UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                       ----------------------------------

                              Washington, DC 20549

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


                                    FORM 10-Q

(Mark One)

  X    Quarterly report pursuant to section 13 or 15(d) of the Securities
----   Exchange Act of 1934

       For the quarterly period ended June 30, 2003

       OR

       Transition report pursuant to section 13 or 15(d) of the Securities
----   Exchange Act of 1934


                         Commission file number 0-17353
                                                -------


                            FMS FINANCIAL CORPORATION
             -----------------------------------------------------
             (Exact name of registrant as specified in its charter)


        New Jersey                                               22-2916440
-------------------------------                             --------------------
(State or other jurisdiction of                             (IRS Employer
incorporation or organization)                               Identification No.)


3 Sunset Road, Burlington, New Jersey                                   08016
----------------------------------------                              ----------
(Address of principal executive offices)                              (Zip Code)


Registrant's telephone number, including area code: (609) 386-2400
                                                    --------------


     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during the  preceding  12 months (or for such  reports),  and (2) has been
subject to such filing requirements for the past 90 days.  YES  X   NO    .
                                                               ---     ---

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act). YES      NO  X .
                                                ---     ---

     As of August 1, 2003 there were issued and outstanding  6,481,324 shares of
the registrant's Common Stock, par value $.10 per share.


<PAGE>
                    FMS FINANCIAL CORPORATION AND SUBSIDIARY
                    ----------------------------------------

                          QUARTERLY REPORT ON FORM 10-Q
                          -----------------------------

                                  JUNE 30, 2003
                                  -------------

                                TABLE OF CONTENTS
                                -----------------
                                                                          Page
                                                                          ----
PART I - Financial Information
------------------------------

     Item 1 - Financial Statements

           Consolidated Statements of Financial Condition as of
                   June 30, 2003 (unaudited) and December 31, 2002..........1

           Consolidated Statements of Operations (unaudited)
                   for the three and six months ended
                   June 30, 2003 and June 30, 2002..........................2

           Consolidated Statements of Cash Flows (unaudited)
                   for the six months ended June 30, 2003
                   and June 30, 2002........................................3

           Consolidated  Statements  of  Changes  in  Stockholders'
                   Equity (unaudited) for the six months ended
                   June 30, 2003 and June 30, 2002..........................4

           Notes to Consolidated Financial Statements.....................5-6

     Item 2 - Management's Discussion and Analysis of
                   Financial Condition and Results of Operations.........7-18

     Item 3 - Disclosure about Market Risk.................................18

     Item 4 - Disclosure Controls and Procedures...........................19

PART II Other Information
-------------------------

     Item 1 - Legal Proceedings............................................20

     Item 2 - Changes in Securities........................................20

     Item 3 - Defaults Upon Senior Securities..............................20

     Item 4 - Submission of Matters to a Vote of Security Holders..........20

     Item 5 - Other Information............................................20

     Item 6 - Exhibits and Reports on Form 8-K.............................20

<PAGE>

FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
                                                                             June 30, 2003     December 31, 2002
----------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>                    <C>
ASSETS                                                                         (Unaudited)
----------------------------------------------------------------------------------------------------------------

     Cash and amounts due from depository institutes                     $       37,049,955     $    41,497,691
     Interest-bearing deposits                                                      421,154              12,252
     Short term funds                                                            32,616,453          46,900,403
                                                                         -------------------    ----------------
        Total cash and cash equivalents                                          70,087,562          88,410,346
     Investment securities held to maturity                                     217,119,432         164,227,126
     Investment securities available for sale                                   138,375,397         118,612,961
     Loans, net                                                                 380,495,936         361,674,400
     Mortgage-backed securities held to maturity                                322,125,518         342,122,678
     Accrued interest receivable:
        Loans                                                                     1,554,456           1,560,272
        Mortgage-backed securities                                                1,882,128           2,175,776
        Investments                                                               1,709,603           1,543,610
     Federal Home Loan Bank stock                                                11,809,620          12,061,720
     Real estate held for development, net                                                0              87,926
     Real estate owned, net                                                         201,421             291,200
     Premises and equipment, net                                                 31,122,424          29,092,970
     Deferred income taxes                                                        2,259,125           2,972,572
     Prepaid expenses and other assets                                            1,392,928           1,005,822
     Trust Capital securities issue costs, net                                      679,077             717,999
     Excess of cost over fair value of assets acquired                            1,249,400                   0

                                                                         -------------------    ----------------
TOTAL ASSETS                                                             $    1,182,064,027     $ 1,126,557,378
                                                                         ===================    ================

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

Liabilities:
     Deposits                                                            $      852,989,916     $   800,340,222
     Securities sold under agreements to repurchase                             225,000,000         225,000,000
     Advances from the Federal Home Loan Bank                                    11,191,047          11,232,103
     Trust Capital Securities - FMS Statutory Trust 1                            25,000,000          25,000,000
     Advances by borrowers for taxes and insurance                                2,418,140           2,049,813
     Accrued interest payable                                                     1,297,002           1,383,054
     Dividends payable                                                              194,524             193,914
     Other liabilities                                                            3,913,800           3,720,453

                                                                         -------------------    ----------------
     Total liabilities                                                        1,122,004,429       1,068,919,559
                                                                         -------------------    ----------------
Commitments and contingencies
Stockholders' Equity:
     Preferred stock - $.10 par value 5,000,000 shares  authorized;
        none issued
     Common stock - $.10 par value 10,000,000 shares authorized; shares
        issued 7,970,309 and 7,949,809 and shares outstanding 6,484,140
        and 6,463,811 as of June 30, 2003 and December 31, 2002, respectively       797,031             794,981
     Paid-in capital in excess of par                                             8,482,475           8,279,525
     Accumulated other comprehensive income -
        net of deferred income taxes                                                684,599           1,216,053
     Retained earnings                                                           60,985,297          58,233,840
     Less:  Treasury stock (1,486,169 and 1,485,998 shares,
        at cost, as of June 30, 2003 and December 31, 2002, respectively)       (10,889,804)        (10,886,580)

                                                                         -------------------    ----------------
Total stockholders' equity                                                       60,059,598          57,637,819
                                                                         -------------------    ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                               $    1,182,064,027     $ 1,126,557,378
                                                                         ===================    ================
</TABLE>

See notes to consolidated financial statements.


                                       1
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------------------------------------------------------
                                                             Three Months ended                           Six Months ended
                                                                  June 30,                                     June 30,
                                                          2003                     2002             2003                2002
--------------------------------------------------------------------------------------------------------------------------------
INTEREST  INCOME:                                                (Unaudited)                              (Unaudited)
Interest income on:
<S>                                             <C>                    <C>                <C>                <C>
    Loans                                           $     6,058,727       $     6,385,849     $    12,284,453     $    12,742,333
    Mortgage-backed securities                            3,770,334             4,535,948           8,306,479           8,834,263
    Investments                                           2,608,387             3,917,284           5,278,711           7,573,931
                                                    ---------------       ---------------     ---------------     ---------------
Total interest income                                    12,437,448            14,839,081          25,869,643          29,150,527
                                                    ---------------       ---------------     ---------------     ---------------

INTEREST EXPENSE:
Interest expense on:
    Deposits                                              2,236,527             3,570,208           4,837,741           7,495,539
    Long term debt                                          327,575               648,249             659,142             934,082
    Borrowings                                            2,365,150             2,256,465           4,707,350           4,352,318
                                                    ---------------       ---------------     ---------------     ---------------
Total interest expense                                    4,929,252             6,474,922          10,204,233          12,781,939
                                                    ---------------       ---------------     ---------------     ---------------
NET INTEREST INCOME                                       7,508,196             8,364,159          15,665,410          16,368,588
PROVISION FOR LOAN LOSSES                                    60,000                26,000             120,000              29,000
                                                    ---------------       ---------------     ---------------     ---------------

NET INTEREST INCOME AFTER PROVISION
    FOR LOAN LOSSES                                       7,448,196             8,338,159          15,545,410          16,339,588
                                                    ---------------       ---------------     ---------------     ---------------

OTHER INCOME (EXPENSE):
    Loan service charges and other fees                      19,920                24,653              43,734              52,663
    Gain on sale of real estate held for
      development, net                                            0                     0             600,780                   0
    Gain on sale of loans                                        22                   388                  51                 463
    Gain on sale of investment securities                   222,743                     0             222,743                   0
    Gain on disposal of fixed assets                              0               100,113            (141,151)            100,113
    Real estate owned operations, net                        28,035                (8,013)             21,205             (15,867)
    Service charges on accounts                           1,184,345               997,390           2,256,242           1,862,178
    Other income                                             46,112                66,849              69,465             151,469
                                                    ---------------       ---------------     ---------------     ---------------
Total other income                                        1,501,177             1,181,380           3,073,069           2,151,019
                                                    ---------------       ---------------     ---------------     ---------------

OPERATING EXPENSES:
    Salaries and employee benefits                        3,907,795             3,409,715           7,731,197           6,858,401
    Occupancy and equipment                               1,360,201             1,113,836           2,688,716           2,220,244
    Purchased services                                      723,733               649,041           1,397,758           1,263,939
    Federal deposit insurance premiums                       31,386                31,146              63,582              62,124
    Professional fees                                       163,703               205,823             341,419             404,036
    Advertising                                             117,245               121,381             232,856             204,583
    Other                                                   508,511               382,664             990,672             696,218
                                                    ---------------       ---------------     ---------------     ---------------
Total operating expenses                                  6,812,574             5,913,606          13,446,200          11,709,545
                                                    ---------------       ---------------     ---------------     ---------------

INCOME BEFORE INCOME TAXES                                2,136,799             3,605,933           5,172,279           6,781,062

INCOME TAXES                                        $       836,827             1,268,655           2,032,384           2,391,202
                                                    ---------------       ---------------     ---------------     ---------------
NET INCOME                                          $     1,299,972       $     2,337,278     $     3,139,895     $     4,389,860
                                                    ===============       ===============     ===============     ===============
BASIC EARNINGS PER COMMON SHARE                     $          0.20       $          0.36     $          0.49     $          0.66
                                                    ===============       ===============     ===============     ===============
DILUTED EARNINGS PER COMMON SHARE                   $          0.20       $          0.36     $          0.48     $          0.66
                                                    ===============       ===============     ===============     ===============
Dividends declared per common share                 $          0.03       $          0.03     $          0.06     $          0.06
                                                    ===============       ===============     ===============     ===============
Weighted average common shares outstanding                6,473,606             6,547,961           6,468,706           6,632,815
Potential dilutive effect of the exercise of
     stock options                                           45,208                30,445              39,763              20,616
                                                    ---------------       ---------------     ---------------     ---------------
Adjusted weighted average common shares outstanding       6,518,814             6,578,406           6,508,469           6,653,431
                                                    ===============       ===============     ===============     ===============
</TABLE>


See notes to consolidated financial statements.

                                       2

<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
                                                                                Six Months ended
                                                                                     June 30,
                                                                   ---------------------------------------
                                                                            2003                   2002
----------------------------------------------------------------------------------------------------------
                                                                                (Unaudited)
<S>                                                             <C>                   <C>
OPERATING ACTIVITIES:
Net income                                                          $      3,139,895     $      4,389,860
Adjustments to reconcile net income to net cash provided
         by operating activities:
Provision for loan losses                                                    120,000               29,000
Depreciation and amortization                                              4,069,921            1,952,609
Realized (gains) and losses on:
    Sale of loans                                                                (51)                (463)
    Disposal and sale of fixed assets                                        141,151             (100,113)
    Sale of investment securities                                           (222,743)                   0
    Sale of real estate owned                                                (33,432)                   0
    Gain on sale of real estate held for development, net                   (600,780)                   0
Increase in accrued interest receivable                                      133,471             (139,463)
Increase in prepaid expenses and other assets                               (387,106)             615,890
Decrease in accrued interest payable                                         (86,052)             (15,190)
Increase (decrease) in other liabilities                                     193,347             (917,261)
Provisions for deferred income taxes                                       1,066,866             (283,735)
                                                                    -----------------    -----------------
    Net cash provided by operating activities                              7,534,487            5,531,134
                                                                   ------------------    -----------------
INVESTING ACTIVITIES:
Proceeds from sale of:
    Education loans                                                           53,203              127,226
    Real estate held for development                                         688,706                    0
    Real estate owned                                                        332,786               12,920
    Property and equipment                                                   149,281              213,656
Principal collected and proceeds from maturities of investment
         securities held to maturity                                     103,407,336           94,078,801
Proceeds from maturities of investment securities available for sale      65,468,657           20,811,995
Principal collected on mortgage-backed securities held to maturity       104,979,136           49,711,717
Principal collected on loans, net                                         52,645,034           44,425,599
Loans originated or acquired                                             (71,889,087)         (67,830,736)
Purchase of investment securities and mortgage-backed securities
         held to maturity                                               (244,796,070)        (101,362,139)
Purchase of investment securities and mortgage-backed securities
         available for sale                                              (86,629,780)         (63,239,425)
Redemption (Purchase) of Federal Home Loan Bank stock                        252,100           (2,025,600)
Purchase of office property and equipment                                 (3,309,486)            (966,676)
Net cash received from deposit purchase, net                              16,539,246                    0
                                                                    -----------------    -----------------
    Net cash (used) provided by investing activities                     (62,108,938)         (26,042,662)
                                                                    -----------------    -----------------
FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts                      40,236,760           42,968,282
Net decrease in time deposits                                             (4,126,312)         (25,572,769)
Net (decrease) increase  in FHLB advances                                    (41,056)           9,961,790
Proceeds from securities sold under agreements to repurchase                       0           30,000,000
Net proceeds from issuance of trust capital securities                             0           24,243,079
Increase in advances from borrowers for taxes and insurance                  368,327              202,312
Purchase of treasury stock                                                    (3,224)          (2,813,136)
Dividends paid on common stock                                              (387,828)            (402,980)
Net proceeds from issuance of common stock                                   205,000                1,195
                                                                    -----------------    -----------------
    Net cash provided by financing activities                             36,251,667           78,587,773
                                                                    -----------------    -----------------
(DECREASE) INCREASE  IN CASH AND CASH EQUIVALENTS                        (18,322,784)          58,076,245
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                            88,410,346           63,359,124
                                                                    -----------------    -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                            $     70,087,562     $    121,435,369
                                                                    =================    =================
Supplemental Disclosures:
    Cash paid for:
       Interest on deposits, advances, and other borrowings         $     10,290,285     $     12,797,129
       Income taxes                                                        2,255,500            2,879,982
    Non-cash investing and financing activities:
       Dividends declared and not paid at quarter end                        194,524              193,914
       Non-monetary transfers from loans to real estate
         owned through foreclosure                                           209,575                    0
</TABLE>

See notes to consolidated financial statements.

                                       3

<PAGE>


FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------------------------
                                                                       Accumulated                                   Total
                               Common 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, 2001   6,717,705    $794,888     $8,278,423      $ 147,496   $ 51,055,818  $(8,073,444)   $ 52,203,181
Net Income                                                                               4,389,860                    4,389,860
Other comprehensive income
  Unrealized gain on securities
      available for sale,
      net of taxes of $303,726                                              540,446                                     540,446
                                                                                                                   -------------
Total comprehensive income                                                                                            4,930,306
                                                                                                                   -------------

Dividends declared ($.06)                                                                 (395,363)                    (395,363)
Exercise of stock options             925          93          1,102                                                      1,195
Purchase of common stock         (254,819)                                                           (2,813,136)     (2,813,136)

--------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 2002       6,463,811    $794,981     $8,279,525      $ 687,942   $ 55,050,315 $(10,886,580)   $ 53,926,183
--------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2002   6,463,811    $794,981     $8,279,525     $1,216,053   $ 58,233,840 $(10,886,580)   $ 57,637,819
Net Income                                                                               3,139,895                    3,139,895
Other comprehensive income
  Unrealized loss on securities
      available for sale, net
      of taxes of $353,419 and
      reclassification
      adjustment of $222,743                                               (531,454)                                   (531,454)
                                                                                                                   -------------
Total comprehensive income                                                                                            2,608,441
                                                                                                                   -------------
Dividends declared ($.06)                                                                 (388,438)                    (388,438)
Exercise of options                20,500       2,050        202,950                                                    205,000
Purchase of common stock             (171)                                                               (3,224)         (3,224)

--------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 2003       6,484,140    $797,031     $8,482,475      $ 684,599   $ 60,985,297 $(10,889,804)   $ 60,059,598
--------------------------------------------------------------------------------------------------------------------------------

</TABLE>

See notes to consolidated financial statements.


                                       4

<PAGE>


FMS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
MONTHS ENDED JUNE 30, 2003 (UNAUDITED).

1-GENERAL
In the opinion of management,  the accompanying unaudited consolidated financial
statements of FMS Financial  Corporation contain all adjustments,  consisting of
normal recurring  accruals,  necessary for a fair  presentation of its financial
condition, results of operations, cash flows and changes in stockholders' equity
for the periods and dates indicated. The results of operations for the three and
six months ended June 30, 2003 are not  necessarily  indicative of the operating
results for the full fiscal year or any other interim period.

The accompanying  unaudited consolidated financial statements have been prepared
in accordance with the instructions for Form 10-Q, and therefore, do not include
all  information  and  notes  necessary  for a fair  presentation  of  financial
condition, results of operations and statements of cash flows in conformity with
generally  accepted  accounting  principles.  These statements should be read in
conjunction  with the  consolidated  statements  and  related  notes  which  are
incorporated  by reference to the  Corporation's  annual report on Form 10-K for
the year ended December 31, 2002. The consolidated  financial statements include
the Corporation's principle subsidiary, Farmers & Mechanics Bank ("the Bank").

The  Corporation  maintains an incentive stock option plan. As permitted by SFAS
No. 148 "Accounting for Stock-Based  Compensation-Transition and Disclosure" the
Corporation  will continue to use the intrinsic  value method of accounting  for
stock options. No options have been granted during the six months ended June 30,
2003.

2-DEPOSITS
On March 28, 2003, the Bank purchased the deposits of the Florence branch of Sun
National Bank totaling $17.9 million.

3-LONG-TERM DEBT
Long-Term Debt at June 30, 2003 and December 31, 2002 consisted of $25.0 million
of Trust  Capital  Securities.  The  interest  rate resets every three months to
LIBOR plus 360 basis  points and will not exceed  11.00%  through the first five
years from its  issuance.  The proceeds were used for the paydown in August 2002
of the $10.0 million subordinated debentures, expansion of the Bank's operations
and general corporate purposes.

4-REGULATORY CAPITAL REQUIREMENTS
The Bank is considered  "well  capitalized" by OTS regulations at June 30, 2003.
The  Bank's  regulatory  tangible  and tier 1 (core)  capital  ratios  are $72.1
million or 6.11% of total bank assets and $76.1 million or 16.84% for risk-based
capital.


                                       5

<PAGE>


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

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


                                       6

<PAGE>

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003.
FMS Financial Corporation ("the Corporation") may from time to time make written
or oral  "forward-looking  statements,"  including  statements  contained in the
Corporation's  filings with the  Securities and Exchange  Commission  (including
this quarterly report on Form 10-Q and the exhibits thereto),  in its reports to
stockholders and in other  communications by the Corporation,  which are made in
good faith by the  Corporation  pursuant to the "safe harbor"  provisions of the
Private Securities Litigation Reform Act of 1995.

These  forward-looking  statements  involve  risk  and  uncertainties,  such  as
statements of the Corporation's plans, objectives,  expectations,  estimates and
intentions,  that are subject to change based on various important factors (some
of which are beyond the Corporation's  control).  The following  factors,  among
others, could cause the Corporation's financial performance to differ materially
from the plans, objectives,  expectations, estimates and intentions expressed in
such  forward-looking  statements:  the strength of the United States economy in
general  and the  strength  of the  local  economies  in which  the  Corporation
conducts operations;  the effects of, and changes in, trade, monetary and fiscal
policies and laws, including interest rate policies of the board of governors of
the federal  reserve  system,  inflation,  interest  rate,  market and  monetary
fluctuations;  the timely  development  of and  acceptance  of new  products and
services of the Corporation and the perceived  overall val! ue of these products
and services by users,  including the features,  pricing and quality compared to
competitors'  products and  services;  the  willingness  of users to  substitute
competitors' products and services for the Corporation's  products and services;
the success of the  Corporation in gaining  regulatory  approval of its products
and services,  when required;  the impact of changes in financial  services laws
and  regulations  (including  laws  concerning  taxes,  banking,  securities and
insurance);  technological changes;  acquisitions;  changes in consumer spending
and saving  habits;  and the success of the  Corporation  at managing  the risks
involved in the foregoing.

The  Corporation  cautions that the foregoing  list of important  factors is not
exclusive.  The  Corporation  does not  undertake to update any  forward-looking
statement,  whether written or oral, that may be made from time to time by or on
behalf of the Corporation.


                                       7
<PAGE>

FINANCIAL CONDITION

Total Assets - at June 30, 2003 were $1.2 billion as compared  with total assets
at December 31, 2002 of $1.1 billion.

Short Term Funds -  decreased  $14.3  million to $32.6  million at June 30, 2003
from $46.9 million at December 31, 2002. The decrease is the result of purchases
of investment securities.

Investment  Securities  Held To  Maturity -  increased  $52.9  million to $217.1
million at June 30, 2003 from $164.2  million at December 31, 2002 primarily due
to purchases of $142.7 million in collateralized  mortgage  obligations (CMO's),
$10.0 million in U.S. Agency Notes,  $3.2 million in Municipal Bonds,  partially
offset by principal  paydowns of $86.6 million in CMO's and the maturity of $3.2
million  in  Municipal  Bonds and calls of $13.6  million in U.S.  Agency  Notes
during the  period.  Investment  securities  held to  maturity  at June 30, 2003
consisted of $7.4 million in adjustable  rate  securities  and $209.7 million in
fixed rate  securities.  A comparison of cost and  approximate  market values of
investment securities held to maturity as of June 30, 2003 and December 31, 2002
follows:

<TABLE>
<CAPTION>

                                                June 30, 2003                                    December 31, 2002
                      ------------------------------------------------------------------  ---------------------------------
                                             Gross          Gross          Estimated                          Estimated
                           Amortized      Unrealized      Unrealized         Market          Amortized          Market
                             Cost            Gains          Losses           Value              Cost            Value
                      ------------------------------------------------------------------  ---------------------------------
<S>                 <C>               <C>           <C>              <C>                <C>               <C>
U. S. Agency Notes    $      22,205,778 $     385,897 $             0  $     22,591,675   $    25,914,918   $   26,547,362
CMO's                       180,476,925     1,304,122        (277,046)      181,504,001       123,809,139      124,545,227
Municipal bonds              14,436,729        13,958               0        14,450,687        14,503,069       14,509,921
                      ------------------------------------------------------------------  ---------------------------------
Total                 $     217,119,432 $   1,703,977 $      (277,046) $    218,546,363   $   164,227,126   $  165,602,510
                      ==================================================================  =================================
</TABLE>


Investment  Securities  Available  For Sale - increased  $19.8 million to $138.4
million at June 30, 2003 from $118.6  million at December 31, 2002. The increase
is the  result of  purchases  of $24.7  million  of  mortgage-backed  securities
(MBS's), $56.0 million of CMO's and $5.0 million of U.S. Agency Notes, partially
offset by principal  paydowns of $44.7 million of CMO's and MBS's, $15.0 million
of calls of U.S. Agency Notes, sales of $5.5 million and $885 thousand in market
adjustments  at June 30,  2003.  The Bank  sold $4.8  million  of MBS's and $728
thousand of CMO's in June 2003, which resulted in $223 thousand gain. Investment
securities  available  for sale  consisted  of  $128.4  million  in  fixed  rate
securities and $10.0 million in adjustable  rate  securities at June 30, 2003. A
comparison  of cost and  approximate  market  values  of  investment  securities
available for sale as of June 30, 2003 and December 31, 2002 follows:

<TABLE>
<CAPTION>

                                                June 30, 2003                                      December 31, 2002
                      ------------------------------------------------------------------  ---------------------------------
                                             Gross          Gross          Estimated                          Estimated
                           Amortized      Unrealized      Unrealized         Market          Amortized          Market
                             Cost            Gains          Losses           Value              Cost            Value
                      ------------------------------------------------------------------  ---------------------------------
<S>                  <C>               <C>           <C>            <C>                  <C>             <C>
U. S. Agency Notes    $      14,997,462 $     112,238 $           0  $     15,109,700     $  24,993,110   $   25,358,000
CMO's                        55,252,945       105,319      (144,968)       55,213,296        21,978,385       22,107,521
MBS's                        67,000,388     1,052,013             0        68,052,401        69,631,991       71,147,440
                      ----------------------------------------------------------------    -------------------------------
Total                 $     137,250,795 $   1,269,570 $    (144,968) $    138,375,397     $ 116,603,486   $  118,612,961
                      ================================================================    ===============================

</TABLE>


                                       8


<PAGE>

Loans,  Net - increased  $18.8  million to $380.5  million at June 30, 2003 from
$361.7  million at December 31, 2002.  This increase was primarily the result of
$71.9  million of loans  originated,  partially  offset by  approximately  $52.6
million of  principal  collected  on loans  during the six months ended June 30,
2003.  The following  table shows loans  receivable  by major  categories at the
dates indicated.


                                     June 30,           December 31,
                                        2003                2002

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

Mortgage Loans                  $    275,283,416     $   272,777,144
Construction Loans                       882,032             305,607
Commercial Construction                2,671,528           1,157,268
Consumer Loans                         3,136,608           3,521,889
Commercial Real Estate                90,307,055          76,354,155
Commercial Business                   13,411,296          12,621,048

                                ------------------------------------
Subtotal                             385,691,935         366,737,111
                                ------------------------------------
Less:
     Deferred loan fees                  762,479             745,236
     Allowance for
        loan losses                    4,433,520           4,317,475

                                ------------------------------------
Total loans, net                $    380,495,936     $   361,674,400
                                ====================================



At June 30, 2003, the recorded investment in loans for which impairment has been
recognized  in  accordance  with SFAS Nos.  114 and 118 totaled  $2.0 million of
which  $985  thousand  related  to loans  that were  individually  measured  for
impairment  with a valuation  allowance of $414  thousand  and $968  thousand of
loans that were collectively  measured for impairment with a valuation allowance
of $27 thousand.  The Bank had $4.4 million in total reserves for loan losses at
June 30, 2003, representing  approximately 227% of non-accrual loans and 1.1% of
total  loans.  For the six months  ended June 30,  2003,  the  average  recorded
investment in impaired loans was approximately $1.9 million. The Bank recognized
$35 thousand of interest  income on impaired loans for the six months ended June
30, 2003, all of which was recognized on the cash basis.

As of June 30, 2003 the Bank had outstanding  loan commitments of $30.4 million,
of which  $13.8  million  represented  variable  rate  loans and  $16.6  million
represented fixed rate loans. The Bank intends to fund these commitments through
scheduled  amortization  of loans  and  mortgage-backed  securities,  additional
borrowings,  and if necessary,  the sale of investment  securities available for
sale.


                                       9


<PAGE>

Non-Performing  Assets - The following  table sets forth  information  regarding
non-accrual  loans,  troubled debt  restructured and real estate owned assets by
the Bank.

<TABLE>
<CAPTION>

                                                        June 30,           December 31,
                                                          2003                 2002
                                                       -----------         ------------

<S>                                                 <C>                  <C>
Loans accounted for on a non-accrual basis:
     One-to-four family mortgage                       $   699,451          $   960,558
     Commercial real estate                              1,253,151            1,785,864
     Consumer and other                                        568               11,789
                                                       -----------          -----------
         Total non-accrual loans                       $ 1,953,170          $ 2,758,211
                                                       -----------          -----------

     Troubled debt restructuring                       $ 1,026,886          $   986,581
     Real estate owned, net                                201,421              291,200
     Other non-performing assets                                 0               87,926
                                                       -----------          -----------
     Total non-performing assets, net                  $ 3,181,477          $ 4,123,918
                                                       ===========          ===========

     Total non-accrual loans to net loans                     0.51%                0.76%
                                                       ===========          ===========
     Total non-accrual loans to total assets                  0.17%                0.24%
                                                       ===========          ===========
     Total non-performing assets to total assets              0.27%                0.37%
                                                       ===========          ===========
</TABLE>


Mortgage-backed  Securities Held To Maturity - decreased $20.0 million to $322.1
million at June 30, 2003 from $342.1  million at December 31, 2002. The decrease
is the result of principal  paydowns of $104.9 million,  partially offset by the
purchases  of $85.0  million  of FNMA,  FHLMC and GNMA  fixed  rate  securities.
Mortgage-backed securities at June 30, 2003 consisted of $289.1 million in fixed
rate  securities  and $33.0 million in  adjustable  rate  securities.  Mortgage-
backed  securities  held to maturity at June 30, 2003 and  December 31, 2002 are
summarized below:

<TABLE>
<CAPTION>

                                  June 30, 2003                               December 31, 2002
           -----------------------------------------------------------  -----------------------------
                               Gross        Gross
              Amortized      Unrealized   Unrealized      Estimated       Amortized      Estimated
                 Cost          Gains        Losses      Market Value         Cost       Market Value
           -----------------------------------------------------------  -----------------------------

<S>       <C>             <C>          <C>         <C>                <C>           <C>
GNMA       $   22,639,172  $  1,092,006 $      (182)  $    23,730,996   $  33,862,839 $   35,556,313

FNMA          207,342,889     5,414,846        (564)      212,757,171     233,608,680    239,975,322

FHLMC      $   92,143,457     1,161,690     (85,101)       93,220,046      74,651,159     76,090,093

           -----------------------------------------------------------  -----------------------------
Total      $  322,125,518  $  7,668,542 $   (85,847)  $   329,708,213   $ 342,122,678 $  351,621,728
           ===========================================================  =============================
</TABLE>

                                       10
<PAGE>


Deposits  -  increased  $52.7  million to $853.0  million at June 30,  2003 from
$800.3  million at December 31, 2002. On March 28, 2003,  the Bank purchased the
deposits of the Florence  branch of Sun National  Bank totaling  $17.9  million.
Non-interest bearing checking accounts increased $24.4 million, savings accounts
increased  $21.1  million,  money  market  accounts  increased  $6.6 million and
certificates  of deposits  increased  $3.6 million for the six months ended June
30, 2003. Interest credited to depositors accounts for the six months ended June
30, 2003  amounted  to $4.9  million.  The  following  table sets forth  certain
information concerning deposits at the dates indicated.


<TABLE>
<CAPTION>
                                             June 30, 2003                          December 31, 2002
                               ---------------------------------------------------------------------------------
                                                   Percent   Weighted                      Percent   Weighted
                                                   of Total   Average                      of Total   Average
                                      Amount       Deposits    Rate            Amount      Deposits    Rate
                               ---------------------------------------------------------------------------------
<S>                             <C>                 <C>        <C>          <C>             <C>        <C>
Non-interest checking              $159,414,510     18.69%     0.00%        $134,969,939    16.85%     0.00%
Checking accounts                   152,650,178     17.90%     0.73%         155,730,226    19.46%     1.18%
Savings accounts                    182,579,318     21.40%     1.00%         161,458,450    20.18%     1.34%
Money market accounts               131,346,217     15.40%     1.10%         124,795,059    15.59%     1.86%
Certificates                        226,999,693     26.61%     2.85%         223,386,548    27.92%     3.58%
                               ---------------------------------------------------------------------------------
   Total Deposits                  $852,989,916    100.00%     1.31%        $800,340,222   100.00%     1.86%
                               =================================================================================
</TABLE>

Borrowings - at June 30, 2003 amounted to $236.2 million.  Borrowings  consisted
of $225.0  million in securities  sold under the agreement to repurchase  with a
weighted  average  interest rate of 4.08% and $11.2 million in Federal Home Loan
Bank Advances with a weighted  average  interest rate of 1.77%.  At December 31,
2002 borrowings  consisted of $225.0 million in securities sold under agreements
to repurchase with a weighted average rate of 4.08% and $11.2 million in Federal
Home Loan Bank Advances with a weighted average interest rate of 1.78%.

Long-Term Debt - at  June 30,  2003 and  December  31, 2002  consisted  of $25.0
million of Trust Capital Securities. The interest rate resets every three months
to LIBOR plus 360 basis points and will not exceed 11.00% through the first five
years from its issuance.

RESULTS OF OPERATIONS

General
The earnings of the Corporation  depend primarily upon the level of net interest
income,  which is the difference between interest earned on its interest-earning
assets such as loans and investments,  and the interest paid on interest-bearing
liabilities,   such  as  deposits  including   non-interest  checking  accounts,
long-term  debts  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,  such as: salaries,  employee benefits,
deposit insurance premiums, depreciation,  occupancy and equipm! ent expense and
purchased services expense.

                                       11
<PAGE>

The Corporation  recorded net income for the three months ended June 30, 2003 of
$1.3 million, or $.20 diluted earnings per share as compared to $2.3 million, or
$.36  diluted  earnings  per  share  for the  comparable  period  in  2002.  The
Corporation  recorded  net income for the six months ended June 30, 2003 of $3.1
million, or $.48 diluted earnings per share as compared to $4.4 million, or $.66
diluted earnings per share for the comparable period in 2002.

Interest Rate Spread

The Bank's  interest  income is affected by the  difference  or  "interest  rate
spread" between yields received by the Bank on its  interest-earning  assets and
the  interest  rates  paid  by  the  Bank  on its  interest-bearing  liabilities
including non-interest checking accounts. Net interest income is affected by (i)
the spread between the yield earned on interest-earning  assets and the interest
rates paid on interest-bearing  savings deposits including non-interest checking
accounts and borrowings (liabilities) and (ii) the relative amounts of interest-
earning assets versus  interest-bearing  liabilities.  The Bank's  interest rate
spread  varies over time because  money fund  accounts and other  flexible  rate
accounts  have  become  significant  sources of savings  deposits.  Income  from
investment  securities and  mortgage-backed  securities  depends upon the amount
invested during the period and the yields earned on such  securities.  The yield
on loans receivable changes  principally as a result of e! xisting mortgage loan
repayments,  adjustable rate loan adjustments,  sales and the interest rates and
volume of new  mortgage  loans.  The  average  yields  and rates are  derived by
dividing income or expense by the average balance of interest-earning  assets or
interest-bearing liabilities, respectively, for the periods presented.

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

                                       12

<PAGE>
<TABLE>
<CAPTION>
                                                                   Three Months Ended June 30,
                                   ---------------------------------------------------------------------------------------------
                                                       2003                                               2002
                                   ---------------------------------------------   ---------------------------------------------
                                        Average                       Average            Average                         Average
                                        Balance       Interest       Yield/Rate          Balance         Interest      Yield/Rate
                                   --------------  -------------    ------------   ----------------  --------------   -----------
                                                                      (Dollars in Thousands)
<S>                           <C>                <C>                  <C>        <C>               <C>               <C>
Interest-earning assets:
     Loans receivable           $        381,737   $      6,059           6.35%    $       364,113   $       6,386        7.02%
     Interest-bearing deposits            43,540            131           1.20%             62,268             292        1.88%
     Mortgage-backed securities          367,474          3,770           4.10%            304,899           4,536        5.95%
     Investment securities               279,957          2,477           3.54%            239,214           3,625        6.06%
                                -----------------  -------------    ------------   ----------------  --------------   ----------
Total interest-earning assets          1,072,708         12,437           4.64%            970,494          14,839        6.12%
                                -----------------  -------------    ------------   ----------------  --------------   ----------
Interest-bearing liabilities:
     Checking deposits                   306,865            238           0.31%            255,844             421        0.66%
     Savings deposits                    180,478            300           0.66%            144,563             519        1.44%
     Money market deposits                91,798            236           1.03%            104,935             537        2.05%
     Time deposits                       228,478          1,462           2.56%            233,071           2,094        3.59%
     Borrowings                          236,191          2,365           4.01%            203,677           2,256        4.43%
     Long-Term Debt                       25,774            328           5.09%             35,774             648        7.25%
                                -----------------  -------------    ------------   ----------------  --------------   ----------
Total interest-bearing
     liabilities                $      1,069,584          4,929           1.84%    $       977,864           6,475        2.65%
                                =================  -------------    ------------   ================  --------------   ----------
Net interest income                                $      7,508                                      $       8,364
                                                   =============                                     ==============
Interest rate spread                                                      2.80%                                           3.47%
                                                                    ============                                      ==========
Net yield on average interest-earning assets                              2.80%                                           3.45%
                                                                    ============                                      ==========
Ratio of average interest-
     earning assets to average interest
     -bearing liabilities                                               100.29%                                          99.25%
                                                                    ============                                      ==========
</TABLE>

<TABLE>
<CAPTION>

                                                                    Six Months Ended June 30,
                                   ---------------------------------------------------------------------------------------------
                                                      2003                                               2002
                                   ---------------------------------------------   ---------------------------------------------
                                      Average                         Average          Average                         Average
                                      Balance        Interest       Yield/Rate         Balance         Interest       Yield/Rate
                                   --------------  -------------    ------------   ----------------  --------------   ----------
                                                                      (Dollars in Thousands)
<S>                           <C>                <C>                <C>          <C>               <C>                  <C>
Interest-earning assets:
     Loans receivable           $        378,892   $     12,284           6.48%    $       358,999   $      12,742        7.10%
     Interest-bearing deposits            44,833            287           1.28%             44,789             512        2.29%
     Mortgage-backed securities          379,631          8,306           4.38%            294,259           8,834        6.00%
     Investment securities               253,532          4,992           3.94%            230,985           7,063        6.11%
                                -----------------  -------------    ------------   ----------------  --------------   ----------
Total interest-earning assets          1,056,888         25,869           4.90%            929,032          29,151        6.28%
                                -----------------  -------------    ------------   ----------------  --------------   ----------
Interest-bearing liabilities:
     Checking deposits                   297,788            519           0.35%            253,378             851        0.67%
     Savings deposits                    173,815            719           0.83%            139,605             996        1.43%
     Money market deposits               128,593            580           0.90%             99,275           1,008        2.03%
     Time deposits                       225,228          3,020           2.68%            239,409           4,641        3.88%
     Borrowings                          236,207          4,707           3.99%            191,545           4,352        4.54%
     Long-Term Debt                       25,774            659           5.11%             23,580             934        7.92%
                                -----------------  -------------    ------------   ----------------  --------------   ----------
Total interest-bearing
        liabilities             $      1,087,405         10,204           1.88%    $       946,792          12,782        2.70%
                                =================  -------------    ------------   ================  --------------   ----------
Net interest income                                $     15,665                                      $      16,369
                                                   =============                                     ==============
Interest rate spread                                                      3.02%                                           3.58%
                                                                    ============                                      ==========
Net yield on average interest-earning assets                              2.96%                                           3.52%
                                                                    ============                                      ==========
Ratio of average interest-
     earning assets to average interest
     -bearing liabilities                                                97.19%                                          98.12%
                                                                    ============                                      ==========
</TABLE>
                                       13
<PAGE>
Rate/Volume Analysis

The following table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Bank's interest income and interest expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
rate, (ii) changes in volume and (iii) total changes in rate and volume (the
combined effect of changes in both volume and rate, not separately identified,
has been allocated to rate). A higher level of non-performing loans affects the
changes in both volume and rate.

<TABLE>
<CAPTION>
                                                Three Months Ended                          Six Months Ended
                                                     June 30,                                   June 30,
                                                   2003 vs 2002                              2003 vs 2002
                                                Increase (Decrease)                      Increase (Decrease)
                                                  Due to Change in:                        Due to Change in:
                                      ---------------------------------------    ---------------------------------------
                                          Rate         Volume         Total         Rate          Volume        Total
                                                   (In Thousands)                             (In Thousands)
                                      ----------------------------------------   ---------------------------------------
<S>                                 <C>           <C>           <C>            <C>           <C>           <C>
Interest income:
Loans receivable                       $    (636)    $      309    $     (327)    $ (1,164)     $      706    $    (458)
Interest-bearing deposits                    (73)           (88)         (161)        (226)              1         (225)
Mortgage-backed securities                (1,697)           931          (766)      (3,091)          2,563         (528)
Investment securities                     (1,765)           617        (1,148)      (2,760)            689       (2,071)
                                      ----------------------------------------   ---------------------------------------
Total change interest income              (4,171)         1,769        (2,402)      (7,241)          3,959       (3,282)
                                      ----------------------------------------   ---------------------------------------
Interest expense:
Checking deposits                           (267)            84          (183)        (481)            149         (332)
Savings deposits                            (348)           129          (219)        (521)            244         (277)
Money market accounts                       (234)           (67)         (301)        (726)            298         (428)
Time deposits                               (591)           (41)         (632)      (1,346)           (275)      (1,621)
Borrowings                                  (251)           360           109         (660)          1,015          355
Long-Term Debt                              (139)          (181)         (320)        (362)             87         (275)
                                      ----------------------------------------   ---------------------------------------

Total change - interest expense           (1,830)           284        (1,546)      (4,096)          1,518       (2,578)
                                      ----------------------------------------   ---------------------------------------

Net change in net interest income      $  (2,341)    $    1,485    $     (856)    $ (3,145)     $    2,441    $    (704)
                                      ========================================   =======================================
</TABLE>

                                       14

<PAGE>

Net  Interest  Income - for the three and six months ended June 30, 2003 totaled
$7.5 million and $15.7 million,  respectively. Net interest income for the three
months ended June 30, 2003 decreased  $856 thousand  compared to the same period
in 2002 due primarily to decreases in interest  income on investment  securities
of $1.1  million,  mortgage-backed  securities of $766  thousand,  loans of $327
thousand and an increase in interest  expense on  borrowings  of $109  thousand,
partially  offset by decreases  in interest  expense on deposits of $1.3 million
and long term debt of $320 thousand.

The  decrease  in  interest  income was  primarily  the result of a decrease  in
interest income on investment securities of $1.1 million to $2.5 million for the
three  months ended June 30, 2003 from $3.5 million for the same period in 2002.
The average  yield of the  investment  portfolio  decreased  252 basis points to
3.54% for the  quarter  ended June 30,  2003 from  6.06% for the same  period in
2002,  which resulted in an interest income decrease of $1.8 million due to rate
changes. The average balance of investment securities increased $40.8 million to
$280.0  million for the three months ended June 30, 2003 from $239.2 million for
the same period in 2002,  which resulted in a volume increase in interest income
of $617 thousand.

Interest income on  mortgage-backed  securities  decreased $766 thousand to $3.8
million for the three  months ended June 30, 2003 from $4.5 million for the same
period in 2002.  The  average  yield of the MBS  portfolio  decreased  185 basis
points to 4.10% for the  quarter  ended  June 30,  2003 from  5.95% for the same
period in 2002,  which resulted in an interest  income  decrease of $1.7 million
due to rate changes.  The average  balance of MBS's  increased  $62.6 million to
$367.5  million for the three months ended June 30, 2003 from $304.9 million for
the same period in 2002, which resulted in an interest income volume increase of
$931 thousand.

Interest  income on loans  decreased $327 thousand to $6.1 million for the three
months  ended June 30, 2003 from $6.4  million for the same period in 2002.  The
average  rate on loans  decreased  67 basis points to 6.35% for the three months
ended June 30, 2003 from 7.02% for the same period in 2002,  which resulted in a
decrease in interest  income of $636 thousand due to rate  changes.  The average
balance of the loan portfolio  increased $17.6 million to $381.7 million for the
three  months  ended June 30,  2003 from  $364.1  million for the same period in
2002, which resulted in a volume increase in interest income of $309 thousand.

Interest  expense on time deposits  decreased  $632 thousand to $1.5 million for
the three  months  ended June 30, 2003 from $2.1  million for the same period in
2002. The average rate on time deposits  decreased 103 basis points to 2.56% for
the quarter  ended June 30,  2003 from 3.59% for the same period in 2002,  which
resulted in a decrease in interest expense of $591 thousand. The average balance
of time deposits  decreased  $4.6 million to $228.5 million for the three months
ended June 30,  2003 from  $233.1  million  for the same  period in 2002,  which
resulted in a volume decrease in interest expense of $41 thousand.

Interest expense on checking  deposits  decreased $183 thousand to $238 thousand
for the three months ended June 30, 2003 from $421  thousand for the same period
in 2002.  The average  rate on checking  deposits  decreased  35 basis points to
0.31% for the  quarter  ended June 30,  2003 from  0.66% for the same  period in
2002,  which resulted in a decrease in interest  expense of $267  thousand.  The
average balance of checking  deposits  increased $51.1 million to $306.9 million
for the three  months  ended June 30,  2003 from  $255.8 for the same  period in
2002, which resulted in a volume increase in interest expense of $84 thousand.

                                       15
<PAGE>
Interest  expense on money  market  deposits  decreased  $301  thousand  to $236
thousand  for the three  months  ended June 30, 2003 from $537  thousand for the
same period in 2002.  The average rate on money market  deposits  decreased  102
basis  points to 1.03% for the  quarter  ended June 30,  2003 from 2.05% for the
same period in 2002,  which  resulted in a decrease in interest  expense of $234
thousand.  The average balance of money market deposits  decreased $13.1 million
to $91.8  million for the three months  ended June 30, 2003 from $104.9  million
for the same period in 2002,  which  resulted  in a volume  decrease in interest
expense of $67 thousand.

Interest  expense on borrowings  increased $109 thousand to $2.4 million for the
three  months ended June 30, 2003 from $2.3 million for the same period in 2002.
The average  balance of borrowings  increased $32.5 million to $236.2 million at
June 30, 2003 from $203.7 million for the same period in 2002, which resulted in
a volume increase in interest expense of $360 thousand. The average rate paid on
borrowings  decreased  42 basis  points to 4.01% for the quarter  ended June 30,
2003 from 4.43% for the same  period in 2002  which  resulted  in a decrease  in
interest expense of $251 thousand due to rate changes.

Interest  expense on long term debt decreased $320 thousand to $328 thousand for
the three months  ended June 30, 2003 from $648  thousand for the same period in
2002. The $25.0 million in Trust capital securities were issued in March 2002 at
an initial floating rate of 5.59%.

Net  interest  income for the six  months  ended June 30,  2003  decreased  $704
thousand primarily due to decreases in interest income on investment  securities
of $2.1  million,  mortgage-backed  securities of $528  thousand,  loans of $458
thousand and an increase in interest  expense on  borrowings  of $355  thousand,
partially  offset by a decrease in interest  expense on deposits of $2.7 million
and a  decrease  in  interest  expense on  long-term  debt of $275  thousand  as
compared to the same six month period in 2002.

The decrease in interest  income on investment  securities was due to a decrease
in the average  yield on the  investment  portfolio of 217 basis points to 3.94%
for the six months  ended June 30,  2003 from 6.11% for the same period in 2002,
which  resulted  in a decrease in  interest  income of $2.8  million due to rate
changes.  The average balance of the portfolio increased $22.5 million to $253.5
million for the six months ended June 30, 2003 from $231.0  million for the same
period in 2002,  which resulted in a volume  increase in interest income of $689
thousand.  The increase in the average balance was primarily due to purchases of
$449.5 million,  partially  offset by investment  calls and maturities of $117.5
million and principal paydowns of $224.8 million.

The  decrease  in interest  income on  mortgage-backed  securities  was due to a
decrease in the average  yield on the portfolio of 162 basis points to 4.38% for
the six months ended June 30, 2003 from 6.00% for the same period in 2002, which
resulted in a decrease in interest  income of $3.1 million due to rate  changes.
The average  balance of the portfolio  increased $85.3 million to $379.6 million
for the six months  ended June 30, 2003 from  $294.3  million for the six months
ended June 30,  2002,  which  resulted  in a $2.6  million  increase in interest
income.  The increase in the average  balance was due to  purchases  during this
period of $224.5  million,  partially  offset by  $180.7  million  of  principal
paydowns from June 2002 through June 2003.

The  decrease in  interest  income on loans was due to a decrease in the average
yield on loans of 62 basis  points to 6.48% for the six  months  ended  June 30,
2003 from 7.10% for the same  period in 2002,  which  resulted  in a decrease in
interest  income of $1.2  million due to rate  changes.  The average  balance of
loans  increased  $19.9 million to $378.9  million for the six months ended June
30,  2003 from  $359.0  million for the six months  ended June 30,  2002,  which
resulted in a $706 thousand volume increase in interest income.  The increase in
the average balance is primarily due to an increase in loan originations.

                                       16
<PAGE>
Interest expense on time deposits decreased $1.6 million to $3.0 million for the
six months  ended June 30,  2003 from $4.6  million for the same period in 2002.
The average rate on time  deposits  decreased  120 basis points to 2.68% for the
quarter  ended  June 30,  2003  from  3.88% for the same  period in 2002,  which
resulted in a decrease in interest expense of $1.3 million.  The average balance
of time deposits  decreased  $14.2 million to $225.2  million for the six months
ended June 30,  2003 from  $239.4  million  for the same  period in 2002,  which
resulted in a volume decrease in interest expense of $275 thousand.

Interest expense on checking  deposits  decreased $332 thousand to $519 thousand
for the six months ended June 30, 2003 from $851 thousand for the same period in
2002. The average rate on checking  deposits  decreased 32 basis points to 0.35%
for the  quarter  ended June 30,  2003 from  0.67% for the same  period in 2002,
which resulted in a decrease in interest  expense of $481 thousand.  The average
balance of checking  deposits  increased $44.4 million to $297.8 million for the
six months  ended June 30, 2003 from  $253.4 for the same period in 2002,  which
resulted in a volume increase in interest expense of $149 thousand.

Interest  expense on money  market  deposits  decreased  $428  thousand  to $580
thousand  for the six months  ended June 30, 2003 from $1.0 million for the same
period in 2002.  The average rate on money market  deposits  decreased 113 basis
points to 0.90% for the  quarter  ended  June 30,  2003 from  2.03% for the same
period in 2002,  which  resulted  in a  decrease  in  interest  expense  of $726
thousand.  The average balance of money market deposits  increased $29.3 million
to $128.6  million for the six months ended June 30, 2003 from $99.3 million for
the same period in 2002, which resulted in a volume increase in interest expense
of $298 thousand.

The increase in interest expense on borrowings was the result of an increase in
the average balance of $44.7 million to $236.2 million for the six months ended
June 30, 2003 from $191.5 million for the same period in 2002, which resulted in
a volume increase in interest expense of $1.0 million. The average yield on
borrowings decreased 55 basis points to 3.99% for the six months ended June 30,
2003 from 4.54% for the same period in 2002, which resulted in a decrease in
interest expense of $660 thousand due to rate changes.

Interest  expense on long-term debt decreased $275 thousand to $659 thousand for
the six months  ended June 30,  2003 from $934  thousand  for the same period in
2002. The $25.0 million in Trust capital securities were issued in March 2002 at
an initial floating rate of 5.59%.

                                       17
<PAGE>

Critical Accounting  Estimate-Provision  For Loan Losses - A critical accounting
estimate is the  provision  for loan losses which  increased $34 thousand to $60
thousand  for the six months  ended June 30, 2003 from $26 thousand for the same
period in 2002. At June 30, 2003 the allowance for loan losses  amounted to $4.4
million compared to $4.3 million at December 31, 2002. The  determination of the
allowance  level for loan losses is based on  management's  analysis of the risk
characteristics of various types of loans, levels of classified loans,  previous
loan  loss  experience,  the  estimated  fair  market  value  of the  underlying
collateral and current  economic  conditions.  Additionally,  the mix within the
Bank's  portfolio  continues  to change as the Bank  offers a wider  variety  of
products.  Within the loan  portfolio,  a change is also occurring as a shift is
made from  lower  yielding  loans  (i.e.,  one-to-four  family  loans) to higher
yielding  loans  (i.e.,   commercial   real  estate   mortgages,   c!  ommercial
construction,  consumer and  commercial  business  loans).  These types of loans
contain a higher degree of risk. 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 changing  conditions  dictate.  Although  the Bank
maintains  its  allowance  for loan  losses at a level that it  considers  to be
adequate to provide for the inherent risk of loss in its loan  portfolio,  there
can be no assurance that future losses will not exceed estimated amounts or that
additional provisions for loan losses will not be required in future periods due
to the higher  degree of credit risk which  might  result from the change in the
mix of the loan portfolio or changes in economic conditions.  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 con! centration 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 - for the three and six month  periods ended June 30, 2003 was $1.5
million and $3.1  million,  as compared to $1.2 million and $2.2 million for the
same periods in 2002.  The increase was primarily due to a $601 thousand gain on
the sale of real estate held for development.  The final parcel of land, located
in Burlington Township,  was sold in January 2003. The Bank sold $5.5 million of
investment  securities  available  for sale during the six months ended June 30,
2003, which resulted in a $223 thousand gain. Additionally,  retail banking fees
increased as a result of the five  branches  opened since the second  quarter of
2002.

Operating  Expenses - for the three and six month  periods  ended June 30,  2003
totaled  $6.8  million  and $13.4  million,  respectively,  as  compared to $5.9
million and $11.7 million for the same periods in 2003.

Salaries and Employee  Benefits - for the three and six month periods ended June
30, 2003 were $3.9 million and $7.7 million,  respectively,  as compared to $3.4
million and $6.9 million for the same period in 2002. The increase was primarily
due to additional staff in the five new branches opened since the second quarter
of 2002.  Average  full time  equivalent  employees at June 30, 2003 were 533 as
compared to 477 at June 30, 2002.

Occupancy and  Equipment- for the three and six month period ended June 30, 2003
were $1.4 million and $2.7  million,  respectively,  as compared to $1.1 million
and $2.2 million for the same period in 2002. This increase is due to additional
depreciation  and occupancy  expense on the new branch  offices opened since the
second quarter of 2002, as well as other facility  improvements and new computer
equipment additions during this period.

Purchased  Services - for the three and six month  periods  ended June 30,  2003
totaled $724  thousand and $1.4  million,  as compared to $649 thousand and $1.3
million for the same periods in 2002.  ATM charges  increased  $117 thousand for
the  first  six  months  of 2003  compared  to the same  period  in 2002.  Check
processing  costs increased $586 thousand for the six months ended June 30, 2003
compared to the same period in 2002 due to higher transaction volume.

                                       18
<PAGE>

ITEM 3:    DISCLOSURE ABOUT MARKET RISK

There were no  significant  changes for the six months  ended June 30, 2003 from
the  information  presented in the annual report on Form 10-K for the year ended
December 31, 2002.

ITEM 4:    CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.  Based on their evaluation
of the  Company's  disclosure  controls  and  procedures  (as  defined  in  Rule
13a-15(e) under the Securities  Exchange Act of 1934 (the "Exchange Act")),  the
Company's  principal  executive  officer and  principal  financial  officer have
concluded that as of the end of the period  covered by this Quarterly  Report of
Form 10-Q such  disclosure  controls and procedures are effective to ensure that
information  required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded,  processed,  summarized and reported
within the time periods  specified in Securities and Exchange  Commission  rules
and forms.

(b) Changes in internal  control over  financial  reporting.  During the quarter
under  report,  there was no  change  in the  Company's  internal  control  over
financial  reporting that has materially  affected,  or is reasonably  likely to
materially affect, the Company's internal control over financial reporting.

                                       19
<PAGE>

PART II.                   OTHER INFORMATION



         Item 1:    Legal Proceedings
         ------     -----------------

                    None


         Item 2:    Changes in Securities
         ------     ---------------------

                    None


         Item 3:    Defaults Upon Senior Securities
         ------     -------------------------------

                    None


         Item 4:    Submission of Matters to Vote of Security of Holders
         ------     ----------------------------------------------------

                    None

         Item 5:    Other Information
         ------     -----------------

                    On March 28, 2003,  the Bank  purchased  the deposits of the
                    Florence branch of Sun National Bank totaling $17.9 million.

         Item 6:    Exhibits and Reports on Form 8-K
         ------     --------------------------------

                    (a)  31  certifications  pursuant  to  Rule  13a-14  of  the
                    Securities Exchange Act of 1934, as amended.

                    (b) 32 certification  pursuant to 18 U.S.C.  Section 1350 as
                    adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                    2002.

                    (c) The Company filed a Form 8-K on July 31, 2003  reporting
                    the  Company's  earnings for the three months ended June 30,
                    2003.

                                       20

<PAGE>

                                S I G N A T U R E S


     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

FMS FINANCIAL CORPORATION




Date: August 12,  2003                     /s/ Craig W. Yates
                                           -------------------------------------
                                           Craig W. Yates
                                           President and Chief Executive Officer
                                           (Principal Executive Officer)



Date: August 12, 2003                       /s/ Channing L. Smith
                                            ------------------------------------
                                            Channing L. Smith
                                            Vice President and
                                            Chief Financial Officer
                                            (Principal Financial Officer)