203,181
                                                                           --------------    ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                 $1,126,557,378    $   966,537,109
                                                                           ==============    ===============
</TABLE>

See notes to consolidated financial statements.

                                      -12-
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                                        2002                2001                 2000
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                  <C>                <C>
INTEREST INCOME:
Interest income on:
  Loans                                                                       $25,658,517          $23,919,782        $23,445,624
  Mortgage-backed securities                                                   18,525,669           13,728,457          8,062,704
  Investments                                                                  13,564,483           17,651,585         20,840,862
                                                                              -----------          -----------        -----------
Total interest income                                                          57,748,669           55,299,824         52,349,190
                                                                              -----------          -----------        -----------
INTEREST EXPENSE:
Interest expense on:
  Deposits                                                                     13,944,396           20,072,856         20,892,189
  Borrowings                                                                    9,069,402            7,621,750          5,448,721
  Long-term debt                                                                1,742,660            1,057,348          1,057,348
                                                                              -----------          -----------        -----------
Total interest expense                                                         24,756,458           28,751,954         27,398,258
                                                                              -----------          -----------        -----------
NET INTEREST INCOME                                                            32,992,211           26,547,870         24,950,932
PROVISION FOR LOAN LOSSES                                                         149,000              221,000            240,000
                                                                              -----------          -----------        -----------
NET INTEREST INCOME AFTER PROVISION
 FOR LOAN LOSSES                                                               32,843,211           26,326,870         24,710,932
                                                                              -----------          -----------        -----------
OTHER INCOME (EXPENSE):
  Loan service charges and other fees                                             125,806              114,774            122,144
  Gain on sale of loans and real estate owned                                      18,261              418,939              2,480
  Gain on sale/disposal of fixed assets                                           100,767               50,799              8,586
  Gain on sale of investment securities                                                 0               35,916                  0
  Real estate owned operations, net                                               (40,156)             (53,469)           (41,904)
  Service charges on accounts                                                   3,992,890            3,361,668          2,688,914
  Other income                                                                    306,907              297,780            194,520
                                                                              -----------          -----------        -----------
Total other income                                                              4,504,475            4,226,407          2,974,740

OPERATING EXPENSES:
  Salaries and employee benefits                                               14,161,356           12,481,771         11,617,550
  Occupancy and equipment                                                       4,599,750            4,545,863          4,111,393
  Purchased services                                                            2,589,186            2,158,833          1,820,308
  Federal deposit insurance premiums                                              123,493              146,108            122,516
  Professional fees                                                               846,880              572,199            468,798
  Advertising                                                                     459,183              340,270            216,896
  Other                                                                         1,585,790            1,872,190          1,366,533
                                                                              -----------          -----------        -----------
Total operating expenses                                                       24,365,638           22,117,234         19,723,994
                                                                              -----------          -----------        -----------
INCOME BEFORE INCOME TAXES                                                     12,982,048            8,436,043          7,916,678
INCOME TAXES                                                                    4,887,622            2,976,752          2,850,076
                                                                              -----------          -----------        -----------
NET INCOME before extraordinary loss                                           $8,094,426           $5,459,291         $5,111,602
EXTRAORDINARY LOSS(net of $81,394 tax benefit)                                   (133,682)                   0                  0
                                                                              -----------          -----------        -----------
NET INCOME                                                                     $7,960,744           $5,459,291         $5,111,602
                                                                               ==========           ==========         ==========
BASIC EARNINGS PER COMMON SHARE(before extraordinary loss)                          $1.24                $0.81              $0.74
                                                                               ==========           ==========         ==========
DILUTED EARNINGS PER COMMON SHARE(before extraordinary loss)                        $1.23                $0.81              $0.74
                                                                               ==========           ==========         ==========
Extraordinary loss per Common Share Basic                                          $(0.02)               $0.00              $0.00
                                                                               ==========           ==========         ==========
Exraordinary loss per Common Share Diluted                                         $(0.02)               $0.00              $0.00
                                                                               ==========           ==========         ==========

BASIC EARNINGS PER COMMON SHARE                                                     $1.22                 $.81               $.74
                                                                               ==========           ==========         ==========
DILUTED EARNINGS PER COMMON SHARE                                                   $1.21                 $.81               $.74
                                                                               ==========           ==========         ==========
DIVIDENDS PER COMMON SHARE                                                           $.12                 $.12               $.12
                                                                               ==========           ==========         ==========

Weighted average common shares outstanding                                      6,548,313            6,700,729          6,887,986
Potential dilutive effect of the exercise of stock options                         28,956               13,498             58,544
                                                                               ----------           ----------         ----------
Adjusted weighted average common shares outstanding                             6,577,269            6,714,227          6,946,530
                                                                               ==========           ==========         ==========
</TABLE>

See notes to consolidated financial statements.

                                      -13-
<PAGE>
FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                                        2002             2001             2000
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>              <C>              <C>
OPERATING ACTIVITIES:
Net income                                                               $   7,960,744    $   5,459,291    $   5,111,602
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses                                                      149,000          221,000          240,000
Provision for real estate owned                                                      0         (325,000)               0
Depreciation and amortization                                                5,163,734        3,357,408        2,082,103
Realized (gains) and losses on:
  Sale of loans and loans held for sale                                           (881)          (1,455)          (2,480)
  Sale and disposal of fixed assets                                           (100,767)         (50,799)          (8,586)
  Loss on retirement of debt                                                   133,682                0                0
  Investment securities                                                              0          (35,916)               0
  Sale of real estate owned                                                    (17,380)        (417,484)         (31,416)
Decrease (Increase) in accrued interest receivable                             263,442          767,782         (285,935)
Decrease (Increase) in prepaid expenses and other assets                       761,872         (335,990)        (432,852)
(Decrease) Increase in accrued interest payable                               (399,454)        (193,299)         512,857
(Decrease) Increase in other liabilities                                      (606,392)         974,901          276,449
Provision for deferred income taxes                                           (443,368)        (336,970)        (550,773)
Other                                                                                0                0           48,680
                                                                         -------------    -------------    -------------
  Net cash provided by operating activities                                 12,864,232        9,083,469        6,959,649
                                                                         -------------    -------------    -------------
INVESTING ACTIVITIES:
Proceeds from sale of:
  Education loans                                                              190,785          215,375          456,651
  Real estate owned                                                            107,097          927,993          570,073
  Office property and equipment                                                208,941           99,631           12,436
Principal collected and proceeds from maturities of
  investment securities held to maturity                                   214,877,925      333,005,946      239,765,750
Principal collected and proceeds from maturities of
  investment securities available for sale                                  73,690,189       46,663,135        9,679,098
Principal collected and proceeds from maturities of
  mortgage-backed securities                                               125,440,105       90,396,808       26,691,733
Principal collected on loans, net                                           89,481,147       49,577,838       56,262,434
Loans originated or acquired                                              (115,141,777)     (71,407,691)     (47,895,284)
Purchase of investment securities and mortgage-backed
  securities held to maturity                                             (380,298,789)    (472,938,992)    (344,856,122)
Purchase of investment securities available for sale                      (139,179,153)     (57,020,968)               0
Purchase of Federal Home Loan Bank stock                                    (3,748,100)      (1,748,310)      (1,453,900)
Purchase of office property and equipment                                   (4,559,726)      (1,619,525)      (7,382,240)
Net cash received from branch purchase                                               0        1,466,726                0
                                                                         -------------    -------------    -------------
  Net cash used by investing activities                                   (138,931,356)     (82,382,034)     (68,149,371)
                                                                         -------------    -------------    -------------
FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts                       103,019,001       52,586,654       44,603,673
Net (decrease) increase in time deposits                                   (32,184,508)         277,028           43,565
Net increase (decrease) in FHLB advances                                     9,961,790       (5,035,331)     (10,031,387)
Proceeds from securities sold under agreement to repurchase                 60,000,000       45,000,000       30,000,000
Net proceeds from issuance of trust capital securities                      24,221,532                0                0
Repayment of subordinated debentures                                       (10,100,000)               0                0
(Decrease) Increase in advances from borrowers for taxes and insurance        (197,189)          49,886         (128,539)
Purchase of treasury stock                                                  (2,813,136)        (432,840)      (3,789,148)
Dividends paid on common stock                                                (790,339)        (804,875)        (833,143)
Net proceeds from issuance of common stock                                       1,195           65,868              129
                                                                         -------------    -------------    -------------
  Net cash provided by financing activities                                151,118,346       91,706,390       59,865,150
                                                                         -------------    -------------    -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                            25,051,222       18,407,825       (1,324,572)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                63,359,124       44,951,299       46,275,871
                                                                         -------------    -------------    -------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                   $  88,410,346    $  63,359,124    $  44,951,299
                                                                         =============    =============    =============
Supplemental Disclosures:
  Cash paid for:
    Interest on deposits, advances, and other borrowings                 $  25,155,912    $  28,919,651    $  26,885,401
    Income taxes                                                             5,679,482        3,647,733        2,919,839
  Non cash investing and financing activities:
    Dividends declared and not paid at year end                                193,914          201,531          201,831
      Non-monetary transfers from loans to real estate
        acquired through foreclosure                                           166,668           45,000          493,554
      Deposits acquired in connection with merger                                    0       28,102,691                0
      Assets acquired in connection with merger                                      0       28,260,337                0
</TABLE>

See notes to consolidated financial statements.

                                      -14-
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------

FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                           Common                              Accumulated                                   Total
                           shares       Common     Paid-in    comprehensive    Retained      Treasury     Stockholders'
                         outstanding    stock      capital    income (loss)    earnings       stock          Equity
                         -----------    -------- ----------   -------------   -----------   -----------   -------------
<S>                     <C>            <C>       <C>         <C>             <C>           <C>            <C>
 Balances at
   December 31, 1999      7,183,978     $789,779  $8,217,535  $(1,167,810)    $42,108,955   $(3,851,456)   $46,097,003
 Net income                                                                     5,111,602                    5,111,602
 Other comprehensive
   income, net of tax
   benefit of $454,659
   Unrealized gain
   on securities
   available
   for sale                                                       809,458                                      809,458
                                                                                                           -----------
Total comprehensive
   income                                                                                                    5,921,060
 Dividends declared                                                              (819,455)                    (819,455)
 Exercise of stock
   options                      100           10         119                                                       129
 Purchase of
   common stock            (456,376)                                                         (3,789,148)    (3,789,148)
----------------------------------------------------------------------------------------------------------------------
Balances at
   December 31, 2000      6,727,702      789,789   8,217,654     (358,352)     46,401,102    (7,640,604)    47,409,589
 Net income                                                                     5,459,291                    5,459,291
 Other comprehensive
   income, net of tax
   benefit of $286,789
   Unrealized gain
   on securities
   available
   for sale                                                       505,848                                      505,848
                                                                                                           -----------
Total comprehensive
   income                                                                                                    5,965,139
 Dividends declared                                                              (804,575)                    (804,575)
 Exercise of stock
   options                   50,993        5,099      60,769                                                    65,868
 Purchase of
   common stock             (60,990)                                                           (432,840)      (432,840)
----------------------------------------------------------------------------------------------------------------------
Balances at
   December 31, 2001      6,717,705      794,888   8,278,423      147,496      51,055,818    (8,073,444)    52,203,181
 Net income                                                                     7,960,744                    7,960,744
 Other comprehensive
  income, net of tax
  of $710,591
  Unrealized gain
  on securities
  available
  for sale                                                      1,068,557                                    1,068,557
                                                                                                           -----------
 Total comprehensive
  income                                                                                                     9,029,301
 Dividends declared                                                              (782,722)                    (782,722)
Exercise of stock
  options                       925           93       1,102                                                     1,195
Purchase of
   common stock            (254,819)                                                         (2,813,136)    (2,813,136)
----------------------------------------------------------------------------------------------------------------------
 Balances at
   December 31, 2002      6,463,811     $794,981  $8,279,525   $1,216,053     $58,233,840  $(10,886,580)   $57,637,819
----------------------------------------------------------------------------------------------------------------------
</TABLE>

 See notes to consolidated financial statements.

                                      -15-
<PAGE>
FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------

FMS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, and 2000
--------------------------------------------------------------------------------

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

     Generally  accepted  accounting   principles  require  management  to  make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities and disclosures of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reported period. Actual results could differ from these estimates.

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

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

Cash and Cash Equivalents
     Cash and cash  equivalents  include  cash and amounts  due from  depository
institutions,  interest-bearing deposits with an original maturity of 90 days or
less,  money  market  funds and federal  funds sold.  Cash and cash  equivalents
exclude  reverse  repurchase   agreements  which  are  generally  classified  as
investments  held to maturity.  Generally,  federal funds are purchased and sold
for one-day  periods.  The Bank is required to maintain  certain average reserve
balances  as  established  by the  Federal  Reserve  Bank.  The  amount of those
balances for the reserve computation periods which include December 31, 2002 and
2001 were $25.9 million and $22.3 million, respectively. These requirements were
satisfied  through the  balance of vault cash and a balance at the Federal  Home
Loan Bank.

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

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

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

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

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

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

                                      -16-
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------

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

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

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

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
$8.3 million and $12.8 million at December 31, 2002 and 2001, respectively. Loan
servicing  fee income was  approximately  $34  thousand,  $44  thousand  and $48
thousand for the years ended December 31, 2002, 2001 and 2000, 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 2001 and 2000 consolidated  financial  statements have
been  reclassified  to conform with the  presentation  in the 2002  consolidated
financial statements.

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

Recently Issued Accounting Standards
     In June 2001,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Statement of Financial  Accounting Standards (SFAS) No. 142, which provides that
goodwill and intangible  assets that have indefinite  useful lives should not be
amortized but rather should be tested annually for  impairment.  SFAS No. 142 is
effective for fiscal years  beginning  after  December 15, 2001. The adoption of
SFAS No. 142,  effective  January 1, 2002, did not have a material effect on the
Consolidated  Statements of Financial  Condition or  Consolidated  Statements of
Operations.

     In June  2001,  the  FASB  issued  SFAS  No.  143,  "Accounting  for  Asset
Retirement  Obligations".  SFAS  No.  143  addresses  financial  accounting  and
reporting for obligations  associated with the retirement of tangible long-lived
assets and the associated  asset retirement  costs.  This statement is effective
for fiscal years  beginning  after June 15,  2002.  It is  anticipated  that the
adoption  of SFAS No.  143 will not have a material  effect on the  Consolidated
Statements of Financial Condition or Consolidated Statements of Operations.

     In  October  2001,  the FASB  issued  SFAS  No.  144,  "Accounting  for the
Impairment or Disposal of Long-Lived Assets".  SFAS No. 144 establishes a single
accounting  model for  impairment  or disposal of long-lived  assets,  including
assets to be held and used,  assets to be  disposed  of by other than sale,  and
assets to be disposed of by sale.  This  statement is effective for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal years.
The adoption by the Corporation of SFAS No. 144,  effective January 1, 2002, did
not have a material effect on the Consolidated Statements of Financial Condition
or Consolidated Statements of Operations.

                                      -17-
<PAGE>
FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------

     In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No.  4,  44  and  64,   Amendment  of  FASB  Statement  No.  13,  and  Technical
Corrections." The provisions of this statement related to the rescission of SFAS
No. 4. The adoption by the Corporation of SFAS~No. 145, effective June 30, 2002,
did not have a  material  effect on the  Consolidated  Statements  of  Financial
Condition or the Consolidated Statements of Operations.

     In June  2002,  the  FASB  issued  SFAS  No.  146,  "Accounting  for  Costs
Associated with Exit or Disposal  Activities"  which superseded  Emerging Issues
Task Force (EITF) Issue No. 94-3  "Liability  Recognition  for Certain  Employee
Termination  Benefits  and Other  Costs to Exit an Activity  (including  certain
costs incurred in restructuring)". This Statement addresses financial accounting
and  reporting  for costs  associated  with exit or  disposal  activities.  This
Statement is effective for exit or disposal activities  initiated after December
31, 2002, with early application encouraged.  The adoption by the Corporation of
FAS 146,  effective  September  30,  2002,  had no  effect  on the  Consolidated
Statements of Financial Condition or the Consolidated Statements of Operations.

     In  October  2002,  the FASB  issued  SFAS 147,  "Acquisitions  of  Certain
Financial  Institutions-an  amendment of FASB Statements No. 72 and 144 and FASB
Interpretations  No. 9". This Statement requires the application of the purchase
method of accounting to all acquisitions of financial  institutions  (except two
or more mutual  enterprises)  and provides  accounting  for the  recognition  of
certain  long-term  customer  relationship  intangible  assets  recognized in an
acquisition of a financial  institution.  This Statement is effective on October
1, 2002, with earlier application permitted.  The adoption of FAS 147, effective
September 30, 2002,  had no effect on the  Consolidated  Statements of Financial
Condition or the Consolidated Statements of Operations.

     In  December  2002,  the FASB  issued  statement  of  Financial  Accounting
Standards SFAS No. 148, "Accounting for Stock-Based  Compensation-Transition and
Disclosure".   This  Statement   amends  FAS  123  "Accounting  for  Stock-Based
Compensation",  to provide  alternative  methods of  transition  for a voluntary
change to the fair value based method of  accounting  for  stock-based  employee
compensation.  As permitted by FAS 123, the Corporation will continue to use the
intrinsic value method of accounting for stock options under APB Opinion No. 25,
"Accounting for Stock Issued to Employees".  Accordingly,  no compensation costs
have been  recognized for options  granted under the Stock Option Plan and there
is no  effect on the  Consolidated  Statements  of  Financial  Condition  or the
Consolidated Statements of Operations.

     In November  2002,  the FASB issued  FASB  Interpretation  No. 45 (FIN 45),
"Guarantor's  Accounting and Disclosure  Requirements for Guarantees,  Including
Indirect   Guarantees  of   Indebtedness   of  Others."  FIN  45  clarifies  the
requirements of SFAS 5, "Accounting for Contingencies,  relating to guarantees".
The disclosure  requirements  of FIN 45 are effective for the  Corporation as of
December 31, 2002.  Commitments and contingencies that have been entered into by
the  Corporation  are  disclosed  in  Note  18.  The  adoption  of FIN 45 by the
Corporation  did not have a material  effect on the  Consolidated  Statements of
Financial Condition or the Consolidated Statements of Operations.

     In  January  2003,  the FASB  issued  FIN 46,  "Consolidation  of  Variable
Interest Entities".  This interpretation  provides guidance on how to identify a
variable  interest entity and determine when such an entity needs to be included
in a company's consolidated  financial statement.  The Corporation does not have
interest  in  any  variable   interest   entities.   The   provisions   of  this
interpretation  became  effective in January 2003. The adoption of FIN 46 by the
Corporation  will not have a material effect on the  Consolidated  Statements of
Financial Condition or the Consolidated Statements of Operations.

                                      -18-
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------

2. INVESTMENT SECURITIES HELD TO MATURITY
     A comparison  of amortized  cost and  estimated  market value of investment
securities held to maturity at December 31, 2002 and 2001 are as follows:

                                              December 31, 2002
                         ------------------------------------------------------
                                            Gross        Gross       Estimated
                            Amortized    Unrealized    Unrealized      Market
                              Cost          Gains        Losses        Value
-------------------------------------------------------------------------------
U.S. Gov't Agencies     $ 25,914,918    $  632,444    $       0   $ 26,547,362
Municipal bonds           14,503,069         6,852            0     14,509,921
CMOs                     123,809,139       750,033     (13,945)    124,545,227
-------------------------------------------------------------------------------
Total                   $164,227,126    $1,389,329    $(13,945)   $165,602,510
-------------------------------------------------------------------------------

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

     The Bank has the intent and ability to hold these  securities  to maturity.
The amortized cost and estimated market value of investments held to maturity at
December 31, 2002,  by  contractual  maturity  period are shown in the following
table.  Expected  maturities  may  differ  as  borrowers  have the right to call
certain  obligations.  CMOs are shown  separately  due to the  amortization  and
prepayment of principal occurring throughout the life of these instruments.

                                             December 31, 2002
                                 -----------------------------------------
                                     Amortized            Estimated
                                        Cost             Market Value
--------------------------------------------------------------------------
Due one year or less               $ 14,173,069          $  14,173,069
Due one to five years                         0                      0
Due five to ten years                21,983,879             22,517,192
Due after ten years                   4,261,039              4,367,022
CMOs                                123,809,139            124,545,227
--------------------------------------------------------------------------
Total                              $164,227,126           $165,602,510
--------------------------------------------------------------------------

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

3. INVESTMENT SECURITIES AVAILABLE FOR SALE
     The  amortized  cost and estimated  market value of  investment  securities
available for sale at December 31, 2002 and 2001 are as follows:

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

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

     The amortized cost and estimated market value of investments  available for
sale at December  31,  2002,  by  contractual  maturity  period are shown in the
following table.  Expected  maturities may differ as borrowers have the right to
call or  prepay  certain  obligations.  CMOs  are  shown  separately  due to the
amortization and prepayment of principal occurring  throughout the life of these
instruments.
                                       December 31, 2002
                             -------------------------------------
                                 Amortized        Estimated
                                   Cost          Market Value
------------------------------------------------------------------
Due one year or less         $           0     $            0
Due one to five years           19,995,804         20,217,350
Due five to ten years            4,997,306          5,140,650
Due after ten years             69,631,991         71,147,440
CMOs                            21,978,385         22,107,521
------------------------------------------------------------------
Total                        $ 116,603,486     $  118,612,961
------------------------------------------------------------------

     During 2001, CMOs available for sale were sold which resulted in a realized
loss of $17 thousand.  There were no sales of investment  securities during 2002
or 2000.

                                      -19-
<PAGE>
FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------

4.   LOANS, NET
     Loans, net at December 31, 2002 and 2001 consist of the following:


                                   2002               2001
---------------------------------------------------------------
Mortgage Loans             $    272,777,144   $    259,970,571
Construction Loans                  305,607          1,254,191
Commercial Construction           1,157,268          4,605,752
Consumer Loans                    3,521,889          4,582,734
Commercial Real Estate           76,354,155         60,626,659
Commercial Business              12,621,048         10,520,704
---------------------------------------------------------------
Subtotal                        366,737,111        341,560,611
Less:
    Deferred loan fees              745,236            786,044
    Allowance for
       loan losses                4,317,475          4,230,563
---------------------------------------------------------------
Total loans, net           $    361,674,400   $    336,544,004
---------------------------------------------------------------

     At December  31, 2002 and 2001 the recorded  investment  in loans for which
impairment had been recognized in accordance  with SFAS No. 114,  "Accounting by
Creditors  for  Impairment of a Loan"  amended by SFAS No. 118,  "Accounting  by
Creditors for Impairment of a Loan-Income Recognition and Disclosures",  totaled
$2.8 million and $2.8  million,  respectively.  At December  31, 2002,  impaired
loans of $998  thousand  related to loans that were  individually  measured  for
impairment with a valuation allowance of $426 thousand and $1.8 million of loans
that were collectively measured for impairment with a valuation allowance of $60
thousand.  At December 31, 2001 impaired loans of $1.1 million  related to loans
that were  individually  measured for impairment  with a valuation  allowance of
$424  thousand  and $1.7  million of loans that were  collectively  measured for
impairment  with a  valuation  allowance  of $87  thousand.  For the years ended
December 31, 2002 and 2001,  the average  recorded  investment in impaired loans
was approximately $2.4 million and $2.9 million, respectively.  During the years
ended December 31, 2002 and 2001 the  Corporation  recognized  $206 thousand and
$322 thousand, respectively, of interest on impaired loans.

     Loans which are 90 days  delinquent  as to  principal  and/or  interest are
placed on a non-accrual  status and all previously accrued interest is reversed.
The principal amount of non-accrual loans at December 31, 2002 and 2001 was $2.8
million and $3.0 million,  respectively.  Interest  income on non-accrual  loans
that would have been recorded in 2002 under the original terms of such loans was
$221 thousand,  and the interest  income  actually recognized in 2002  for  such
loans was $338 thousand.  Interest  income on non-accrual  loans that would have
been  recorded in 2001 under the original  terms of such loans was $96 thousand,
and the  actual  interest  income  recognized  in 2001  for such  loans  was $62
thousand.

     The Bank  originates and purchases both  adjustable and fixed interest rate
loans. At December 31, 2002, the composition of these loans is as follows:

<TABLE>
<CAPTION>
                                             Maturing    Maturing
                                              during     from 2004      Maturing
(In Thousands)                                 2003     through 2007   after 2007    Total
---------------------------------------------------------------------------------------------
<S>                                        <C>           <C>           <C>        <C>
Mortgage Loans
   (1-4 dwelling)                            $ 2,090       $17,754       $252,933   $272,777
Construction Loans                               306             0              0        306
Commercial Construction                        1,157             0              0      1,157
Consumer Loans                                 1,065         1,791            666      3,522
Commercial Real Estate                         3,442        12,510         60,402     76,354
Commercial Business                            6,556         4,719          1,346     12,621
---------------------------------------------------------------------------------------------
Total                                        $14,616       $36,774       $315,347   $366,737
---------------------------------------------------------------------------------------------

Interest sensitivity on the above loans:
Loans with predetermined rates               $ 7,127       $33,313       $244,790   $285,230
Loans with adjustable or
  floating rates                               7,489         3,461         70,557     81,507
---------------------------------------------------------------------------------------------
Total                                        $14,616       $36,774       $315,347   $366,737
---------------------------------------------------------------------------------------------
</TABLE>

     Construction,  commercial and land loans are generally indexed to the prime
rate plus a percentage  (generally 1% to 2%). The adjustable rate mortgage loans
have interest rate adjustment  limitations and are generally  indexed to the one
year U.S. Treasury constant maturity yield. Future market factors may affect the
correlation of the interest rate  adjustment with the rates the Bank pays on the
short-term deposits that have been primarily utilized to fund these loans. Loans
pledged as  collateral  for  advances  and lines of credit from the Federal Home
Loan Bank totaled $44.1 million at December 31, 2002.

     Changes in the allowance for loan losses are as follows:

                                          Years ended December 31,
                             ---------------------------------------------------
                                    2002              2001            2000
--------------------------------------------------------------------------------
Balance at beginning
    of year                      $ 4,230,563       $ 3,980,347      $ 3,840,967
Provision charged to
    operations                       149,000           221,000          240,000
Charge-offs                          (77,052)          (45,304)        (131,740)
Recoveries                            14,964            12,914           31,120
Increase due to merger                     0            61,606                0
--------------------------------------------------------------------------------
Balance at end of year           $ 4,317,475       $ 4,230,563      $ 3,980,347
--------------------------------------------------------------------------------

                                      -20-
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------

5. MORTGAGE-BACKED SECURITIES HELD TO MATURITY

     Mortgage-backed  securities  held to maturity at December 31, 2002 and 2001
are summarized as follows:

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


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

     The Bank has the intent and ability to hold these  securities  to maturity.
At December 31, 2002,  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,  2002  and  2001  are
summarized by major classification, as follows:

                                                        December 31,
                                           -----------------------------------
                                                   2002                2001
------------------------------------------------------------------------------
Land, buildings and improvements           $   31,025,488       $  28,166,126
Furniture and equipment                         6,473,211           5,830,584
Computers                                       5,416,997           4,749,041
------------------------------------------------------------------------------
Total                                          42,915,696          38,745,751

Less accumulated depreciation                 (13,822,726)        (12,380,771)
------------------------------------------------------------------------------
Office properties and equipment, net       $   29,092,970       $  26,364,980
------------------------------------------------------------------------------

Depreciation expense totaled $1.7 million, $1.8 million and $1.7 million for the
years ended December 31, 2002, 2001 and 2000, respectively.

7.  REAL ESTATE HELD FOR DEVELOPMENT, NET
     The Bank,  through its wholly-owned  subsidiary,  Land Financial  Services,
Inc.,  had entered into several  real estate  investments.  Real estate held for
development is carried at the lower of cost or estimated net  realizable  value.
Intercompany  loans from the Bank are the  primary  sources of funding  and have
been eliminated in  consolidation.  Such  investments in real estate at December
31, 2002 and 2001, are summarized as follows:

                                               December 31,
                           -----------------------------------------------------
                                       2002                     2001
--------------------------------------------------------------------------------
Real estate held for
    development                    $  376,694               $  376,694
Valuation allowance                  (288,768)                (288,768)
--------------------------------------------------------------------------------
Net                                $   87,926               $   87,926
--------------------------------------------------------------------------------

In January  2003,  the remaining  land was sold which  resulted in a net gain of
$361 thousand.


8. REAL ESTATE OWNED, NET
     Real estate owned, which was acquired through foreclosure and deeds in-lieu
of  foreclosure,  totaled $291 thousand and $214  thousand,  net at December 31,
2002 and 2001,  respectively.  Changes in the allowance for real estate owned is
as follows:

                                      Years ended December 31,
                        -----------------------------------------------------
                                 2002             2001              2000
-----------------------------------------------------------------------------
Balance at
    beginning of year          $ 381,676        $ 716,919         $ 668,239
Valuation allowance                    0         (325,000)                0
Charge-offs                       (2,080)         (10,243)           (9,962)
Recoveries                             0                0            58,642
-----------------------------------------------------------------------------
Balance at end of year         $ 379,596        $ 381,676         $ 716,919
-----------------------------------------------------------------------------

                                      -21-
<PAGE>
FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------

9. DEPOSITS

     Deposits at December  31, 2002 and 2001  consisted of the  following  major
classifications and weighted average interest rates:

                                                December 31, 2002
                             -------------------------------------------------
                               Weighted                           Percent
                              Average Rate          Amount        of Total
------------------------------------------------------------------------------
Non-interest checking             0.00%          $134,969,939       16.85%
Checking accounts                 1.18            155,730,226       19.46
Savings accounts                  1.34            161,458,450       20.18
Money market accounts             1.86            124,795,059       15.59
Certificates                      3.58            223,386,548       27.92
 -----------------------------------------------------------------------------
Total                             1.86%          $800,340,222      100.00%
------------------------------------------------------------------------------


                                                December 31, 2001
                             -------------------------------------------------
                               Weighted                           Percent
                              Average Rate          Amount        of Total
------------------------------------------------------------------------------
Non-interest checking             0.00%          $120,954,278       16.57%
Checking accounts                 2.16            134,601,630       18.45
Savings accounts                  2.23            131,524,016       18.04
Money market accounts             2.55             86,854,749       11.91
Certificates                      5.12            255,571,056       35.03
------------------------------------------------------------------------------
Total                             2.99%          $729,505,729      100.00%
------------------------------------------------------------------------------

     The aggregate  amount of certificates of deposit in excess of $100 thousand
totaled $28.1  million.  Deposits from related  parties  totaled $1.6 million at
December 31, 2002. A summary of certificates by maturity at December 31, 2002 is
as follows:

Years ended December 31,                 Amount
-------------------------------------------------
2003                               $ 168,603,390
2004                                  23,839,898
2005                                  13,712,958
2006                                  10,679,426
2007                                   6,382,301
Thereafter                               168,575
-------------------------------------------------
Total                              $ 223,386,548
-------------------------------------------------

     A summary of interest expense on deposits is as follows:

                                          Years ended December 31,
                           -----------------------------------------------------
                                2002               2001                2000
--------------------------------------------------------------------------------
Checking accounts          $  1,620,862         $2,711,539         $3,508,791
Savings accounts              1,920,339          2,644,185          3,045,369
Money market accounts         2,033,447          1,926,269          1,864,489
Certificates                  8,369,748         12,790,863         12,473,540
--------------------------------------------------------------------------------
Total interest expense     $ 13,944,396       $ 20,072,856       $ 20,892,189
--------------------------------------------------------------------------------

10.   ADVANCES FROM FEDERAL HOME LOAN BANK
     At December 31, 2002, the Bank had advances from the Federal Home Loan Bank
of New York  (FHLB)  in the  amount of $11.2  million  with a  weighted  average
interest rate of 1.78%.  Advances are  collateralized  by certain first mortgage
loans.

<TABLE>
<CAPTION>
                             Years ended December 31,
----------------------------------------------------------------
              2002                       2001
----------------------------------------------------------------
                 Weighted                    Weighted
                 Average  Maturity           Average   Maturity
      Amount      Rate     Date     Amount     Rate      Date
----------------------------------------------------------------
<S>              <C>    <C>    <C>          <C>      <C>
  $  1,232,103    5.00%  10/9/07 $1,270,313    5.00%    10/9/07
    10,000,000    1.38%  4/15/05
----------------------------------------------------------------
  $ 11,232,103    1.78%          $1,270,313    5.00%
----------------------------------------------------------------
</TABLE>

11.  SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
     At December 31, 2002, the Bank had securities  sold under the agreements to
repurchase  (repurchase  agreements) in the aggregate  amount of $225.0 million.
The repurchase  agreements are collateralized by U.S. Agency Notes, MBS and CMOs
with a market value of $245.3  million.  Accrued  interest  payable totaled $1.1
million at December 31, 2002.

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

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

                                      -22-
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------

12.  INCOME TAXES

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

<TABLE>
<CAPTION>
                                                             2002                        2001                  2000
                                                      ---------------------        ----------------     -------------------
                                                      Amount        Percent        Amount   Percent       Amount    Percent
                                                      ------        -------        ------   -------       ------    -------
<S>                                               <C>               <C>       <C>          <C>       <C>           <C>
Tax at Federal tax rate                             $4,340,770       34.00%     $2,868,255   34.00%    $2,706,971    34.00%
Increase (decrease) from:
  State income taxes,
    net of federal income tax benefit                  859,765        6.73         174,772    2.07        163,163     2.05
  Change in State Tax Rate on
    Deferred Tax Assets & Liabilities                 (250,965)      (1.97)              0                      0        0
  Tax exempt interest income                           (82,791)      (0.65)        (70,599)  (0.84)             0        0
   Other                                               (60,553)      (0.47)          4,324    0.05        (20,058)   (0.25)
                                                    ----------       -----      ----------   -----     ----------    -----
Total                                               $4,806,226 (a)   37.64%     $2,976,752   35.28%    $2,850,076    35.80%
                                                    ==========       =====      ==========   =====     ==========    =====
</TABLE>
(a)  Includes tax benefit of extraordinary loss of $81,396.

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

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

                                                         December 31,
                                                 ------------------------------
                                                       2002           2001
--------------------------------------------------------------------------------
Deferred income tax assets:
     Allowance for loan losses                    $ 1,815,129    $ 1,649,358
     Real estate losses                               151,611        381,720
     Compensation and pension                         116,745        237,093
     Amortization of deposit premium                  309,642        325,128
     Post retirement benefits                         199,700        185,000
     Capitalized interest                             713,093        697,632
     Accrued  expenses                                226,840        166,431
     Other                                            (42,852)        59,512
--------------------------------------------------------------------------------
Deferred tax assets                                 3,489,908      3,701,874
--------------------------------------------------------------------------------

Deferred income tax liabilities:
     Prepaid Deposit Insurance premium                 12,439         11,461
     Depreciation                                     249,451        337,945
     Deferred loan fees, net                          255,446        194,066
--------------------------------------------------------------------------------
Gross deferred tax liabilities                       517,336        543,472
--------------------------------------------------------------------------------
Deferred income tax assets, net                   $ 2,972,572    $ 3,158,402
--------------------------------------------------------------------------------

     There was no change in the valuation  allowance for the year ended December
31, 2002, 2001 and 2000.


     The following represents the components of income tax expense for the years
ended December 31, 2002, 2001 and 2000, respectively.

<TABLE>
<CAPTION>
                                                   2002           2001          2000
---------------------------------------------------------------------------------------
<S>                                            <C>            <C>           <C>
Current Federal tax provision                   $3,369,485     $3,424,066    $3,072,152
Current State tax provision                      1,389,574        350,387       289,905
---------------------------------------------------------------------------------------
   Total Current provision                       4,759,059      3,774,453     3,362,057
---------------------------------------------------------------------------------------
Deferred Federal tax provision (benefit)           384,346       (733,022)     (469,292)
Deferred State tax provision (benefit)            (337,179)       (64,679)      (42,689)
---------------------------------------------------------------------------------------
   Total Deferred provision(benefit)                47,167       (797,701)     (511,981)
---------------------------------------------------------------------------------------
Total                                           $4,806,226     $2,976,752    $2,850,076
---------------------------------------------------------------------------------------
</TABLE>

13.  LEASES
     The Bank leases eight branch  locations  under  noncancelable  leases which
expire over the next 18 years. These leases generally provide for the payment of
taxes and maintenance by the lessee.  Most of these operating leases provide the
Bank with the option to renew the lease  after the initial  lease  term.  Future
minimum rental  payments  under  existing  leases as of December 31, 2002 are as
follows:

Fiscal Year                                       Amount
-------------------------------------------------------------
2003                                           $  205,826
2004                                              217,034
2005                                              217,034
2006                                              223,484
2007 and beyond                                 2,643,878
-------------------------------------------------------------
Total                                          $3,507,256
-------------------------------------------------------------

     The  leases  contain  cost of living  adjustments  based on  changes in the
consumer  price  index.  The minimum  lease  payments  shown above  include base
rentals  exclusive  of any  future  adjustments.  Total  rent  expense  for  all
operating leases amounted to $275 thousand,  $201 thousand and $197 thousand for
fiscal years 2002, 2001 and 2000, respectively.

                                      -23-
<PAGE>
FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------

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

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

     The Bank is considered "well capitalized" by OTS regulation at December 31,
2002 and 2001.The  following  table  presents the capital  ratios of the Bank at
December 31, 2002 and 2001.

<TABLE>
<CAPTION>
                                                                                  Minimum
                                                                                to be well
                                                                                Captilaized
                                                                               Under Prompt
                                                             Mimimum            Corrective
                                                             Capital              Action
                                       Actual               Requirement          Provisions
-----------------------------------------------------------------------------------------------
December 31, 2002 (thousands)     Amount     Ratio       Amount    Ratio       Amount   Ratio
-----------------------------------------------------------------------------------------------
<S>                            <C>          <C>       <C>          <C>      <C>         <C>
Tier 1 (Core) Capital            $71,334      6.34%     $44,973      4.0%     $56,217     5.0%
Risk-Based Capital               $75,222     18.04%     $33,365      8.0%     $41,706    10.0%
Tier 1 Risked-Based Capital      $71,334     17.10%     $16,682      4.0%     $25,023     5.0%
Tangible Equity                  $71,334      6.34%     $16,865      1.5%     $22,487     2.0%
-----------------------------------------------------------------------------------------------
December 31, 2001 (thousands)
-----------------------------------------------------------------------------------------------
Tier 1 (Core) Capital            $60,432      6.25%     $38,649      4.0%     $48,311     5.0%
Risk-Based Capital               $64,221     17.59%     $29,206      8.0%     $36,507    10.0%
Tier 1 Risked-Based Capital      $60,432     16.55%     $14,603      4.0%     $18,254     5.0%
Tangible Equity                  $60,432      6.25%     $14,493      1.5%     $19,324     2.0%
-----------------------------------------------------------------------------------------------
</TABLE>

15.  Pension Plan
     The Bank has a defined  benefit  pension  plan for  active  employees.  Net
pension  expense was $621  thousand,  $499  thousand and $395 thousand for years
ended  December 31, 2002,  2001 and 2000,  respectively.  The  components of net
pension cost are as follows:

                                  Years ended December 31,
                       -------------------------------------------
                          2002           2001          2000
------------------------------------------------------------------
Service cost           ($641,336)     ($594,777)    ($578,116)
Interest cost           (448,782)      (395,140)     (362,856)
Return on assets         504,790        508,187       527,031
Net amortization
    and deferral         (35,585)       (17,459)       18,563
------------------------------------------------------------------
Net periodic
    pension cost       ($620,913)     ($499,189)    ($395,378)
------------------------------------------------------------------

     The following table presents a  reconciliation  of the funded status of the
defined benefit pension plan at December 31, 2002 and 2001:

                                                   December 31,
                                   ------------------------------------------
                                                2002                 2001
-----------------------------------------------------------------------------
Projected benefit obligation                 $8,491,179         $7,488,903
Fair value of plan assets                     6,512,856          6,714,753
-----------------------------------------------------------------------------
Unfunded (Excess) of plan assets over
    projected benefit obligation              1,978,323            774,150
Unrecognized net (loss) gain                 (1,529,695)            72,150
Unrecognized prior service cost                 (56,117)           (60,796)
Unrecognized net transition
    obligation                                  (38,945)           (69,851)
-----------------------------------------------------------------------------
Accrued pension cost
    included in the consolidated
    balance sheet                              $353,566           $715,653
-----------------------------------------------------------------------------

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

                                                 December 31,
                                         ---------------------------
Change in Projected Benefit Obligation       2002         2001
--------------------------------------------------------------------
Projected benefit obligation
  at beginning of year                     $7,488,903   $6,813,938
Service cost                                  641,336      594,777
Interest cost                                 448,782      395,140
Actuarial gain                                 47,334     (178,366)
Benefits paid                                (135,176)    (136,586)
--------------------------------------------------------------------
Projected benefit obligation
  at end of year                           $8,491,179   $7,488,903
--------------------------------------------------------------------
Change in Plan Assets
--------------------------------------------------------------------
Fair value of plan assets
  at beginning of year                     $6,714,753   $7,310,672
Actual return of plan assets               (1,049,721)    (459,333)
Employer contribution                         983,000            0
Benefits paid                                (135,176)    (136,586)
--------------------------------------------------------------------
Fair value of plan assets
  at end of year                           $6,512,856   $6,714,753
--------------------------------------------------------------------

                                      -24-
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------

     Actuarial assumptions used in determining pension cost are as follows:

                                    Years ended December 31,
                          -----------------------------------------
                                2002         2001          2000
-------------------------------------------------------------------
Discount rate for
    benefit obligation          6.00%        6.00%         6.00%
Rate of increase in
    compensation levels
    and social security
    wage base                   4.00%        4.00%         4.00%
Expected long-term
    rate of return on
    plan assets                 7.00%        7.00%         7.00%
-------------------------------------------------------------------

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

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

                                                  December 31,
                                       ------------------------------
                                          2002      2001        2000
---------------------------------------------------------------------
Interest cost                          $54,000   $47,737     $34,748
Amortization of prior service cost     (14,499)  (14,499)    (14,499)
Amortization of loss (gain)             29,561    12,077           0
---------------------------------------------------------------------
Net periodic post-retirement
    benefit cost                       $69,062   $45,315     $20,249
---------------------------------------------------------------------

     The  assumed  discount  rate  used  in the  calculation  for  net  periodic
post-retirement   benefit   cost  was   7.25%  and  7.50%  for  2002  and  2001,
respectively. The assumed health care cost trend rate for 2002 was 10.0% and was
graded down in 0.5%  increments  per year to an ultimate  rate of 5.0% per year.
The  impact of a 1%  increase  in the  assumed  health  care cost trend for each
future year would be as follows:

                                                         December 31, 2002
--------------------------------------------------------------------------------
Accumulated post-retirement obligation
    at year end                                               $57,588
Service and interest Cost                                      $3,599
--------------------------------------------------------------------------------

     The following table summarizes the amounts recognized in the Bank's balance
sheet:
                                            December 31,
                                       -----------------------
                                           2002         2001
--------------------------------------------------------------
Accumulated post-retirement
    benefit obligation                $(798,214)   $(662,507)
Unrecognized prior service cost         (41,080)     (55,579)
Unrecognized net loss                   316,305      186,104
--------------------------------------------------------------
Accrued post-retirement benefit
    cost                              $(522,989)   $(531,982)
--------------------------------------------------------------

     The  assumed  discount  rate used in the  calculation  for the  accumulated
post-retirement benefit obligation as of December 31, 2002 and 2001 was 6.5% and
7.25%, respectively.

16.  LONG-TERM DEBT
     The  Corporation  formed a wholly-owned  subsidiary,  FMS Statutory Trust 1
("the  Trust") in March 2002.  The Trust issued $25.0  million of floating  rate
capital  securities.  The interest  rate resets every three months to LIBOR plus
360  basis  points,  with an  initial  rate of 5.59% and will not  exceed  11.0%
through the first five years from its  issuance.  The proceeds were used for the
paydown of the $10.0 million  subordinated  debentures,  expansion of the Bank's
operations and general  corporate  purposes.  On August 1, 2002, the Corporation
redeemed its $10.0 million subordinated debentures.  The early redemption was at
a price of 101%.  The cost of  redemption  and the  remaining  unamortized  bond
issuance costs were recorded as a one-time extraordinary charge to net income of
$134 thousand, net of $81 thousand in tax benefits.

                                      -25-
<PAGE>
FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

Trust capital securities: Fair value is estimated using quoted market prices for
similar securities.

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

    At December  31, 2002 and December  31,  2001,  the carrying  amount and the
estimated  market  value  of  the  Corporation's  financial  instruments  are as
follows:

<TABLE>
<CAPTION>
                                                                       December 31, 2002                   December 31, 2001
                                                                  ------------------------------    --------------------------------
                                                                     Carrying        Estimated         Carrying        Estimated
                                                                      Amount        Market Value        Amount        Market Value
                                                                  -------------   --------------    -------------   ----------------
<S>                                                              <C>              <C>              <C>             <C>
Financial assets:
    Cash and cash equivalents                                      $ 88,410,346     $ 88,410,346     $ 63,359,124    $ 63,359,124
    Investment securities held to maturity and investment
     securities available for sale                                 $282,840,087     $284,215,471     $248,540,721    $248,875,164
    Mortgage-backed securities                                     $342,122,678     $351,621,728     $272,494,220    $274,840,518
    FHLB Stock                                                     $ 12,061,720     $ 12,061,720     $  8,313,620    $  8,313,620
    Loans, net of unearned income                                  $365,991,875     $377,166,278     $340,774,567    $347,846,348
     Less: Allowance for loan losses                               $ (4,317,475)    $ (4,317,475)    $ (4,230,563)   $ (4,230,563)
    Loans, net                                                     $361,674,400     $372,848,803     $336,544,004    $343,615,785

Financial liabilities:
    Deposits
     Checking, passbook, and money market accounts                 $576,953,764     $576,953,764     $473,934,673    $473,934,673
     Certificates                                                  $223,386,458     $225,792,088     $255,571,056    $256,997,077
    Securities sold under agreements to repurchase                 $225,000,000     $245,302,000     $165,000,000    $173,890,500
    Subordinated debentures                                        $          0     $          0     $ 10,000,000    $ 10,274,000
    Advances from the Federal Home Loan Bank                       $ 11,232,103     $ 11,086,972     $  1,270,313    $  1,278,908
    Trust capital securities-FMS Statutory Trust 1                 $ 25,000,000     $ 25,195,375     $          0    $          0
</TABLE>

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

18.  COMMITMENTS AND CONTINGENCIES
     The Bank has outstanding  loan  commitments of $48.7 million as of December
31, 2002. Of these  commitments  outstanding,  the  breakdown  between fixed and
variable rate loans is as follows:

                                           December 31, 2002
                             ---------------------------------------------------
                                 Fixed         Variable
                                 Rate            Rate             Total
--------------------------------------------------------------------------------
Commitments to
       fund loans            $15,537,238      $12,529,411      $28,066,649
Unused lines:
       Construction                    0        2,911,066        2,911,066
       Equity line of
         credit loans                  0       17,754,458       17,754,458
--------------------------------------------------------------------------------
Total                        $15,537,238      $33,194,935      $48,732,173
--------------------------------------------------------------------------------

     In addition to outstanding  loan  commitments,  the Bank as of December 31,
2002, issued $3.3 million in standby letters of credit to guarantee  performance
of a bank customer to a third party.

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

19.  LITIGATION
     There were no  significant  pending legal  proceedings at December 31, 2002
which are  expected  to have a material  impact on the  Corporation's  financial
position or results of operations.

20.  LOANS TO EXECUTIVE OFFICERS AND DIRECTORS
     Regulation O provides that all loans to executive officers and directors be
made on  substantially  the same terms and  conditions  as are  available to the
general public. However, executive officers are permitted to participate in rate
discount programs available to all employees.The rate discounts are available to
employees as long as they are employed at the Bank. If employment is terminated,
the rate discount ceases from the date of termination.  At December 31, 2002 and
2001, loans made to directors and executive officers whose indebtedness exceeded
$60 thousand  amounted to $4.3 million and $3.1  million,  respectively.  During
2002, new loans to these individuals totaled $1.8 million and repayments totaled
$674 thousand.

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

     A total of 115,000  shares of authorized  but unissued  common stock of the
Corporation  have 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,  2002,  the option
exercise prices were $5.333 and $10.00.  Options are fully vested at the date of
grant and must be exercised within ten years.

     The following table summarizes  information about stock options outstanding
at December 31, 2002.

   Exercise          Outstanding       Average         Exercisable
     Price             Options         Life (1)          Options
----------------------------------------------------------------------
 $        5.33           36,000            2.9              36,000
 $       10.00           79,000            5.8              79,000
----------------------------------------------------------------------
 $        8.54          115,000            4.9             115,000
----------------------------------------------------------------------

(1) Average contractual life in years

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

     A  summary  of the  status of the  Corporation's  Stock  Option  Plan as of
December  31, 2002,  2001 and 2000 and changes  during the years ending on those
dates is presented below.

<TABLE>
<CAPTION>
                                                 Years Ended December 31,
                      ----------------------------------------------------------------------------
                                 2002                    2001                     2000
--------------------------------------------------------------------------------------------------
<S>                      <C>        <C>         <C>          <C>         <C>           <C>
Outstanding at the
  Beginning of the year   121,925     $8.56      175,418       $6.34      205,518        $5.94
Options exercised            (925)     1.29      (50,993)       1.29         (100)        1.29
Options surrendered        (6,000)    10.00       (2,500)       1.29      (30,000)        3.61
--------------------------------------------------------------------------------------------------
Outstanding at the
  End of the year         115,000     $8.54      121,925       $8.56      175,418        $6.34
--------------------------------------------------------------------------------------------------
</TABLE>

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

22. RISKS AND UNCERTAINTIES

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

                                      -27-
<PAGE>
FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------

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

                                      -28-
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------

23.  PARENT COMPANY FINANCIAL INFORMATION

     The financial statements for FMS Financial Corporation are as follows:

<TABLE>
<CAPTION>
                                                                                                                December 31,
                                                                                                      ------------------------------
FMS Financial Corporation Statements of Financial Condition                                                 2002            2001
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                 <C>             <C>
Assets:
    Cash                                                                                                 $1,447,088      $1,901,529
    Investment in subsidiary                                                                             73,795,337      60,667,120
    Investment securities                                                                                         0       1,000,000
    Intercompany receivable (payable), net                                                                7,108,475      (1,065,179)
    Trust capital securities issue costs, net                                                               717,999               0
    Subordinated debentures issue costs, net                                                                      0         149,069
    Other                                                                                                   554,733         168,840
                                                                                                        -----------     ------------
Total Assets                                                                                            $83,623,632     $62,821,379
                                                                                                        ===========     ============

Liabilities:
    10% Subordinated debentures due 2004                                                                $         0     $10,000,000
    Trust capital securities-FMS Statutory Trust 1                                                       25,774,000               0
    Dividends payable                                                                                       193,914         201,531
    Accrued interest payable                                                                                 17,899         416,667
                                                                                                        -----------     ------------
Total liabilities                                                                                       $25,985,813     $10,618,198
                                                                                                        -----------     ------------
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 7,949,809 and 7,948,884 and shares outstanding 6,463,811 and 6,717,705 as
       of December 31, 2002 and 2001, respectively                                                          794,981         794,888
    Paid-in capital in excess of par                                                                      8,279,525       8,278,423
    Accumulated comprehensive income - net of deferred income taxes                                       1,216,053         147,496
    Retained earnings                                                                                    58,233,840      51,055,818
    Less:Treasury Stock (1,485,998 and 1,231,179 shares, at cost at December 31, 2002 and
       2001, respectively)                                                                              (10,886,580)     (8,073,444)
                                                                                                        -----------     ------------
Total stockholders' equity                                                                               57,637,819      52,203,181
                                                                                                        -----------     ------------
Total Liabilities and Stockholders' Equity                                                              $83,623,632     $62,821,379
                                                                                                        ============    ============
</TABLE>

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                                                                Years Ended December 31,
                                                                ----------------------------------------------------
FMS Financial Corporation Statements of Operations                      2002               2001             2000
--------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>                <C>                <C>
Intercompany interest income                                         $848,662           $560,750           $560,750
Interest expense                                                   (1,742,660)        (1,057,348)        (1,057,348)
Dividends from subsidiary                                           2,400,000          2,400,000          2,150,000
Equity in undistributed income of subsidiary                        6,284,466          3,387,046          3,289,357
--------------------------------------------------------------------------------------------------------------------
Income before taxes                                                 7,790,468          5,290,448          4,942,759
Income tax benefit                                                    303,958            168,843            168,843
Extraordinary Loss                                                   (133,682)                 0                  0
--------------------------------------------------------------------------------------------------------------------
Net Income                                                         $7,960,744         $5,459,291         $5,111,602
--------------------------------------------------------------------------------------------------------------------
</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                                  2002           2001         2000
------------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>             <C>            <C>
Operating Activities
Net income                                                                      $7,960,744     $5,459,291    $5,111,602
Adjustments to reconcile net income to net cash provided
   by operating activities:
Extraordinary loss on retirement of debt                                           133,682              0             0
Equity in undistributed earnings of the subsidiary                              (6,284,466)    (3,387,046)   (3,289,357)
Amortization of  issue costs                                                        94,462         57,348        57,348
Decrease in interest payable                                                      (398,768)             0             0
(Increase) Decrease in intercompany receivable, net                             (8,173,654)       (27,909)    3,278,397
Other                                                                             (304,498)             0             0
                                                                                -----------    -----------   -----------

    Net cash (used) provided by operating activities                            (6,972,498)     2,101,684     5,157,990

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

Financing Activities
Purchase of treasury stock                                                      (2,813,136)      (432,840)   (3,789,148)
Repayment of subordinated debentures                                           (10,100,000)             0             0
Proceeds from issuance of trust capital securities                              24,221,532              0             0
Investment in subsidiary                                                        (5,001,195)       (65,868)         (129)
Cash dividends paid on common stock                                               (790,339)      (804,875)     (833,143)
Proceeds from issuance of stock                                                      1,195         65,868           129
                                                                                -----------    -----------   -----------

    Net cash provided (used) by financing activities                             5,518,057     (1,237,715)   (4,622,291)
                                                                                -----------    -----------   -----------

DECREASE IN CASH AND CASH EQUIVALENTS                                             (454,441)       863,969       535,699
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                     1,901,529      1,037,560       501,861
                                                                                -----------    -----------   -----------

CASH AND CASH EQUIVALENTS, END OF YEAR                                          $1,447,088     $1,901,529    $1,037,560
                                                                                -----------    -----------   -----------
------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

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

PRICEWATERHOUSECOOPERS [LOGO]

                        REPORT OF INDEPENDENT ACCOUNTANTS



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

In our opinion, the accompanying  consolidated statements of financial condition
and the related consolidated statements of operations,  changes in stockholders'
equity, and cash flows present fairly, in all material  respects,  the financial
position of FMS Financial Corporation and Subsidiary ("the Company") at December
31, 2002 and 2001, and the results of their  operations and their cash flows for
each of the three years in the period ended  December 31,  2002,  in  conformity
with accounting  principles  generally accepted in the United States of America.
These financial  statements are the responsibility of the Company's  management;
our responsibility is to express an opinion on these financial  statements based
on our audits.  We conducted our audits of these  statements in accordance  with
auditing  standards  generally  accepted in the United States of America,  which
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

/s/PRICEWATERHOUSECOOPERS LLP

Philadelphia, PA
February 13, 2003

                                      -31-
<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, 2002,  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,  2002.  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, 2002.

COMPLIANCE WITH LAWS AND REGULATIONS
Management is also  responsible  for compliance  with federal and state laws and
regulations  concerning  dividend  restrictions and federal laws and regulations
concerning loans to insiders  designated by the Office of Thrift  Supervision as
safety and soundness laws and regulations.

Management  assessed its  compliance  with the designated  laws and  regulations
relating to safety and soundness. Based on this assessment,  management believes
that  the  Corporation  has  complied,  in all  significant  respects,  with the
designated  laws and  regulations  related to safety and  soundness for the year
ended December 31, 2002.

/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 13, 2003

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


                              CORPORATE INFORMATION

ANNUAL MEETING

     The 2003 Annual Shareholders'  Meeting of FMS Financial Corporation will be
held at 10:00 a.m., on the 24th day of April, 2003 at the Riverton Country Club,
Highland Avenue off of Route 130, Riverton, New Jersey.

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

     The number of record holders of common stock of the Corporation as of March
3, 2003 was approximately 711, 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, 2002 and 2001:

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

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

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

     As of December 31, 2002 the Bank was a Tier 1 capital compliant institution
and had available  $21.5 million for  dividends to the  Corporation,  subject to
nonobjection by the OTS. It is not likely that the  Corporation  would request a
dividend of that  magnitude.  The  Corporation  is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders,  but is subject to
the  requirements  of New Jersey  law,  which  permits  the  Corporation  to pay
dividends  in cash or shares out of the  Corporation's  surplus,  defined as the
excess of net assets of the Corporation over stated capital.

                                      -33-
<PAGE>
FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------

                  BOARD OF DIRECTORS
                  EDWARD J. STAATS, JR.
                  Chairman of the Board

                  WAYNE H. PAGE
                  Vice Chairman

                  GEORGE J. BARBER
                  JOSEPH W. CLARKE, JR
                  DOMINIC W. FLAMINI
                  VINCENT R. FARIAS
                  JAMES C. LIGNANA
                  MARY WELLS
                  CRAIG W. YATES
                  ROY D. YATES

                  DIRECTORS EMERITUS

                  KAREN S. OLEKSA
                  HILYARD S. SIMPKINS

                  BANK OFFICERS

                  CRAIG W. YATES*
                  President

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

                  CHANNING L. SMITH*
                  Vice President and Chief Financial Officer

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

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

                  DOUGLAS B. HALEY
                  Vice President, Consumer Lending

                  AMY J. HANNIGAN
                  Vice President and Controller

                  PETER S. SCHOENFELD
                  Vice President, Investments

                  KAREN D. SHINN
                  Vice President, Operations

                  FRANK E. SMITH
                  Vice President, Facilities and Design

                  MARCELLA F. HATCHER*
                  Assistant Secretary
                  * Officers of Bank and Holding Company

                                      -34-
<PAGE>
                                                       FMS FINANCIAL CORPORATION
--------------------------------------------------------------------------------

                  MARKET MAKERS
                  The   following   companies   were  making  a  market  in  the
                  Corporation's common stock at December 31, 2002:

                  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, 2002, as filed with the Securities and
                  Exchange  Commission  will be furnished to shareholders of the
                  Corporation upon written request without charge. Shareholders,
                  analysts  and  others  seeking  this and  other  requests  for
                  information  relating to stock, annual  shareholders'  meeting
                  and  related  matters  on FMS  Financial  Corporation,  should
                  contact the Corporate Secretary at the Executive Offices.

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                      -36-