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, 1999

                                       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    .
                                                             ---      ---

         As of July 30,  1999 there were  7,208,978  shares  outstanding  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, 1999
                                  -------------

                                TABLE OF CONTENTS
                                -----------------
<TABLE>
<CAPTION>
                                                                                               Page
                                                                                               ----
PART I - Financial Information
------------------------------
<S>     <C>    <C>                                                                              <C>
         Item 1 - Financial Statements

               Consolidated Statements of Financial Condition as of
                       June 30, 1999 (unaudited) and December 31, 1998...........................1

               Consolidated  Statements of Income  (unaudited) for the three and
                       six  month  periods  ended  June  30,  1999  and June 30,
                       1998......................................................................2

               Consolidated  Statements  of Cash Flows  (unaudited)  for the six
                       month   periods   ended  June  30,   1999  and  June  30,
                       1998......................................................................3

               Consolidated Statements of Changes in Stockholders' Equity
                       for the six months ended June 30, 1999 (unaudited)........................4

         Item 2 - Management's Discussion and Analysis of
                     Financial Condition and Results of Operations............................5-16

         Item 3 - Disclosure about Market Risk..................................................16

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

         Item 1 - Legal Proceedings.............................................................17

         Item 2 - Changes in Securities.........................................................17

         Item 3 - Defaults Upon Senior Securities...............................................17

         Item 4 - Submission of Matters to a Vote of Security Holders...........................17

         Item 5 - Other Information.............................................................17
</TABLE>



<PAGE>


FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                           June 30, 1999           December 31, 1998
------------------------------------------------------------------------------------------------------------------------------------
                                                                                          (Unaudited)
ASSETS
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>                        <C>
     Cash and amounts due from depository institutions                                $          15,766,161      $       18,142,316
     Interest-bearing deposits                                                                      104,228                       0
     Short term funds                                                                            29,256,017              11,754,075
                                                                                    ------------------------     -------------------
        Total cash and cash equivalents                                                          45,126,406              29,896,391
     Investment securities held to maturity                                                     181,313,322             129,417,826
     Investment securities available for sale                                                    65,661,289             109,833,133
     Loans, net                                                                                 296,665,788             298,603,223
     Mortgage-backed securities held to maturity                                                 92,041,772              90,592,647
     Accrued interest receivable:
        Loans                                                                                     1,767,397               1,839,217
        Mortgage-backed securities                                                                  630,813                 633,667
        Investments                                                                               2,685,827               2,371,410
     Federal Home Loan Bank stock                                                                 4,861,410               4,861,410
     Real estate held for development, net                                                          644,487                 644,487
     Real estate owned,  net                                                                        167,541                 167,541
     Office properties and equipment, net                                                        19,627,245              19,292,247
     Deferred income taxes                                                                        1,995,005               2,015,772
     Excess cost over fair value of net assets acquired                                              76,460                 164,969
     Prepaid expenses and other assets                                                            1,738,067               1,156,573
     Subordinated debentures issue cost,  net                                                       292,439                 321,113
                                                                                    ------------------------     -------------------
TOTAL ASSETS                                                                          $         715,295,268      $      691,811,626
                                                                                    ========================     ===================

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------------------------------------
Liabilities:
     Deposits                                                                         $         558,406,794      $      536,309,623
     Securities sold under agreements to repurchase                                              80,000,000              80,000,000
     Advances from the Federal Home Loan Bank                                                    16,337,031              16,368,321
     10% Subordinated debentures, due 2004                                                       10,000,000              10,000,000
     Advances by borrowers for taxes and insurance                                                2,249,943               2,259,435
     Accrued interest payable                                                                     1,365,051               1,304,742
     Dividends payable                                                                              216,270                 216,953
     Other liabilities                                                                            2,119,093               1,883,887
                                                                                    ------------------------     -------------------
Total liabilities                                                                               670,694,182             648,342,961
                                                                                    ------------------------     -------------------

Commitments and contingencies
Stockholders' Equity:
     Preferred stock - $.10 par value 5,000,000 shares  authorized;  none issued
     Common stock - $.10 par value 10,000,000 shares authorized; shares
        issued 7,897,691 and 7,897,191 and shares outstanding 7,208,978 and
        7,231,767 as of June 30, 1999 and December 31, 1998, respectively                           789,769                 789,719
     Paid-in capital in excess of par                                                             8,217,415               8,216,820
     Unrealized loss on securities available for sale - net of deferred income taxes               (605,318)                (21,793)
     Retained earnings                                                                           39,805,994              37,860,291
     Less:  Treasury stock (688,713 and 665,424 shares, at cost,  as of
        June 30, 1999 and December 31, 1998, respectively)                                       (3,606,774)             (3,376,372)
                                                                                    ------------------------     -------------------
Total stockholders' equity                                                                       44,601,086              43,468,665
                                                                                    ------------------------     -------------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                            $         715,295,268      $      691,811,626
                                                                                    ========================     ===================
</TABLE>
See notes to consolidated financial statements.

                                       1

<PAGE>


MS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                                             Three Months ended               Six Months ended
                                                                   June 30,                       June 30,
                                                     --------------------------------------------------------------------
                                                         1999             1998              1999              1998
--------------------------------------------------------------------------------------  ---------------------------------
INTEREST  INCOME:                                             (Unaudited)                        (Unaudited)
<S>                                               <C>               <C>              <C>               <C>
Interest income on:
    Loans                                          $    5,914,577    $   6,041,597    $   11,574,220    $   12,131,301
    Mortgage-backed securities                          1,563,110        1,662,632         3,059,153         3,318,195
    Investments                                         4,221,455        4,100,734         8,219,334         7,779,548
                                                     -------------   --------------     -------------   ---------------
Total interest income                                  11,699,142       11,804,963        22,852,707        23,229,044
                                                     -------------   --------------     -------------   ---------------
INTEREST EXPENSE:
Interest expense on:
    Deposits                                            4,410,701        4,645,628         8,744,607         9,079,866
    Subordinated debentures                               264,337          264,337           528,674           528,674
    Borrowings                                          1,371,151        1,454,958         2,730,773         2,892,014
                                                     -------------   --------------     -------------   ---------------
Total interest expense                                  6,046,189        6,364,923        12,004,054        12,500,554
                                                     -------------   --------------     -------------   ---------------
NET INTEREST INCOME                                     5,652,953        5,440,040        10,848,653        10,728,490
PROVISION FOR LOAN LOSSES                                  60,000           60,000           120,000           120,000
                                                     -------------   --------------     -------------   ---------------
NET INTEREST INCOME AFTER PROVISION
    FOR LOAN LOSSES                                     5,592,953        5,380,040        10,728,653        10,608,490
                                                     -------------   --------------     -------------   ---------------
OTHER INCOME (EXPENSE):
    Loan service charges and other fees                    28,130           34,362            61,275            71,270
    Gain on sale of loans                                   1,220            1,210             1,333             1,355
    Gain on sale of fixed assets                          244,731                0           244,731                 0
    Real estate owned operations, net                      (5,874)         (20,582)          (12,839)          (47,615)
    Service charges on accounts                           644,096          577,576         1,216,604         1,171,441
    Other income (expense)                                 41,115          (56,195)           93,517           (54,831)
                                                     -------------   --------------     -------------   ---------------
Total other income (expense)                              953,418          536,371         1,604,621         1,141,620
                                                     -------------   --------------     -------------   ---------------
OPERATING EXPENSES:
    Salaries and employee benefits                      2,494,568        2,246,500         4,914,489         4,566,297
    Occupancy and equipment                               859,277          712,465         1,743,403         1,432,472
    Purchased services                                    365,773          313,874           732,769           615,456
    Federal deposit insurance premiums                     76,744           73,706           152,132           146,507
    Professional fees                                     200,139           74,583           278,750           177,555
    Advertising                                            55,008           60,046           103,456           100,783
    Other                                                 315,365          338,711           679,780           673,317
                                                     -------------   --------------     -------------   ---------------
Total operating expenses                                4,366,874        3,819,885         8,604,779         7,712,387
                                                     -------------   --------------     -------------   ---------------
INCOME BEFORE INCOME TAXES                              2,179,497        2,096,526         3,728,495         4,037,723

INCOME TAXES:
  Current                                                 530,862          878,599         1,000,859         1,625,186
  Deferred                                                256,342         (117,599)          348,713          (163,870)
                                                     -------------   --------------     -------------   ---------------
Total income taxes                                        787,204          761,000         1,349,572         1,461,316

NET INCOME                                         $    1,392,293    $   1,335,526    $    2,378,923    $    2,576,407
                                                     =============   ==============     =============   ===============
 BASIC EARNINGS PER COMMON SHARE                   $         0.19    $        0.19 *  $         0.33    $         0.36 *
                                                     =============   ==============     =============   ===============
 DILUTED EARNINGS PER COMMON SHARE                 $         0.19    $        0.18 *  $         0.33    $         0.35 *
                                                     =============   ==============     =============   ===============
 Weighted average common shares outstanding             7,210,673        7,194,162         7,220,658         7,185,492

 Potential dilutive effect of the exercise of
   stock options                                           82,098          125,607            82,029           122,673
                                                     -------------   --------------     -------------   ---------------
 Adjusted weighted average common shares outstanding    7,292,771        7,319,769         7,302,687         7,308,165
                                                     =============   ==============     =============     =============
</TABLE>

*Basic and diluted  earnings per common share,  weighted  average  common shares
outstanding  and the potential  dilutive effect of the exercise of stock options
were restated to reflect a three-for-one stock split paid in July 1998.

See notes to consolidated financial statements.

                                       2
<PAGE>


FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                                                                      Six Months ended
                                                                                                          June 30
                                                                                       -------------------------------------------
                                                                                                1999                   1998
----------------------------------------------------------------------------------------------------------------------------------
                                                                                                        (Unaudited)
<S>                                                                                   <C>                     <C>
OPERATING ACTIVITIES:
Net income                                                                             $         2,378,923     $        2,576,407
Adjustments  to  reconcile   net  income  to  net  cash  provided  by  operating
   activities:
Provision for loan losses                                                                          120,000                120,000
Depreciation and amortization                                                                    1,024,751                865,184
Provision for real estate owned                                                                          0                 35,659
Realized (gains) and losses on:
     Sale of loans and loans held for sale                                                          (1,333)                (1,355)
     Disposal and sale of fixed assets                                                            (244,731)                     0
Increase in accrued interest receivable                                                           (239,743)              (418,289)
Decrease in prepaid expenses and other assets                                                     (581,494)               (29,350)
Decrease in accrued interest payable                                                                60,309                240,057
Increase in other liabilities                                                                      270,469               (257,654)
Deferred income taxes                                                                              348,713               (167,946)
                                                                                       --------------------    -------------------
     Net cash provided by operating activities                                                   3,135,864              2,962,713
                                                                                       --------------------    -------------------
INVESTING ACTIVITIES:
Proceeds from sale of:
     Education loans                                                                                 1,446                308,467
     Real estate owned                                                                             348,731                228,283
Principal collected and proceeds from maturities of investment securities held to maturity      33,205,167            179,090,586
Proceeds from maturities of investment securities available for sale                            47,233,392             40,623,255
Principal collected on mortgage-backed securities held to maturity                              14,651,267             15,168,480
Principal collected on longer-term loans, net                                                   33,398,033             29,646,907
Longer-term loans originated or acquired, net                                                  (31,533,616)           (28,822,325)
Purchase of investment securities and mortgage-backed securities held to maturity             (101,378,437)          (188,881,218)
Purchase of investment securities and mortgage-backed securities available for sale             (4,056,040)           (91,270,008)
Purchase of Federal Home Loan Bank stock                                                                 0             (1,230,610)
Purchase of office property and equipment                                                       (1,169,204)            (1,403,780)
                                                                                       --------------------    -------------------
     Net cash used in investing activities                                                      (9,299,261)           (46,541,963)
                                                                                       --------------------    -------------------
FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts                                            17,318,262             27,100,044
Net increase in time deposits                                                                    4,778,909              2,704,703
Net decrease in FHLB advances                                                                      (31,290)            (6,800,000)
Proceeds from securities sold under agreements to repurchase                                             0             20,000,000
Increase (decrease) in advances from borrowers for taxes and insurance                              (9,492)               251,071
Purchase of treasury stock                                                                        (230,402)              (186,051)
Dividends paid on common stock                                                                    (433,220)              (334,777)
Net proceeds from issuance of common stock                                                             645                 70,972
                                                                                       --------------------    -------------------
     Net cash provided by financing activities                                                  21,393,412             42,805,962
                                                                                       --------------------    -------------------
INCREASE IN CASH AND CASH EQUIVALENTS                                                           15,230,015               (773,288)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                  29,896,391             12,631,622
                                                                                       --------------------    -------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                               $        45,126,406     $       11,858,334
                                                                                       ====================    ===================
Supplemental Disclosures:
     Cash paid for:
        Interest on deposits, advances, and other borrowings                           $        11,943,745     $       12,260,497
        Income taxes                                                                             1,435,238              1,824,557
     Non-cash investing and financing activities:
        Dividends declared and not paid at quarter end                                             216,270                167,623
        Non-monetary transfers from loans to real estate acquired
        through foreclosure                                                                              0                316,949
</TABLE>

See notes to consolidated financial statements.


                                       3

<PAGE>



FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                             Accumulated
                                                                               other                                       Total
                                      Common shares  Common      Paid-in    comprehensive     Retained      Treasury   Stockholders'
                                       outstanding   stock       capital       income         earnings       stock        Equity
------------------------------------------------------------------------------------------------------------------------------------

<S>                                     <C>        <C>        <C>           <C>           <C>           <C>           <C>
Balances at December 31, 1998            7,231,767  $ 789,719  $ 8,216,820   $ (21,793)    $ 37,860,291  $ (3,376,372) $ 43,468,665
Net Income                                                                                    2,378,923                   2,378,923
Other comprehensive income
  Unrealized loss on securities
    available for sale                                                        (583,525)                                    (583,525)
                                                                                                                      --------------
Total comprehensive income                                                                                                1,795,398
                                                                                                                      --------------

Dividends declared                                                                             (433,220)                   (433,220)
Exercise of stock options                 500              50          595                                                      645
Purchase of common stock              (23,289)                                                               (230,402)     (230,402)
------------------------------------------------------------------------------------------------------------------------------------

Balances at June 30, 1999         $ 7,208,978       $ 789,769  $ 8,217,415  $ (605,318)    $ 39,805,994  $ (3,606,774) $ 44,601,086
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See notes to consolidated financial statements.


                                       4

<PAGE>

ITEM 2: MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998.

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  risks  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 value 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.

GENERAL
FMS  Financial  Corporation  is the parent  company of Farmers & Mechanics  Bank
("the Bank"), its only subsidiary.

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 FMS's financial
condition, results of operations, cash flows and changes in stockholders' equity
for the  periods and dates  indicated.  The  results of  operations  for the six
months  ended June 30,  1999 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

                                       5
<PAGE>



consolidated statements and related notes which are incorporated by reference to
the  Corporation's  annual  report on Form 10K for the year ended  December  31,
1998.

YEAR 2000

The Year 2000 issue concerns the potential impact of historic  computer software
code that only utilizes two digits to represent the calendar year (e.g. "99" for
"1999"). Software so developed could produce inaccurate or unpredictable results
upon the change to January 1, 2000,  when current and future  dates  represent a
lower two digit year number than dates in the prior century.  The Bank,  similar
to most financial institutions, is significantly subject to the potential impact
of the "Year 2000 issue" due to the nature of financial  information.  Potential
impact to the Bank may arise from software,  hardware, and equipment both within
the Bank's direct  control and outside of the Bank's  ownership,  yet with which
the Bank  electronically  or operationally  interfaces (e.g.  vendors  providing
credit bureau information).  Financial  institution  regulators have intensively
focused upon Year 2000 exposures,  issuing guidance  concerning an adequate Year
2000 program and the  responsibilities  of senior management and directors.  The
Bank has a Year 2000  compliance  program in place to ensure  that all  software
applications  will be Year 2000 certified  compliant.  The program includes Year
2000 committees  consisting of directors and executive officers of the Bank. The
purposes of the  committees  are to oversee and manage the Year 2000  compliance
program providing regular reports to the Board of Directors  detailing  progress
with the Year 2000 issue.  The Bank has  contacted all  significant  vendors and
suppliers  regarding their Year 2000  readiness.  These third party vendors have
delivered  written  assurance  that they are or expect to be Year 2000 compliant
prior to the end of 1999. At the current time management estimates its Year 2000
readiness  is at 95%.  The  following  table  provides a summary of the  current
status of the five phases involved in our Year 2000 readiness plan.


          ----------------------------------------------------------------------
              Project Phase       Percent        Projected Date      Comments
                                  Complete       of Completion
          ----------------------------------------------------------------------

          Awareness                 100%            Complete
          Assessment                100%            Complete
          Renovation                90%          September 1999    On Schedule
          Validation                100%            Complete
          Implementation            90%          September 1999    On Schedule
          Overall Completion        95%          September 1999    On Schedule


 At this  time  management  currently  estimates  Year 2000  compliance  cost at
between $50,000 and $150,000 of which $48,000 was expensed during the six months
ended June 30, 1999.  The Bank does not expect that these costs will be material
to its financial  condition or results of  operations.  Non-compliance  with the
Year 2000 issue could have an adverse  affect on the operations of the business.
Successful  and  timely  completion  of  Year  2000  compliance  is  based  upon
management's  best estimate  derived from various  assumptions  of future events
which are inherently uncertain, including the progress and results of the Bank's
testing  plans,  and all vendors,  suppliers and customers  readiness.  The Bank
continues in the process of updating contingency plans for each critical system,
in the event one of those  systems fail,  despite our best  efforts.  The bank's
contingency  plans to provide  resources during the weekend of December 31, 1999
and for the period of time  afterward.  It is anticipated  that the Bank, and or
its vendors will be able to overcome any unforeseen problems associated with the
millennium change.

                                       6
<PAGE>

FINANCIAL CONDITION -

Total  Assets - at June 30,  1999 were  $715.3  million as  compared  with total
assets at December 31, 1998 of $691.8 million.

Investment  Securities  Held to  Maturity -  increased  $51.9  million to $181.3
million at June 30, 1999 from $129.4 million at December 31, 1998 as a result of
purchases of $61.5  million of U.S.  Government  Agencies  and $23.1  million of
fixed rate CMOs,  partially  offset by $16.9 million in calls of U.S  Government
Agencies,  paydowns of $14.7  million in the CMO  portfolio  and $1.6 million in
matured municipal bonds. Investment securities held to maturity at June 30, 1999
consisted  entirely  of  fixed  rate  securities.   A  comparison  of  cost  and
approximate  market values of investment  securities held to maturity as of June
30, 1999 and December 31, 1998 follows:
<TABLE>
<CAPTION>
                                                    June 30, 1999                                        December 31, 1998
                         ---------------------------------------------------------------------  ------------------------------------
                                                 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. Gov't Agencies     $     122,857,420  $        2,558 $    (3,344,449) $     119,515,529   $      78,291,686  $      78,241,778
CMOs                            55,795,919               0      (1,186,648)        54,609,271          47,302,338         47,297,209
Municipal bonds                  2,659,983               0               0          2,659,983           3,823,802          3,826,635
                           -------------------------------------------------------------------  ------------------------------------
Total                    $     181,313,322  $        2,558 $    (4,531,097) $     176,784,783   $     129,417,826  $     129,365,622
                         =====================================================================  ====================================
</TABLE>

Investment  Securities  Available  for Sale - decreased  $44.1  million to $65.7
million at June 30, 1999 from $109.8 million at December 31, 1998 as a result of
the net purchase of $3.0  million of GNMAs and $1.0 million of US Agency  notes,
offset by $38.0 million of principal paydowns on CMOs and $9.2 million called US
Agency notes during the six months  ended June 30, 1999.  Investment  securities
available for sale consisted of $4.3 million in adjustable  rate  securities and
$61.4  million in fixed rate  securities  at June 30, 1999. A comparison of cost
and approximate market values of investment  securities available for sale as of
June 30, 1999 and December 31, 1998 follows:

<TABLE>
<CAPTION>
                                                 June 30, 1999                                       December 31, 1998
                        ----------------------------------------------------------------  ---------------------------------
                                              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. Gov't Agencies    $     10,290,373 $           0 $     (236,401)$      10,053,972   $    18,492,035 $     18,500,616
CMOs                          53,262,717        26,403       (757,352)       52,531,768        91,377,435       91,332,517
GNMAs                          3,056,012        19,536              0         3,075,548                 0                0

                        ================================================================  =================================
Total                   $     66,609,102 $      45,939 $     (993,753)$      65,661,289   $   109,869,470 $    109,833,133
                        ================================================================  =================================
</TABLE>

                                       7

<PAGE>


Loans  Receivable  and Loans Held for Sale -  decreased  $1.9  million to $296.7
million at June 30, 1999 from $298.6 million at December 31, 1998. This decrease
was the result of approximately  $33.4 million of principal  collected on loans,
partially  offset by $31.1  million  of loans  originated  during the six months
ended  June 30,  1999.  The  following  table  sets  forth  certain  information
concerning the loan portfolio by major categories at the dates indicated.

Table 1                                      June 30,          December 31,
                                               1999                1998
                                      ----------------------------------------

Mortgage loans ( 1-4  dwelling)        $      240,269,642  $      246,071,511
Construction loans                                979,971           1,410,456
Commercial construction                         1,692,315           2,609,315
Consumer loans                                  3,154,318           3,237,176
Commercial real estate                         50,216,776          45,937,998
Commercial business                             4,827,699           4,120,967
                                      ----------------------------------------
Subtotal                                      301,140,721         303,387,423
                                      ----------------------------------------
Less:
    Deferred loan fees                            994,645           1,441,926
    Allowance for possible
     loan losses                                3,480,288           3,342,274
                                      ----------------------------------------
Net Loans Receivable                   $      296,665,788  $      298,603,223
                                      ========================================

At June 30, 1999, the recorded investment in loans for which impairment has been
recognized  in  accordance  with SFAS Nos.  114 and 118 totaled  $3.9 million of
which  $1.8  million  related  to loans  that  were  individually  measured  for
impairment with a valuation allowance of $388 thousand and $2.1 million of loans
that were  collectively  measured for impairment  with a valuation  allowance of
$106  thousand.  For the six months  ended June 30, 1999,  the average  recorded
investment in impaired loans was approximately $3.1 million. The Bank recognized
$13 thousand of interest income on impaired  loans,  all of which was recognized
on the cash basis. The Bank had $3.5 million in total reserves for possible loan
losses at June 30, 1999, representing approximately 89% of non-accrual loans and
1.2% of total loans.

As of June 30, 1999 the Bank had outstanding  loan commitments of $31.3 million,
of which  $19.4  million  represented  variable  rate  loans and  $11.9  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.


                                       8

<PAGE>



Mortgage-Backed  Securities  Held to Maturity - increased  $1.4 million to $92.0
million at June 30, 1999 from $90.6  million at December 31, 1998.  The increase
is the  result of the  purchase  of $16.0  million  in GNMA and FNMA  fixed rate
securities  offset by $14.7  million in  principal  repayments.  Mortgage-backed
securities at June 30, 1999 consisted of $71.9 million in fixed rate  securities
and $20.1 million in adjustable rate securities. Mortgage-backed securities held
to maturity at June 30, 1999 and December 31, 1998 are summarized below:

<TABLE>
<CAPTION>
                                  June 30, 1999                              December 31, 1998
            ---------------------------------------------------------  ----------------------------
                                Gross         Gross
                Amortized     Unrealized    Unrealized    Estimated       Amortized     Estimated
                  Cost          Gains        Losses      Market Value       Cost       Market Value
            ---------------------------------------------------------  ----------------------------

<S>         <C>            <C>           <C>          <C>             <C>            <C>
GNMA         $  33,263,444  $    355,873  $   662,607  $  32,956,710   $  31,716,739  $ 32,312,889

FNMA            42,249,756       216,342      551,125     41,914,973      37,531,455    38,079,458

FHLMC           16,528,572       336,513       42,150     16,822,935      21,255,729    21,779,645

Private                  0             0            0              0          88,724        90,301

            ---------------------------------------------------------  ----------------------------
Total        $  92,041,772  $    908,728  $ 1,255,882  $  91,694,618   $  90,592,647  $ 92,262,293
            =========================================================  ============================
</TABLE>


                                       9

<PAGE>



Asset  Classifications  -  are  monitored  by  management  on a  regular  basis.
Classified  assets  generally  consist of assets which have possible credit risk
and/or  have a  sufficient  degree  of risk or  potential  weakness  to  warrant
management's  close attention.  Total classified  assets increased $395 thousand
during  the six  months  ended  June 30,  1999  resulting  from an  increase  in
classified  one-to-four family loans of $324 thousand and doubtful loans of $242
thousand, partially offset by a decrease in classified commercial real estate of
$98 thousand and consumer loans of $64 thousand.  The following table sets forth
information with respect to the Bank's classified assets at the dates indicated:

                                               June 30,          December 31,
                                                1999                 1998
                                         --------------------   ---------------

Classified Assets:
Substandard Loans:
  One-to-four family                              $2,269,123        $1,945,059
  Commercial real estate                           3,658,094         3,756,181
  Consumer and other                                 218,775           282,740
                                         --------------------   ---------------
     Total loans                                   6,145,992         5,983,980

Real estate held for development, net                644,487           644,487
Real Estate Owned, net                               167,541           167,541
                                         --------------------   ---------------
   Total Substandard                               6,958,020         6,796,008
                                         --------------------   ---------------

   Doubtful loans                                    242,152                 0
                                         --------------------   ---------------
Total Doubtful                                       242,152                 0
                                         --------------------   ---------------

   Loss - Commercial Real Estate                           0             9,121
                                         --------------------   ---------------
Total Loss                                                 0             9,121
                                         --------------------   ---------------

TOTAL CLASSIFIED ASSETS                           $7,200,172        $6,805,129
                                         ====================   ===============

Deposits  -  increased  $22.1  million to $558.4  million at June 30,  1999 from
$536.3  million  at  December  31,  1998 as a result of an  increase  in savings
accounts  of $11.3  million  and  $6.5  million  in  interest  bearing  checking
accounts. Non-interest checking accounts increased $3.4 million and certificates
of deposit  increased $4.8 million  offsetting a $3.8 million  decrease in money
market accounts.  Non-interest  checking accounts increased due to the promotion
of "Free Business" checking accounts.  Interest credited to depositors  accounts
for the six months ended June 30, 1999 amounted to $8.7  million.  The following
table set forth certain information concerning deposits at the dates indicated:
<TABLE>
<CAPTION>
                                  Amount       Deposits      Rate          Amount        Deposits       Rate
                             -------------------------------------------------------------------------------------
<S>                             <C>           <C>         <C>             <C>           <C>           <C>
Non-interest checking             $72,702,988   13.02%      0.00%           $69,336,887   12.93%        0.00%
Checking accounts                  81,760,049   14.64%      2.07%            75,280,395   14.04%        1.89%
Savings accounts                  106,843,862   19.13%      2.64%            95,591,907   17.82%        2.83%
Money market accounts              63,910,774   11.45%      2.78%            67,690,222   12.62%        2.64%
Certificates                      233,189,121   41.76%      5.05%           228,410,212   42.59%        5.35%
                             -------------------------------------------------------------------------------------
   Total Deposits                $558,406,794  100.00%      3.25%          $536,309,623  100.00%        3.49%
                             =====================================================================================

</TABLE>

                                       10
<PAGE>

Borrowings - at June 30, 1999 amounted to $106.3  million.  Borrowings  included
$10.0 million of 10% subordinated  debentures,  $80.0 million in securities sold
under the agreement to repurchase with a weighted average interest rate of 5.57%
and $16.3  million in Federal Home Loan Bank  Advances  with a weighted  average
interest  rate of 6.00%.  At December  31, 1998  borrowings  consisted  of $10.0
million of 10% subordinated  debentures,  $80.0 million in securities sold under
agreements  to  repurchase  with a  weighted  average  rate of 5.57%,  and $16.4
million in Federal Home Loan Bank Advances with a weighted average interest rate
of 5.08%.

There are three (3) standards that a savings  institution  must satisfy in order
to meet its capital requirements under the Federal Deposit Insurance Corporation
Improvement Act of 1991 "FDICIA".  The requirements  include a leverage ratio of
tier 1 (core)  capital  to  adjusted  total  assets of 4.0  percent,  a tangible
capital  standard  requirement  of 2.0 percent of total adjusted  assets,  and a
risk-based  capital  standard set at 8.0 percent of risk-weighted  assets.  If a
savings institution is not in compliance with applicable capital standards,  the
Office of Thrift Supervision (OTS) can restrict the institution's  asset growth,
require the submission of a capital plan, and require  compliance with a capital
directive,  which may  include  restrictions  on the  payment of  dividends  and
compensation, and other restrictions determined to be appropriate by the OTS. At
June 30, 1999 the Bank exceeds all three  current  capital  requirements  as the
Bank's core,  tangible,  and risk-based  capital ratios were 7.07%,  7.07%,  and
18.75%, respectively.


RESULTS OF OPERATIONS -

General

The earnings of the Bank depend primarily upon the level of net interest income,
which is the difference between interest earned on its interest-earning  assets,
such as  loans  and  investments,  and  the  interest  paid on  interest-bearing
liabilities,  such as deposits and borrowings. Net interest income is a function
of the interest rate spread (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 the provision for loan losses,  non-interest  income,  such as gains
(losses) on sales of loans and  investments,  service charges and other fees. In
addition  to  interest  expense,  the Bank  incurs  operating  expenses  such as
salaries  and  employee  benefits,  deposit  insurance  premiums,  depreciation,
occupancy and equipment expense and purchased services expense.

The Corporation  recorded net income for the three months ended June 30, 1999 of
$1.4 million, or $.19 diluted earnings per share as compared to $1.3 million, or
$.18 diluted earnings per share for the comparable period in 1998.  Earnings for
the six months ended June 30, 1999 were $2.4 million,  or $.33 diluted  earnings
per share as compared to $2.6  million,  or $.35 diluted  earnings per share for
the comparable period in 1998.



                                       11



<PAGE>


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 existing  mortgage loan
repayments,  adjustable rate loan adjustments,  sales and the interest rates and
volume of new mortgage loans.

The  following  table  sets  forth  the  Bank's  weighted-average  yields on its
interest-earning   assets,   weighted-average   interest   rates   paid  on  its
interest-bearing  liabilities and weighted-average interest rate spreads for the
periods indicated:

<TABLE>
<CAPTION>
                                               Three Months Ended                     Six Months Ended
                                                    June 30,                              June 30,
                                        ----------------------------------    --------------------------------
                                              1999               1998               1999            1998
                                        ----------------------------------    --------------------------------
<S>                                          <C>                <C>                <C>             <C>
Weighted-Average Yields Earned on:
  Loans, net                                  7.84%              7.95%              7.69%           7.97%
  Mortgage-Backed Securities                  6.83               7.08               6.89            7.17
  Investment Securities                       6.11               6.61               6.16            6.63
                                        ----------------------------------    --------------------------------
  Total Interest-Earning Assets               6.99               7.31               6.96            7.35
                                        ----------------------------------    --------------------------------

Weighted-Average Interest Rates Paid on:
  Deposits                                    3.18               3.59               3.21            3.61
  Borrowings                                  5.69               5.70               5.66            5.67
  Subordinated Debentures                    10.56              10.56              10.58           10.58
                                        ----------------------------------    --------------------------------
  Total Interest-Bearing Liabilities          3.65               4.04               3.69            4.06
                                        ----------------------------------    --------------------------------
Weighted-Average Interest Rate Spread
  for the Period                              3.34%              3.27%        $     3.27%           3.29%
                                        ==================================    ================================
</TABLE>


                                       12

<PAGE>



Average Balance of Interest-Earning Assets and Interest-Bearing Liabilities

The following  table sets forth the Bank's average  balance of  interest-earning
assets in  comparison  to its average  balance of  interest-bearing  liabilities
during the periods indicated:
<TABLE>
<CAPTION>
                                               Three Months Ended                     Six Months Ended
                                                    June 30,                              June 30,
                                        ----------------------------------    --------------------------------
                                              1999               1998               1999            1998
                                        ----------------------------------    --------------------------------
                                                 (In Thousands)                       (In Thousands)
<S>                                      <C>                <C>               <C>             <C>
Average Interest-Earning Assets:
  Loans, net                             $    301,611       $     304,082     $      301,039  $       304,287
  Mortgage-Backed Securities                   91,559              94,006             88,853           92,601
  Investment Securities                       276,545             248,031            266,829          234,768
                                        ----------------------------------    --------------------------------
  Total                                       669,715             646,119            656,721          631,656
                                        ----------------------------------    --------------------------------

Average Interest-Bearing Liabilities:
  Deposits                                    555,372             517,939            544,705          503,586
  Borrowings                                   96,340             102,118             96,456          102,021
  Subordinated Debentures                      10,000              10,000             10,000           10,000
                                        ----------------------------------    --------------------------------
  Total                                       661,712             630,057            651,161          615,607
                                        ----------------------------------    --------------------------------
Excess of Interest-Earning Assets
  over Interest-Bearing Liabilities      $      8,003       $      16,062     $        5,560  $        16,049
                                        ==================================    ================================
</TABLE>

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).

<TABLE>
<CAPTION>
                                                                 Three Months Ended                          Six Months Ended
                                                                      June 30,                                  June 30,
                                                               1999 compared to 1998                       1999 compared to 1998
                                                   ----------------------------------------   --------------------------------------
                                                           Increase (Decrease) due to:
                                                       Rate          Volume       Total             Rate        Volume        Total
                                                   ----------------------------------------   --------------------------------------
                                                                 (In Thousands)                           (In Thousands)
<S>                                                <C>               <C>       <C>                <C>    <C>          <C>
          Interest income:
            Loans receivable                        $     (78)    $   (49)      $     (127)    $   (428)  $      (129) $       (557)
            Mortgage-backed securities                    (57)        (43)            (100)        (125)         (134)         (259)
            Investment securities                        (351)        471              120         (623)        1,062           439
                                                   ----------------------------------------   --------------------------------------

             Total change - interest income              (486)        379             (107)      (1,176)          799          (377)
                                                   ----------------------------------------   --------------------------------------
          Interest expense:
            Deposits                                     (571)        336             (235)      (1,076)          741          (335)
            Borrowings                                     (2)        (82)             (84)         (10)         (158)         (168)
            Subordinated Debentures                         0           0                0            0             0             0
                                                   ----------------------------------------   --------------------------------------

             Total change - interest expense             (573)        254             (319)      (1,086)          583          (503)
                                                   ----------------------------------------   --------------------------------------

          Net change in net interest income         $      87     $   125       $      212     $    (90)  $       216  $        126
                                                   ========================================   ======================================
</TABLE>

                                       13

<PAGE>


Net  Interest  Income - for the three and six months ended June 30, 1999 totaled
$5.7 million and $10.8 million,  respectively. Net interest income for the three
months  ended June 30,  1999  increased  $213  thousand  as compared to the same
period in 1998 due  primarily  to an increase in interest  income on  investment
securities of $121 thousand,  and a decrease in interest  expense on deposits of
$235 thousand,  partially offset by decrease in interest income on MBS's of $100
thousand.

The increase in interest income on investment  securities was due to an increase
in the average  balance of the portfolio of $28.5 million to $276.5  million for
the three months ended June 30, 1999 from $248.0  million for the same period in
1998,  which resulted in an increase in interest  income of $471  thousand.  The
average balance increase was due to the net purchase of $4.1 million of CMOs and
$30.4 million of US Agency notes. The average yield on the investment  portfolio
decreased 50 basis points to 6.11% for the three months ended June 30, 1999 from
6.61% for the three months ended June 30, 1998,  which resulted in a decrease in
interest income of $351 thousand due to rate changes.

The $235 thousand  decrease in interest expense on deposits for the three months
ended  June 30,  1999  compared  to the same  period in 1998 was caused by lower
average rates paid on deposits,  principally  lower CD rates coupled with higher
relative  balances  in our  non-interest  "Free  checking"  and "Free  Business"
checking products. Overall deposit rates declines 41 basis points to 3.18% which
decreased interest expense $571 thousand between the three month periods. Higher
overall average deposit balances increased interest expense $336 thousand.

The  decrease in interest  expense on  borrowings  of $84 thousand for the three
months  ended June 30,  1999  compared  to the same  period in 1998 was due to a
decrease in the average  balance of  borrowings of $5.8 million to $96.3 million
at June 30, 1999 from $102.1 million at June 30, 1998.

Net  interest  income for the six  months  ended June 30,  1999  increased  $120
thousand  primarily  due  to  an  increase  in  interest  income  on  investment
securities  of $440  thousand and a decrease in interest  expense on deposits of
$335 thousand partially offset by a decrease in interest income on loans of $557
thousand as compared to the same period in 1998.

The increase in interest income on investment  securities was due to an increase
in the average balance of the portfolio of $32 million to $266.8 million for the
six months ended June 30, 1999 from $234.8  million for the same period in 1998,
which  resulted in an increase in interest  income of $1.1 million.  The average
yield on the investment portfolio decreased 47 basis points to 6.16% for the six
months  ended June 30, 1999 from 6.63% for the six months  ended June 30,  1998,
which  resulted in a decrease in interest  income of $623  thousand  due to rate
changes.

Interest  expense on deposits  decreased  $335 thousand for the six months ended
June 30, 1999 compared to the first six months of 1998.  Average  interest rates
on  deposits  decreased  40 basis  points to 3.21%  resulting  in a decrease  in
interest  expense of $1.1  million.  The average  balance on deposits  increased
$41.1 million  increasing  interest  expense $741 thousand between the first six
months of 1999 and 1998.

The  decrease in interest  expense on  borrowings  of $161  thousand for the six
months  ended June 30,  1999  compared  to the same  period in 1998 was due to a
decrease in the average  balance of  borrowings of $5.5 million to $96.5 million
for the six months  ended June 30, 1999 from  $102.0  million for the six months
ended June 30, 1998,  which  resulted in a decrease in interest  expense of $158
thousand.  The weighted  average rate on borrowings  decreased 1 basis points to
5.66% for the six months ended June 30, 1999 from 5.67% for the six months ended
June 30, 1998, which resulted in a decrease in interest expense of $10 thousand.


                                       14

<PAGE>

Provision  for Loan Losses - for the three months  ended June 30, 1999  remained
constant at $60 thousand  from 1998 to 1999.  The total  provision for potential
loan losses  remained  constant  at $120  thousand  from June 1998 to 1999.  The
determination  of the allowance  level for loan losses is based on  management's
analysis  of the risk  characteristics  of  various  classifications  of  loans,
previous loan loss experience, estimated fair value of the underlying collateral
and current  economic  conditions.  Accordingly,  there can be no assurance that
future provisions for loan losses will not increase or be necessary. 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 - for the three and six months  ended June 30, 1999  totaled  $953
thousand and $1.6 million  respectively  increasing  $417  thousand in the three
month period and $463  thousand in the first six months of 1999 when compared to
the same  periods in 1998.  The May 1999 sale of a two acre parcel of land for a
$245  thousand  gain  along  with the  increased  volume of  service  charges on
accounts  between  1999 and 1998  periods  were the  principal  reasons  for the
increases.

Operating  Expenses - for the three and six month  periods  ended June 30,  1999
amounted to $4.4  million  and $8.6  million,  respectively  as compared to $3.8
million and $7.7 million for the same periods in 1998.

Salaries and Employee  Benefits - for the three and six month periods ended June
30, 1999 were $2.5 million and $4.9 million,  respectively,  as compared to $2.2
million and $4.6 million for the same  periods in 1999.  The increase was due to
additional  staff in the three new branches  opened since the second  quarter of
1998.  Average  full  time  equivalent  employees  at June 30,  1999 were 391 as
compared to 333 at June 30, 1998.

Occupancy  and  Equipment - for the three and six month  periods  ended June 30,
1999 amounted to $859 thousand and $1.7  million,  respectively,  as compared to
$712 thousand and $1.4 million for the same periods in 1998. The increase is the
result of additional  depreciation  and occupation  expenses on the new branches
opened as well as other facility improvements and equipment additions since June
30, 1998.

Purchased  Services - for the three and six month  periods  ended June 30,  1999
amounted to $366 thousand and $733 thousand,  respectively,  as compared to $314
thousand and $615 thousand for the same periods in 1998.  MAC charges  increased
$54 thousand  for the first six months of 1999  compared to the same time period
1998.  Check  processing  costs have  increased  $51 thousand for the six months
ended June 30, 1999 due to higher  transaction  volumes  from an increase in the
number of checking accounts opened.

Federal  Insurance  Premium - for the three and six month periods ended June 30,
1999 amounted to $77 thousand and $152  thousand,  respectively,  as compared to
$74 thousand and $147 thousand for the same periods in 1998. The increase in the
six months  ended June 30, 1999 was due to an increase in deposits  between June
30, 1999 and 1998.

                                       15

<PAGE>


Liquidity and Capital Resources

The Bank's  liquidity is a measure of its ability to fund loans,  withdrawals of
deposits, and other cash outflows in a cost effective manner. The Bank's primary
sources of funds are deposits and scheduled amortization and prepayments of loan
principal.  To a lesser extent, the Bank obtains funds from sales and maturities
of mortgage-backed securities, investment securities, and short-term investments
and  borrowings.  During the past  several  years,  the Bank has used such funds
primarily to meet ongoing  commitments to fund maturing time deposits and saving
withdrawals,  fund  existing and  continuing  loan  commitments  and to maintain
liquidity.  While  loan  payments,   maturing  investments  and  mortgage-backed
securities are a relatively  predictable source of funds, deposit flows and loan
prepayments  are  greatly   influenced  by  general  interest  rates,   economic
conditions and competition. The Bank's liquidity is also influenced by the level
of demand for funding loan originations.

The Bank is required under applicable federal  regulations to maintain specified
levels of "liquid  assets",  which  include  obligations  of the  United  States
government  and federal  agencies and other  approved  investments.  Regulations
currently in effect require the Bank to maintain  liquid assets of not less than
4% of its net  withdrawable  accounts plus short-term  borrowings.  The Bank has
generally  maintained  liquidity  in  excess  of  required  levels.  The  Bank's
regulatory  liquidity  was 50.22% at June 30,  1999 and 31.35% at  December  31,
1998.


ITEM 3:  DISCLOSURE ABOUT MARKET RISK

MARKET RISK
The Bank's financial  performance is impacted by, among other factors,  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, 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.  The  principal  objective of the
ALCO is to maximize income within  acceptable  levels as established by the risk
policy.  The Board of Directors  may direct  management  to adjust its asset and
liability mix to bring interest rate risk within Board approved limits. The Bank
has  developed  strategies  to  manage  its  liquidity,  shorten  the  effective
maturities  of  certain  interest-earning  assets  and  increase  the  effective
maturities  of certain  liabilities,  to reduce the  exposure to  interest  rate
fluctuations.  These strategies  include  focusing its investment  activities on
short and  medium-term  securities,  maintaining  and increasing the transaction
deposit accounts, as these accounts are considered to be relatively resistant to
changes in interest  rates and utilizing FHLB  borrowings and deposit  marketing
programs  to adjust  the term or  repricing  of its  liabilities.  There were no
significant  changes for the six months ended June 30, 1999 from the information
presented  in the  annual  report on Form 10-K for the year ended  December  31,
1998.

                                       16

<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 a Vote of Security of Holders
         -------       ------------------------------------------------------

                       The annual meeting of shareholders of the corporation was
                       held on April  29,1999  and the  following  matters  were
                       voted upon:

                       Proposal I - Election of  directors  with terms to expire
                       in 2002.
                                                      For              Against
                                                      ---              -------
                       Rupert A. Hall Jr.           6,633,075           7,606
                       Edward J. Staats, Jr.        6,625,467          18,214
                       Mary Wells                   6,633,273           7,408
                       Craig W. Yates               6,629,601          11,074

                       Proposal  II  -  Ratification   of  the   appointment  of
                       PricewaterhouseCoopers   LLP,   as   auditors   for   the
                       corporation for the 1999 fiscal year.

                       For:  6,633,599;    Against:  1,750;     Abstain:  5,332.
                             ---------               -----                -----


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

                       None


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

               (a)  (27) Financial Data Schedule (Electronic data filing only)

               (b)  No reports on Form 8-K were filed for the period  covered by
                    this report.


                                       17

<PAGE>

                                S I G N A T U R E





     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 10 , 1999                 /s/ Craig W. Yates
                                          --------------------------------------
                                          Craig W. Yates
                                          President and Chief Executive Officer
                                          (Principal Executive Officer)



Date: August 10, 1999                 /s/ Channing L. Smith
                                          --------------------------------------
                                          Channing L. Smith
                                          Vice President and
                                          Chief Financial Officer
                                          (Principal Financial Officer)