UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                   FORM 10-K/A
                                (Amendment No. 1)


(MARK ONE)
[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES  EXCHANGE
     ACT OF 1934
For the Fiscal Year Ended December 31, 2006

                                     - OR -

[ ]  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________

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 incorporation   I.R.S. Employer 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
                                                    --------------

           Securities registered pursuant to Section 12(b) of the Act:

    Title of each class                Name of each exchange on which registered
    -------------------                -----------------------------------------
Common Stock, $0.10 par value                  Nasdaq Stock Market, LLC

        Securities registered pursuant to Section 12(g) of the Act: None
                                                                    ----

Indicate by check mark if the  registrant is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act.
[  ] YES  [X]   NO

Indicate  by  check  mark if the  registrant  is not  required  to file  reports
pursuant to Section 13 or Section 15(d) of the Act.
[  ] YES    [X]   NO

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  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. [X] YES [ ] NO

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer. See definition of "accelerated
filer and large  accelerated  filer" in Rule 12b-2 of the Exchange  Act.  (Check
one):

Large accelerated filer [ ]   Accelerated filer [ ]    Non-accelerated filer [X]

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Act). [ ] YES [X] NO

     Based on the closing  sales  price of $16.12 per share of the  registrant's
common  stock on June 30, 2006,  as reported on the Nasdaq  Global  Market,  the
aggregate market value of voting stock held by  non-affiliates of the registrant
was  approximately  $57.5  million.  As of March 8, 2007,  there were  6,541,313
shares outstanding of the registrant's common stock.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None.

<PAGE>


                                EXPLANATORY NOTE


     This Amendment No. 1 to FMS Financial  Corporation's  (the "Corporation" or
"FMS Financial") Annual Report on Form 10-K for the year ended December 31, 2006
as originally  filed with the  Securities  and Exchange  Commission on March 14,
2007  (the  "Original  Filing")  is being  filed to amend  Item 7  "Management's
Discussion and Analysis of Financial  Condition and Results of Operations," Item
8. "Financial  Statements"  and  Item 11  "Executive  Compensation."  Item 7 was
amended to add a reconciliation  of regulatory  capital to GAAP capital.  Item 8
was amended to (i)  reclassify  the $1.4 million  adjustment  resulting from the
initial  application  of SFAS No. 158 from  total  comprehensive  income  into a
separate adjustment of accumulated  comprehensive  income, (ii) add a new Note 6
regarding accrued interest receivable, (iii) add a new Note 10 regarding accrued
interest  payable,  (iv) add to Note 13 (previously Note 11) a reconciliation of
regulatory capital to GAAP capital,  (v) add certain  additional  disclosures to
Note 14 (previously Note 12) regarding the  Corporation's  retirement plans, and
(vi) make additional  wording changes and disclosures of an immaterial nature in
response  to  comments  from the staff of the Office of Thrift  Supervision  and
Securities  and  Exchange  Commission.  Item 11 was  amended  to add  additional
disclosure to the  Compensation  Discussion  and Analysis and to add a narrative
paragraph  following the Director  Compensation  table  discussing  director fee
arrangements.

     Except for the matters described above, the updated certifications pursuant
to  Section  302 and  Section  906 of the  Sarbanes-Oxley  Act of 2002  filed as
Exhibits 31 and 32 hereto, and updated exhibit index, this Form 10-K/A continues
to speak as of the date of the  Original  Filing and does not  modify,  amend or
update in any way any other item or disclosure in the Original Filing. This Form
10-K/A sets forth the Original  Filing in its entirety  and, no attempt has been
made in this Form  10-K/A to modify or update the  disclosures  in the  Original
Filing except as described  above. In particular,  this Form 10-K/A continues to
describe  conditions as of the date of the Original Filing,  and the disclosures
contained   herein  have  not  been  updated  to  reflect  events,   results  or
developments  that occurred  after the Original  Filing,  or to modify or update
those   disclosures   affected  by  subsequent   events.   Among  other  things,
forward-looking  statements made in the Original Filing have not been revised to
reflect events, results or developments that occurred or facts that became known
to  the  Corporation   after  the  date  of  the  Original   Filing,   and  such
forward-looking  statements should be read in conjunction with the Corporation's
filings with the SEC subsequent to the filing of the Original Filing.


                                       2
<PAGE>
##
ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS
-------------

GENERAL

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

     Earnings of the Corporation are primarily  dependent on the earnings of the
Bank because the  Corporation  engages in no significant  operations of its own.
Accordingly,  the  earnings  of the  Corporation  are largely  dependent  on the
receipt of earnings from the Bank in the form of dividends.



         The earnings of the Bank depend  primarily on its net interest  income.
Net interest  income is affected by: (i) the volume of  interest-earning  assets
and  interest-bearing  liabilities (see "Rate Volume  Analysis"),  (ii) rates of
interest earned on  interest-earning  assets and rates paid on  interest-bearing
liabilities,  and (iii) the difference  ("interest rate spread") between average
rates of interest  earned on  interest-earning  assets and average rates paid on
interest-bearing liabilities. When interest-earning assets approximate or exceed
interest-bearing  liabilities,  any positive  interest rate spread will generate
net interest income. In recent years, FMS Financial's interest rate spread, like
that  of  most  financial  institutions,  has  narrowed  significantly  due to a
flattening  of the yield curve which has made it  difficult  to obtain  interest
earning assets at rates  significantly  higher than the rates it must pay on its
interest bearing liabilities.  FMS Financial anticipates that this will continue
in 2007 and has tried to offset the impact of this interest rate  environment by
increasing its non-interest income.


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

FINANCIAL CONDITION

     Total assets of the  Corporation  decreased  $43.2 million or 3.5% to $1.19
billion at December 31, 2006 from $1.23 billion at December 31, 2005. Short-term
funds  increased  $14.2  million or 36.1% to $53.4  million at December 31, 2006
from $39.3  million at  December  31,  2005,  primarily  due to an  increase  in
short-term  money  market  accounts.  Investment  securities  held  to  maturity
decreased  $55.1  million or 11.4% to $428.4  million at December  31, 2006 from
$483.5  million at December 31, 2005 primarily due to $43.1 million in principal
paydowns and $27.8 million in investment calls and maturities,  partially offset
by purchases of $5.0 million of U.S.  Government  agency notes and $11.0 million
of municipal  bonds.  Investment  securities  available for sale  decreased $9.6
million or 6.2% to $146.0  million  during the year ended December 31, 2006 from
$155.6 million at December 31, 2005, due to principal  paydowns of $14.2 million
and calls and maturities of $5.0 million, partially offset by purchases of $10.0

                                       3
<PAGE>

million in U.S. Government agency notes. Loans receivable increased $7.5 million
or 1.7% to $450.1  million at December 31, 2006 from $442.6  million at December
31, 2005 primarily due to $105.1 million of loans  originated,  partially offset
by $97.0 million of principal  collected on loans.  Federal Home Loan Bank stock
decreased  $1.9  million or 23.5% to $6.3 million at December 31, 2006 from $8.2
million at December  31, 2005 due to  mandatory  redemption  by the Federal Home
Loan Bank as a result of the  Bank's  repayment  of FHLB  borrowings  during the
year.

     Total  liabilities  decreased  $46.4  million  or 4.0% to $1.11  billion at
December 31, 2006 from $1.16  billion at December 31, 2005.  Deposits  decreased
$14.0 million or 1.5% to $933.1 million at December 31, 2006 from $947.1 million
at December 31, 2005. The decrease in total deposits  during the year was due to
decreases in money market accounts of $18.3 million,  savings  accounts of $13.8
million and checking  accounts of $1.8 million,  partially offset by an increase
in  time  deposits  of  $19.9  million.  Securities  sold  under  agreements  to
repurchase  decreased  $60.0 million or 34.3% to $115.0  million at December 31,
2006 from $175.0  million at December  31,  2005 due to the  repayment  of these
borrowings  during  the  year.  These  borrowings  are  collateralized  by  U.S.
Government  agency notes, MBSs and CMOs and had a weighted average rate of 5.24%
and 4.93% at December 31, 2006 and 2005, respectively. FMS Statutory Trust I and
II debentures  increased  $25.8 million or 100% to $51.5 million at December 31,
2006 from $25.8 million at December 31, 2005. The  Corporation  established  FMS
Statutory  Trust II in June 2006 and  issued  $25.0  million  of  floating  rate
capital  securities  to  institutional  investors  and $774  thousand  of common
securities to the Corporation.

     Stockholders'  equity  increased  $3.3 million or 4.4% to $78.4  million at
December 31, 2006 from $75.1 million at December 31, 2005.  The increase was due
to net  income  of $5.3  million  and the  exercise  of  stock  options  of $165
thousand,  partially  offset by $782  thousand of  dividends  declared on common
stock and a decrease of $1.4 million in accumulated  comprehensive  income ($136
thousand  increase in the net unrealized  loss on available for sale  securities
and a $1.3 million net increase in the  underfunded  pension and  postretirement
liabilities).

RESULTS OF OPERATIONS

NET INTEREST INCOME

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


                                       4
<PAGE>

     The  following  table  sets  forth  certain  information  relating  to  the
Corporation's average balance sheet and reflects the average yield on assets and
average rates paid on  liabilities  for the periods  indicated.  Such yields and
rates are derived by dividing  interest income or expense,  on a  tax-equivalent
basis, by the average  balance of  interest-earning  assets or  interest-bearing
liabilities, respectively for the periods presented.
<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                   ------------------------------------------------------------------------
                                                                2006                                  2005
                                                   -------------------------------       --------------------------------
                                                                           Average                                Average
                                                   Average                  Yield/       Average                   Yield/
                                                   Balance     Interest      Cost        Balance      Interest      Cost
                                                   -------     --------      ----        -------      --------      ----
<S>                                              <C>           <C>            <C>       <C>            <C>          <C>
Interest-earning assets:
    Loans receivable..........................   $   456,185   $ 27,802       6.09%     $436,338       $25,906      5.94%
    Interest-bearing deposits.................        40,739      2,107       5.17        46,693         1,338      2.87
    Mortgage-backed securities................       250,778     12,559       5.01       308,078        14,630      4.75
    Investment securities.....................       366,474     18,719       5.11       340,922        16,124      4.73
                                                 -----------   --------     ------    ----------       -------      ----
        Total interest-earning assets.........     1,114,176     61,187       5.49     1,132,031        57,998      5.12
                                                 -----------   --------     ------    ----------        ------      ----

Interest-bearing liabilities:
    Checking deposits.........................   $   399,912      6,293       1.57   $   399,956         4,125      1.03
    Savings deposits..........................       187,601      1,138       0.61       196,030         1,149      0.59
    Money market accounts.....................       127,365      1,548       1.22       142,137         1,266      0.89
    Time deposits.............................       214,651      7,105       3.31       208,825         4,878      2.34
    Borrowings................................       152,725      7,753       5.08       167,402         8,293      4.95
    Long-term debt............................        39,735      3,578       9.00        25,774         1,826      7.08
                                                 -----------   --------     ------    ----------       -------      ----
        Total interest-bearing liabilities....   $ 1,121,989     27,415       2.44    $1,140,124        21,537      1.89
                                                 ===========   --------     ------    ==========       -------      ----
Net interest income...........................                  $33,772                                $36,461
                                                                =======                                =======
Interest rate spread..........................                                3.05%                                 3.23%
                                                                             =====                                 =====
Net yield on average interest-earning
    assets....................................                                3.03%                                 3.22%
                                                                             =====                                 =====
Ratio of average  interest-earning
    assets to average interest-bearing
    liabilities...............................                               99.30%                                99.29%
                                                                             =====                                 =====

<CAPTION>
                                                            Year Ended December 31,
                                                        ----------------------------------
                                                                      2004
                                                        ---------------------------------
                                                                                  Average
                                                        Average                    Yield/
                                                        Balance      Interest       Cost
                                                        -------      --------       ----
<S>                                                    <C>            <C>          <C>
Interest-earning assets:
    Loans receivable............................       $  418,354     $24,634      5.89%
    Interest-bearing deposits...................           50,928         667      1.31
    Mortgage-backed securities..................          396,962      17,389      4.38
    Investment securities.......................          281,314      13,149      4.67
                                                       ----------     -------     -----
        Total interest-earning assets..........         1,147,558      55,839      4.87
                                                       ----------     -------     -----

Interest-bearing liabilities:
    Checking deposits...........................       $  366,338       1,717      0.47
    Savings deposits............................          194,246       1,071      0.55
    Money market accounts.......................          139,038       1,001      0.72
    Time deposits...............................          216,906       3,965      1.83
    Borrowings..................................          221,883       9,291      4.19
    Long-term debt..............................           25,774       1,369      5.31
                                                       ----------     -------     -----
        Total interest-bearing liabilities......       $1,164,185      18,414      1.58
                                                       ==========     -------     -----
Net interest income.............................                      $37,425
                                                                      =======
Interest rate spread............................                                   3.29%
                                                                                  =====
Net yield on average interest-earning
    assets......................................                                   3.26%
                                                                                  =====
Ratio of average  interest-earning
    assets to average interest-bearing
    liabilities.................................                                  98.57%
                                                                                  =====
</TABLE>

                                       5
<PAGE>

RATE/VOLUME ANALYSIS

     The table below sets forth  certain  information  regarding  changes in the
Bank's interest income and interest expense, on a tax-equivalent  basis, for the
periods   indicated.   For  each   category  of   interest-earning   assets  and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (changes in average volume  multiplied by old rate);  (ii)
changes in rates  (changes  in rate  multiplied  by old average  volume);  (iii)
changes in  rate-volume  (changes  in rate  multiplied  by the change in average
volume).
<TABLE>
<CAPTION>

                                                                   Years Ended December 31,
                                          ----------------------------------------------------------------------------
                                                     2006 vs. 2005                           2005 vs. 2004
                                          ------------------------------------    ------------------------------------
                                                  Increase (Decrease)                     Increase (Decrease)
                                                   Due to Change in                        Due to Change in
                                          ------------------------------------    ------------------------------------
                                             Rate     Volume          Net            Rate      Volume         Net
                                             ----     ------          ---            -----     -------        ----
<S>                                       <C>         <C>          <C>            <C>          <C>         <C>
Interest income:
    Loans..........................       $     718   $   1,178    $    1,896     $     213    $   1,059   $    1,272
    Interest-bearing deposits......             940        (171)          769           726          (55)         671
    Mortgage-backed securities                  650      (2,721)       (2,071)        1,135       (3,894)      (2,759)
    Investment securities..........           1,387       1,208         2,595           189        2,786        2,975
                                          ---------   ---------    ----------     ---------    ---------   ----------
Total change - interest income.....           3,695        (506)        3,189         2,263         (104)       2,159
                                          ---------   ----------   ----------     ---------    ---------   ----------

Interest expense:
    Checking deposits..............           2,168           0         2,168         2,250          158        2,408
    Savings deposits...............              38         (49)          (11)           68           10           78
    Money market deposits..........             414        (132)          282           243           22          265
    Time deposits..................           2,091         136         2,227         1,061         (148)         913
    Borrowings.....................             187        (727)         (540)        1,283       (2,281)        (998)
    Long-term debt.................             763         989         1,752           457            0          457
                                          ---------   ---------    ----------     ---------    ---------   ----------
Total change - interest expense....           5,661         217         5,878         5,362       (2,239)       3,123
                                          ---------   ---------    ----------     ---------    ---------   ----------

Change in net interest income......       $  (1,966)  $    (723)   $   (2,689)    $  (3,099)   $   2,135   $     (964)
                                          ==========  ==========   ===========    =========    =========   ==========
</TABLE>

COMPARISONS OF YEARS ENDED DECEMBER 31, 2006 AND 2005.

     NET INCOME. The Corporation and its subsidiary  recorded net income of $5.3
million for the year ended  December 31,  2006,  or $0.81  diluted  earnings per
share, as compared to net income of $6.7 million,  or $1.03 diluted earnings per
share  for the year  ended  December  31,  2005.  Net  interest  income on a tax
equivalent  basis was $33.8  million in 2006  compared to $36.5 million in 2005.
Provisions for loan losses were $330 thousand in 2006 and $360 thousand in 2005.
Non-interest  income was $7.2 million in 2006  compared to $5.4 million in 2005.
Total  non-interest  expenses  for the year ended  December  31, 2006 were $31.7
million  compared  to $30.1  million in the  previous  year.  During  2006,  the
Corporation  declared cash  dividends,  which totaled $782 thousand or $0.12 per
share, which resulted in a dividend payout ratio of 14.81%.

     INTEREST INCOME.  Total interest income on a tax-equivalent basis increased
$3.2 million to $61.2 million in 2006 from $58.0  million in 2005.  The increase
in 2006 is attributable to increases in interest income on investment securities
of $2.6  million,  loans of $1.9 million and  interest-bearing  deposits of $769
thousand,  partially offset by a decrease in interest income on  mortgage-backed
securities of $2.1 million.

     Interest  income on investment  securities  increased $2.6 million to $18.7
million in 2006 from $16.1  million in 2005.  The average yield on the portfolio
increased 38 basis points to 5.11% in 2006 from 4.73% in 2005, which resulted in
an increase  in  interest  income of $1.4  million.  The average  balance of the
portfolio  increased $25.6 million to $366.5 million in 2006 from $340.9 million
in 2005,  which  resulted in

                                       6
<PAGE>
an increase in interest income of $1.2 million in 2006. The investment portfolio
increased  primarily due to purchases of $15.0 million of U.S. Government agency
notes and $11.0  million of municipal  bonds during the year ended  December 31,
2006.  These increases were partially  offset by principal  paydowns of CMO's of
$15.0 million and calls of $5.0 million of U.S.  Government  agency notes during
the year.

     Interest  income on loans  increased  $1.9 million to $27.8 million in 2006
from $25.9 million in 2005. The average balance of the loan portfolio  increased
$19.9  million  to $456.2  million  in 2006 from  $436.3  million  in 2005.  The
increase in the average  balance in 2006 was primarily due to $105.1  million in
loans originated,  partially offset by $97.0 million in principal collected. The
increase  in the loan  volume  during  2006  resulted  in a volume  increase  in
interest  income  of $1.2  million.  The  average  yield on the  loan  portfolio
increased 15 basis points to 6.09% in 2006 from 5.94% in 2005, which resulted in
an increase in interest income of $718 thousand.

     Interest  income on  interest-bearing  deposits  increased $769 thousand to
$2.1 million in 2006 from $1.3 million in 2005.  The increase was  primarily due
to an increase  in the average  yield on the  portfolio  of 230 basis  points to
5.17% in 2006 from 2.87% in 2005,  which  resulted  in an  increase  in interest
income of $940  thousand.  The average  balance  decreased $6.0 million to $40.7
million in 2006 from $46.7  million in 2005,  which  resulted  in a decrease  in
interest income of $171 thousand.

     Interest  income on  mortgage-backed  securities  decreased $2.0 million to
$12.6  million in 2006 from $14.6  million in 2005.  The average  balance of the
portfolio  decreased $57.3 million to $250.8 million in 2006 from $308.1 million
in 2005, resulting in a decrease in interest income of $2.7 million. The average
balance  decrease  in 2006 was due to $31.6  million in  principal  paydowns  on
mortgage-backed  securities  and security  sales of $12.0  million.  The average
yield on the portfolio  increased 26 basis points to 5.01% in 2006 from 4.75% in
2005,  which  resulted  in an  increase  in  interest  income of $650  thousand.

     INTEREST  EXPENSE.  Total interest expense  increased $5.9 million to $27.4
million in 2006 from $21.5 million in 2005. The increase in interest  expense on
time deposits of $2.2 million, checking deposits of $2.2 million, long-term debt
of $1.8 million and money market deposits of $282 thousand were partially offset
by  decreases in interest  expense on  borrowings  of $540  thousand and savings
deposits of $11 thousand.

     Interest expense on time deposits increased $2.2 million to $7.1 million in
2006 from $4.9 million in 2005.  The average rate on time deposits  increased 97
basis  points to 3.31% in 2006 from 2.34% in 2005,  resulting  in a $2.1 million
increase in interest expense due to changes in rate. The average balance of time
deposits increased $5.9 million to $214.7 million in 2006 from $208.8 million in
2005, resulting in a $136 thousand increase in interest expense due to volume.

     Interest  expense  on  checking  deposits  increased  $2.2  million to $6.3
million in 2006 from $4.1 million in 2005. The average rate on checking deposits
increased 54 basis points to 1.57% in 2006 from 1.03% in 2005, which resulted in
an increase in interest  expense of $2.2 million from higher rates.  The average
balance of checking  deposits  remained  constant at $400.0  million in 2006 and
2005.

     Interest  expense on long-term  debt increased $1.8 million to $3.6 million
in 2006 from $1.8 million in 2005. The average  balance on debentures  increased
$13.9  million  to $39.7  million  in 2006 from  $25.8  million  in 2005,  which
resulted in an increase in interest  expense of $989 thousand.  This increase is
primarily due to the Trust II issuance in June 2006 of $25.0 million of floating
rate  debentures.  The average rate  increased 192 basis points to 9.00% in 2006
from 7.08% in 2005,  which  increased  interest  expense on long-term  debt $763
thousand.

                                       7
<PAGE>

     Interest  expense on money market deposits  increased $282 thousand to $1.5
million in 2006 from $1.3  million in 2005.  The  average  rate on money  market
deposits  increased 33 basis  points to 1.22% in 2006 from 0.89% in 2005,  which
resulted  in an  increase  in  interest  expense of $414  thousand.  The average
balance of money market  deposits  decreased  $14.7 million to $127.4 million in
2006 from  $142.1  million  in 2005,  which  resulted  in a volume  decrease  in
interest expense of $132 thousand.

     Interest  expense on borrowings  decreased $540 thousand to $7.8 million in
2006 from $8.3  million in 2005.  The average  balance of  borrowings  decreased
$14.7  million to $152.7  million  in 2006 from  $167.4  million in 2005,  which
resulted in a decrease in interest  expense of $727  thousand.  The average rate
paid on  borrowings  increased  13 basis  points to 5.08% in 2006 from  4.95% in
2005,  which resulted in an increase in interest expense of $187 thousand due to
rate changes.

     Interest expense on savings deposits decreased $11 thousand to $1.1 million
in 2006 from $1.1  million in 2005.  The  average  balance  of savings  deposits
decreased  $8.4 million to $187.6  million in 2006 from $196.0  million in 2005,
which  resulted in a decrease in interest  expense of $49 thousand.  The average
rate on savings deposits increased 2 basis points to 0.61% in 2006 from 0.59% in
2005, which resulted in an increase in interest expense of $38 thousand.

     CRITICAL  ACCOUNTING   ESTIMATE-PROVISION   FOR  LOAN  LOSSES.  A  critical
accounting  estimate of the Bank is the provision for loan losses. The provision
for loan  losses  decreased  $30  thousand  to $330  thousand  in 2006 from $360
thousand in 2005.  The decrease in the  provision was due to the moderate to low
actual loan loss  experienced  over the last several years along with  allowance
for loan loss approaching  1.20% of total loans. The amount of the allowance for
loan losses is based on management's analysis of risk characteristics of various
classifications of loans, previous loan loss experience, estimated fair value of
the underlying  collateral and current economic conditions.  The net charge-offs
for 2006 and 2005 totaled $2 thousand and $16 thousand,  respectively.  The Bank
will  continue  to  monitor  its  allowance  for loan  losses  and  make  future
adjustments to the allowance  through the provision for loan losses.  Management
continues to offer a wider variety of loan  products  coupled with the continued
change in the mix of the  products  offered  in the loan  portfolio  from  lower
yielding loans (i.e.,  one-to-four family loans) to higher yielding loans (i.e.,
commercial  real  estate  mortgage,   commercial  construction,   consumer,  and
commercial  business) which have a higher degree of risk than one to four family
loans. Although the Bank maintains its allowance for loan losses at a level that
it  considers to be adequate to provide for the  probable  existing  loss in the
loan  portfolio,  there can be no assurance  that future  losses will not exceed
estimated  amounts or that  additional  provisions  for loan  losses will not be
required in future  periods due to the higher  degree of credit risk which might
result from the change in the mix of the loan portfolio.

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

     The  Corporation  recognizes  deferred tax assets and  liabilities  for the
future tax effects of temporary differences.  Deferred tax assets are subject to
management's  judgment based upon available  evidence that future realization is
more likely than not.  If  management  determines  that the  Corporation  may be
unable to realize all or part of net deferred tax assets in the future, a direct
charge to income tax expense may be required to reduce the recorded value of the
net deferred tax asset to the expected realizable amount.

                                       8
<PAGE>

     NON-INTEREST  INCOME.  Non-interest  income from operations  increased $1.8
million to $7.2 million in 2006 compared with $5.4 million in 2005. The increase
is primarily  due to the gain on the sale of fixed  assets of $837  thousand and
the gain on the sale of investment securities of $365 thousand during 2006.

     Service charges on accounts increased $537 thousand to $5.8 million in 2006
from $5.3 million in 2005.  This is  primarily  due to a new fee  structure  for
retail  banking  fees,  effective  April 2006,  resulting in an increase of $362
thousand to $3.3  million in 2006 from $2.9  million in 2005.  Check card income
increased $175 thousand to $1.8 million in 2006 from $1.6 million in 2005 due to
increased customer activity.

     NON-INTEREST EXPENSE.  Non-interest expense increased $1.6 million to $31.7
million in 2006 from $30.1 million in 2005.

     Salaries and benefits  increased $1.0 million to $19.0 million in 2006 from
$18.0  million  in 2005.  The  increase  was  primarily  due to a $981  thousand
increase in retirement  and health  insurance  costs in 2006.  Average full time
equivalent employees were 519 during 2006 as compared to 525 during 2005.

     Occupancy and equipment  expense increased $516 thousand to $6.1 million in
2006 from $5.6 million in 2005.  Maintenance  expense  increased  $259 thousand,
property  taxes  increased $152 thousand and light,  heat and utilities  expense
increased $93 thousand during 2006.

     Telecommunications expense increased $100 thousand to $556 thousand in 2006
from $456 thousand in 2005. This increase was due to enhancing our network lines
to provide more efficient service to our customers.

COMPARISONS OF YEARS ENDED DECEMBER 31, 2005 AND 2004

     NET INCOME. The Corporation and its subsidiary  recorded net income of $6.7
million for the year ended  December 31,  2005,  or $1.03  diluted  earnings per
share, as compared to net income of $8.8 million,  or $1.34 diluted earnings per
share  for  the  year  ended  December  31,  2004.  Net  interest  income  on  a
tax-equivalent  basis was $36.4  million in 2005  compared  to $37.4  million in
2004. Provisions for loan losses were $360 thousand in 2005 and $330 thousand in
2004.  Non-interest  income was $5.4 million in 2005 compared to $6.1 million in
2004.  Total  non-interest  expenses  for the year ended  December 31, 2005 were
$30.1 million  compared to $28.4 million in the previous year.  During 2005, the
Corporation  declared cash dividends of $780 thousand or $0.12 per share,  which
resulted in a dividend payout ratio of 11.65%.

     INTEREST INCOME.  Total interest income on a tax equivalent basis increased
$2.2 million to $58.0 million in 2005 from $55.8  million in 2004.  The increase
in 2005 is attributable to increases in interest income on investment securities
of $3.0  million,  loans of $1.3 million and  interest-bearing  deposits of $671
thousand,  partially offset by a decrease in interest income on  mortgage-backed
securities of $2.8 million.

     Interest  income on investment  securities  increased $3.0 million in 2005.
The average  balance of the portfolio  increased $59.6 million to $340.9 million
in 2005 from $281.3 million in 2004. The investment  portfolio increased in 2005
primarily due to purchases of $123.0  million of U. S.  Government  agency notes
and $9.4 million of CMOs. These increases in 2005 were partially offset by calls
of $94.7 million of U.S.  Government agency notes and principal paydowns of CMOs
of $25.2 million.  The increase in the average balance of investment  securities
resulted in an increase in interest  income of $2.8 million in 2005. The average
yield on the  portfolio  increased 6 basis points to 4.73% in 2005 from 4.67% in
2004, which resulted in an increase in interest income of $189 thousand.

                                       9
<PAGE>

     Interest  income on loans  increased  $1.3 million to $25.9 million in 2005
from $24.6 million in 2004. The average balance of the loan portfolio  increased
$17.9  million to $436.3  million  in 2005 from  $418.4  million in 2004.  Loans
originated  during the year totaled  $117.4  million and principal  collected on
loans totaled $93.3 million in 2005. The increase in the loan volume during 2005
resulted in a volume  increase in interest  income of $1.1 million.  The average
yield on the loan portfolio increased 5 basis points to 5.94% in 2005 from 5.89%
in 2004, which resulted in an increase in interest income of $213 thousand.

     Interest  income on  interest-bearing  deposits  increased $671 thousand to
$1.3  million in 2005 from $667  thousand in 2004.  The  increase  was due to an
increase in the average  yield on the  portfolio of 156 basis points to 2.87% in
2005 from 1.31% in 2004,  which  resulted in an  increase in interest  income of
$726 thousand.  The average  balance  decreased $4.2 million to $46.7 million in
2005 from $50.9  million in 2004.  This  decrease  was  primarily  due to a $5.8
million  decline in the average balance of the money market  investment  account
during  the  year,  which  resulted  in a  decrease  in  interest  income of $55
thousand.

     Interest  income on  mortgage-backed  securities  decreased $2.8 million in
2005 due to volume  decreases  in the  portfolio.  The  average  balance  of the
portfolio  decreased $88.9 million to $308.1 million in 2005 from $397.0 million
in 2004, resulting in a decrease in interest income of $3.9 million. The average
balance  decrease  in 2005  was due to  principal  paydowns  on  mortgage-backed
securities of $63.1  million,  partially  offset by purchases of $3.0 million in
FHLMC securities.  The average yield on the portfolio  increased 37 basis points
to 4.75% in 2005 from 4.38% in 2004,  which  resulted in an increase in interest
income of $1.1 million.

     INTEREST  EXPENSE.  Total interest expense  increased $3.1 million to $21.5
million in 2005 from $18.4 million in 2004. The increase in interest  expense on
checking  deposits of $2.4 million,  time deposits of $913  thousand,  long-term
debt of $457  thousand,  money  market  deposits  of $265  thousand  and savings
deposits of $78 thousand, was partially offset by a decrease in interest expense
on borrowings of $998 thousand.

     Interest  expense  on  checking  deposits  increased  $2.4  million to $4.1
million in 2005 from $1.7  million in 2004.  The average  rate on time  deposits
increased 56 basis points to 1.03% in 2005 from 0.47% in 2004, which resulted in
an increase in interest  expense of $2.3 million from higher rates.  The average
balance of checking  deposits  increased $33.7 million to $400.0 million in 2005
from $366.3 million in 2004,  which resulted in an increase in interest  expense
of $158 thousand.

     Interest  expense on time deposits  increased $913 thousand to $4.9 million
in 2005 from $4.0 million in 2004.  The average rate on time deposits  increased
51 basis points to 2.34% in 2005 from 1.83% in 2004, resulting in a $1.1 million
increase in interest expense due to changes in rate. The average balance of time
deposits decreased $8.1 million to $208.8 million in 2005 from $216.9 million in
2004, resulting in a $148 thousand decrease in interest expense due to volume.

     Interest  expense on long-term debt increased $457 thousand to $1.8 million
in 2005 from $1.4 million in 2004.  The average rate on long-term debt increased
177 basis  points  to 7.08% in 2005 from  5.31% in 2004,  which  resulted  in an
increase in interest expense of $457 thousand.  The average balance of long-term
debt remained constant at $25.8 million in 2005 and 2004.

     Interest  expense on money market deposits  increased $265 thousand to $1.3
million in 2005 from $1.0  million in 2004.  The  average  rate on money  market
deposits  increased 17 basis  points to 0.89% in 2005 from 0.72% in 2004,  which
resulted  in an  increase  in  interest  expense of $243  thousand.  The average

                                       10
<PAGE>


balance of money market  deposits  increased  $3.1 million to $142.1  million in
2005 from  $139.0  million in 2004,  which  resulted  in an increase in interest
expense of $22 thousand.

     Interest expense on savings deposits increased $78 thousand to $1.1 million
in 2005  from  $1.1  million  in 2004.  The  average  rate on  savings  deposits
increased 4 basis points to 0.59% in 2005 from 0.55% in 2004,  which resulted in
an increase in interest expense of $68 thousand.  The average balance of savings
deposits increased $1.8 million to $196.0 million in 2005 from $194.2 million in
2004, which resulted in an increase in interest expense of $10 thousand.

     Interest  expense on borrowings  decreased $998 thousand to $8.3 million in
2005 from $9.3  million in 2004.  The average  balance of  borrowings  decreased
$54.5 million to $167.4 million in 2005 from $221.9  million in 2004,  resulting
in a $2.3  million  volume  decrease in interest  expense.  The average  rate on
borrowings  increased  76 basis  points  to 4.95%  in 2005  from  4.19% in 2004,
resulting in a $1.3 million increase in interest expense due to rate changes.

     CRITICAL  ACCOUNTING   ESTIMATE-PROVISION   FOR  LOAN  LOSSES.  A  critical
accounting  estimate of the Bank is the provision for loan losses. The provision
for loan  losses  increased  $30  thousand  to $360  thousand  in 2005 from $330
thousand in 2004.  The  increase in the  provision  was due to  increases in the
total loan portfolio and particularly  increases in commercial  construction and
commercial real estate loans,  which have a higher risk of loss than residential
mortgages.  The net  charge-offs  for 2005 and 2004 totaled $16 thousand and $19
thousand, respectively.

     NON-INTEREST  INCOME.  Non-interest  income from operations  decreased $636
thousand  to $5.4  million  in 2005  compared  with $6.1  million  in 2004.  The
decrease is primarily  due to the absence of a $683 thousand gain on the sale of
investment securities recorded in 2004.

     Service charges on accounts increased $109 thousand to $5.3 million in 2005
from $5.2 million in 2004.  This is primarily the result of an increase in check
card income of $218  thousand to $1.6 million in 2005 from $1.4 million in 2004,
partially  offset by a $90 thousand  reduction in returned  item charges to $1.8
million in 2005 from $1.9 million in 2004.

     NON-INTEREST EXPENSE.  Non-interest expense increased $1.7 million to $30.1
million in 2005 from $28.4 million in 2004.

     Salaries and benefits  increased $1.1 million to $18.0 million in 2005 from
$16.9  million  in 2004.  The  increase  was  primarily  due to annual  pay rate
increases of $359 thousand and an increase of $472  thousand in  retirement  and
health  insurance costs in 2005.  Average full time equivalent  employees during
2005 were 525 as compared to 515 during 2004.

     Occupancy and equipment  expense increased $203 thousand to $5.6 million in
2005 from  $5.4  million  in 2004.  Furniture,  fixture  and  equipment  expense
increased  $104  thousand,  light,  heat and  utilities  expense  increased  $58
thousand and maintenance  expense  increased $57 thousand.  These increases were
due to the addition of the Cherry Hill Walmart  branch opened in 2005, and other
facility and equipment additions and improvements during the year.

     Telecommunications expense increased $153 thousand to $456 thousand in 2005
from $303  thousand in 2004.  This  increase was due to enhancing our network to
provide more efficient service to our customers.

                                       11
<PAGE>

IMPACT OF INFLATION AND CHANGING PRICES

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

LIQUIDITY AND CAPITAL RESOURCES

     The Bank's liquidity is a measure of its ability to fund loans, withdrawals
of deposits  and other cash  outflows  in a cost  effective  manner.  The Bank's
primary  sources of funds are deposits and scheduled  repayments and prepayments
of loan  principal.  The Bank also  obtains  funds from the sale and maturity of
investment  securities  and  short-term  investments  as well as the maturity of
mortgage-backed  securities and funds  provided by  operations.  During the past
several  years,  the Bank has used  such  funds  primarily  to meet its  ongoing
commitments  to fund  maturing time  deposits and savings  withdrawals,  to fund
existing and continuing loan commitments and to maintain liquidity. The Bank has
periodically   supplemented   its  funding  needs  with  securities  sold  under
agreements to repurchase  ("repurchase  agreements") and advances from the FHLB.
At December 31, 2006 the Bank had $115.0 million in repurchase agreements. While
loan  payments,   maturing   investments  and  mortgage-backed   securities  are
relatively  predictable sources of funds, deposit flows and loan prepayments are
greatly   influenced  by  general  interest  rates,   economic   conditions  and
competition.  The Bank's liquidity is also influenced by the level of demand for
funding loan  originations.  Liquidity  may be adversely  affected by unexpected
deposit  outflows,  excessive  interest  rates  paid  by  competitors,   adverse
publicity  relating to the Banking  industry  and  similar  matters.  Management
monitors projected liquidity needs and determines the level desirable,  based in
part on the Corporation's  commitment to make loans and management's  assessment
of the Corporation's  ability to generate funds. The Corporation is also subject
to federal regulations that impose certain minimum capital requirements.


     The Bank is also subject to federal regulations that impose certain minimum
capital requirements.  At December 31, 2006 and 2005, the Bank was in compliance
with all of these  requirements.  A reconciliation of GAAP capital to regulatory
capital is as follows:
<TABLE>
<CAPTION>

                                                DECEMBER 31, 2006  DECEMBER 31, 2005

<S>                                               <C>               <C>
Bank GAAP Capital                                 $ 94,220,043      $ 91,137,726
Accumulated Other Comprehensive
    Loss                                             2,485,410         1,099,630
Less:
    Subsidiary Investments not includable             (745,645)         (745,655)
    Core deposit intangible                         (1,159,614)       (1,675,822)
Tier 1, Tier 1 Risk-Based and
    Tangible Capital                              $ 94,800,194      $ 89,615,889
    General Valuation Allowance                      4,977,001         4,649,217
Risk-Based Capital                                $ 99,777,195      $ 94,265,106

</TABLE>

     The amount of time deposit  accounts  which are  scheduled to mature during
the twelve months ending December 31, 2007 is approximately  $180.4 million.  To
the extent  these  deposits  do not remain at the Bank upon  maturity,  the Bank
believes it can  replace  these funds with  deposits,  FHLB  advances or outside
borrowings. It has been the Bank's experience that a substantial portion of such
maturing deposits remain with the Bank.


                                      12
<PAGE>
     The following table sets forth our contractual  obligations and commitments
as of December 31, 2006.
<TABLE>
<CAPTION>
                                              Less than                                   More than
                                              1 Year           1-3 Years     3-5 Years      5 Years      Total
                                              ------           ---------     ---------      -------      -----
                                                                         (In thousands)
<S>                                          <C>              <C>           <C>            <C>          <C>
Securities sold under agreements to
  Repurchase*...........................     $20,000          $   --        $80,000        $15,000      $115,000
FMS Statutory Trust I and II debentures           --              --             --         51,548        51,548
Operating leases........................         375             557            217            609         1,758
Commitments to fund loans...............       6,017              --             --             --         6,017
Unused lines of credit..................          --              --             --         29,531        29,531
Standby letters of credit...............       6,569              --             --             --         6,569
Software maintenance contracts..........          90              --             --             --            90
----------
*  Subject to prepayment calls, which may accelerate the payment of these obligations.
</TABLE>


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------

MARKET RISK AND LIQUIDITY RISK


     Market risk is the risk of loss from adverse  changes in market  prices and
rates.  The Bank's market risk arises primarily from interest rate risk inherent
in  its  lending,   investment  and  deposit  taking   activities.   The  Bank's
profitability  is  affected by  fluctuations  in  interest  rates.  A sudden and
substantial  increase in interest rates may adversely impact the Bank's earnings
to the extent that the  interest  rates borne by assets and  liabilities  do not
change at the same speed,  to the same extent or on the same basis. To that end,
management  actively  monitors and manages its interest rate risk exposure.  The
Bank does not participate in hedging programs  including  interest rate swaps or
other activities  involving the use of off-balance  sheet  derivative  financial
instruments.  The Bank's investment policy allows investment only in securities,
which have a rating of AA or better.  U.S.  Government  agency  investments  are
callable notes issued by Fannie Mae (FNMA),  Freddie Mac (FHLMC) and the Federal
Home  Loan  Bank   (FHLB),   which   carry   either  a  direct   government   or
quasi-government  guarantee.  The  Bank  holds a  substantial  component  of its
investment portfolio in mortgage-backed  securities and collateralized  mortgage
obligations  (collectively,  "MBS  and  CMO").  At the end of  2006,  the  total
investment  in MBSs and  CMOs  amounted  to  $307.2  million,  or 48.4% of total
investments.  These are instruments  collateralized  by pools of residential and
commercial  mortgages  which  return  interest  and  principal  payments  to the
investor when performing in accordance with their terms.  Approximately 53.1% of
the Bank's MBS holdings are U.S.  Government  agency  securities (GNMA, FNMA and
FHLMC), which carry either direct government or quasi-government  guarantees and
are rated AAA in terms of credit quality.  The Bank also owns  non-agency  CMOs,
issued by major  financial  institutions,  which  are rated AAA or AA.  CMOs are
generally  very  liquid  issues  with major  brokerage  houses  providing  ready
markets.  However,  CMOs are subject to prepayment and extension risk, which can
adversely affect their yields and expected average life. MBS's, CMO's and agency
notes of $49.0  million and $54.1  million  were used to secure  public funds on
deposit at December 31, 2006 and 2005,  respectively.  At December 31, 2006, FMS
FInancial  had  total  unrealized  losses  of  $9.5  million  on its  investment
portfolio.  The unrealized  lossese were due to changes in market value stemming
from changes in the general  level of interest  rates and are  considered  to be
temporary and not material to FMS Financial.


                                       13
<PAGE>

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 Funds Management  Committee ("FMC"),  which
includes senior  management.  The FMC monitors and considers methods of managing
interest  rate risk by  monitoring  changes in the interest  rate  repricing gap
("GAP"),  the net portfolio values ("NPV") and net interest income under various
interest rate  scenarios.  The FMC 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 FMC. Interest rate sensitivity is a measure of
the difference between amounts of interest-earning  assets and  interest-bearing
liabilities,  which either  reprice or mature within a given period of time. The
difference,  or the interest rate repricing  GAP,  provides an indication of the
extent to which an  institution's  interest  rate  spread  will be  affected  by
changes in interest  rates over a period of time. A GAP is  considered  positive
when the amount of interest rate sensitive  assets  maturing or repricing over a
specified  period  of  time  exceeds  the  amount  of  interest  rate  sensitive
liabilities  maturing or repricing within that period and is considered negative
when the amount of interest  rate  sensitive  liabilities  maturing or repricing
over a specified  period of time exceeds the amount of interest  rate  sensitive
assets maturing or repricing within that period.  Generally,  during a period of
rising  interest  rates,  a  negative  GAP  within a given  period of time would
adversely affect net interest income, while a positive GAP within such period of
time may  result  in an  increase  in net  interest  income;  during a period of
falling  interest rates, a negative GAP within a given period of time may result
in an increase in net interest income while a positive GAP within such period of
time may have the opposite effect. At December 31, 2006, the Bank's GAP position
for net assets  repricing  for one year  cumulative  totaled a  negative  $151.8
million or 12.8%.

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

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

                                       14
<PAGE>

     The Bank  measures  its  interest  rate  risk  using  the  Office of Thrift
Supervision's  ("OTS") NPV method.  NPV is  calculated  based on the net present
value of estimated cash flows utilizing market prepayment assumptions and market
rates of interest  provided by  independent  broker  quotations and other public
sources.  An  institution's  interest rate risk is measured as the change to its
NPV as a result of a  hypothetical  immediate  200 basis point  change in market
interest  rates.  Based on this  analysis at December 31,  2006,  the Bank would
experience a 390 basis point decrease in its NPV as a percent of assets if rates
rise by 200 basis points in comparison to a flat rate scenario.
<TABLE>
<CAPTION>
        Change                        Net Portfolio Value
       In Market       -------------------------------------------------------
    Interest Rates     $ Amount        $ Change      % Change     NPV Ratio(1)
    --------------     --------        --------      --------     ------------
    (basis points)     (Dollars in thousands)
           <S>         <C>            <C>              <C>            <C>
          +300        $ 79,524        $(79,184)        (50)%          6.84%
          +200         104,835         (53,873)        (34)%          8.81%
          +100         133,522         (25,186)        (16)%         10.94%
             0         158,708               0           0%          12.71%
          -100         166,976           8,269           5%          13.24%
          -200         163,170           4,463           3%          12.92%

-------------
(1) Calculated as the estimated NPV divided by present value of total assets.
</TABLE>

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
---------------------------------------------------

     The Corporation's financial statements and supplementary data are contained
in this Annual Report on Form 10-K immediately following Item 15.

<PAGE>
                    FMS FINANCIAL CORPORATION AND SUBSIDIARY

                                    INDEX TO
                        CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
                                                                           PAGE
                                                                           ----
Report of Independent Registered Public Accounting Firm....................16
Report of Independent Registered Public Accounting Firm....................17
Consolidated Statements of Financial Condition.............................18
Consolidated Statements of Operations......................................19
Consolidated Statements of Cash Flows......................................20
Consolidated Statements of Changes in Stockholders' Equity.................21
Notes to Consolidated Financial Statements.................................22

                                       15
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors and Shareholders
FMS Financial Corporation


     We have  audited  the  accompanying  consolidated  statement  of  financial
condition of FMS Financial  Corporation  and  Subsidiary  (the  "Company") as of
December 31, 2006 and the related consolidated statements of operations, changes
in stockholders' equity, and cash flows for the year then ended. These financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements  are free of material  misstatements.  The Company is not required to
have,  nor were we  engaged to perform  an audit of its  internal  control  over
financial reporting.  Our audit included  consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   assessing  the  accounting  principles  used  and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the consolidated  financial  position of FMS
Financial   Corporation   and  Subsidiary  as  of  December  31,  2006  and  the
consolidated  results of their operations and their cash flows for the year then
ended in conformity with accounting  principles generally accepted in the United
States of America.

As  discussed  in Note 1 to the  financial  statements,  the Company has adopted
Financial  Accounting  Standards  Board  Statement  (FASB) No.  158,  Employers'
Accounting  for  Defined  Benefit  Pension and Other  Postretirement  Plans - an
amendment of FASB Statements No. 87, 88, 106 and 132(R) in 2006.

/s/ Grant Thornton LLP

Grant Thornton LLP
Philadelphia, PA
March 12, 2007


                                       16
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

In our opinion, the accompanying  consolidated  statement of financial condition
and the related consolidated statements of operations,  changes in stockholders'
equity, and cash flows present fairly, in all material  respects,  the financial
position of FMS Financial  Corporation and its  subsidiaries  ("the Company") at
December 31, 2005, and the results of their  operations and their cash flows for
each of the two years in the period ended  December 31, 2005 in conformity  with
accounting principles generally accepted in the United States of America.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.  We conducted our audits of these  statements in accordance with the
standards of the Public  Company  Accounting  Oversight  Board (United  States).
Those standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
New York, N.Y.
March 24, 2006


                                       17
<PAGE>

FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,                                                                              2006                     2005
-----------------------------------------------------------------------------------------------------------------------------

ASSETS
-----------------------------------------------------------------------------------------------------------------------------

<S>                                                                                   <C>                    <C>
             Cash and amounts due from depository institutions                        $   55,269,961         $   54,544,693
             Interest-bearing deposits                                                     1,052,911                 27,874
             Short term funds                                                             53,438,325             39,268,382
                                                                                      --------------         --------------
                  Total cash and cash equivalents                                        109,761,197             93,840,949

             Investment securities held to maturity                                      428,441,417            483,536,309
             Investment securities available for sale                                    146,005,715            155,632,095
                                                                                      --------------         --------------
                  Total investment securities                                            574,447,132            639,168,404

             Loans, net                                                                  450,099,184            442,571,357
             Accrued interest receivable                                                   6,372,354              6,224,371
             Federal Home Loan Bank stock                                                  6,313,520              8,248,420
             Office properties and equipment, net                                         33,738,928             34,801,087
             Deferred income taxes                                                         4,094,838              2,607,641
             Core deposit intangible                                                       1,159,614              1,875,822
             Prepaid expenses and other assets                                             2,125,656              1,925,324
                                                                                      --------------         --------------
TOTAL ASSETS                                                                          $1,188,112,423         $1,231,263,375
                                                                                      ==============         ==============

LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------------------
Liabilities:
             Interest-bearing deposits                                                $  738,896,140         $  759,991,442
             Noninterest-bearing deposits                                                194,206,626            187,075,982
                                                                                      --------------         --------------
                Total deposits                                                           933,102,766            947,067,424
             Securities sold under agreements to repurchase                              115,000,000            175,000,000
             FMS Statutory Trust I and II debentures                                      51,548,000             25,774,000
             Advances by borrowers for taxes and insurance                                 2,086,128              2,132,320
             Accrued interest payable                                                      1,467,745              1,378,353
             Dividends payable                                                               195,849                195,486
             Other liabilities                                                             6,351,377              4,633,516
                                                                                      --------------         --------------
             Total liabilities                                                         1,109,751,865          1,156,181,099
                                                                                      ==============         ==============


Commitments and contingencies (Note 17)


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 8,022,892 and 8,006,392 and shares outstanding 6,529,313
                and 6,515,110 as of December 31, 2006 and 2005, respectively                 802,289                800,639
             Additional paid-in capital                                                    8,930,731              8,767,381
             Accumulated other comprehensive loss- net of deferred income taxes           (2,485,410)            (1,099,630)
             Retained earnings                                                            82,120,391             77,583,683
             Less:  Treasury stock (1,493,579 and 1,491,282 shares, at cost, as of
                December 31, 2006 and 2005 respectively)                                 (11,007,443)           (10,969,797)
                                                                                      --------------         --------------
 Total stockholders' equity                                                               78,360,558             75,082,276
                                                                                      --------------         --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                            $1,188,112,423         $1,231,263,375
                                                                                      ==============         ==============
</TABLE>

See notes to consolidated financial statements.

                                       18
<PAGE>


FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                                        2006                  2005                 2004
------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                <C>                <C>
INTEREST  INCOME:
Interest income on:
 Loans                                                          $27,801,801        $25,906,502        $ 24,634,462
 Mortgage-backed securities                                      12,559,180         14,629,526          17,388,728
 Investments
     Taxable                                                     20,254,674         17,192,737          13,758,077
     Tax exempt                                                     377,265            177,550              38,143
                                                                -----------        -----------        ------------
Total interest income                                            60,992,920         57,906,315          55,819,410
                                                                -----------        -----------        ------------

INTEREST EXPENSE:
Interest expense on:
 Deposits                                                        16,083,899         11,418,289           7,754,391
 Borrowings                                                       7,753,044          8,293,015           9,290,862
 Long-term debt                                                   3,577,511          1,826,092           1,368,591
                                                                -----------        -----------        ------------
Total interest expense                                           27,414,454         21,537,396          18,413,844
                                                                -----------        -----------        ------------

NET INTEREST INCOME                                              33,578,466         36,368,919          37,405,566
PROVISION FOR LOAN LOSSES                                           330,000            360,000             330,000
                                                                -----------        -----------        ------------
NET INTEREST INCOME AFTER PROVISION
    FOR LOAN LOSSES                                              33,248,466         36,008,919          37,075,566
                                                                -----------        -----------        ------------

NON-INTEREST INCOME:
 Service charges on accounts                                      5,811,341          5,274,330           5,197,949
 Gain (Loss) on sale/disposal of fixed assets                       837,335            (6,769)              46,080
 Gain on sale of investment securities                              364,621                  -             682,880
 Other income                                                       150,118            155,667             132,779
                                                                -----------        -----------        ------------
Total non-interest income                                         7,163,415          5,423,228           6,059,688
                                                                -----------        -----------        ------------

NON-INTEREST EXPENSE:
 Salaries and employee benefits                                  19,027,244         18,012,670          16,877,722
 Occupancy and equipment                                          6,103,445          5,587,270           5,383,883
 Purchased services                                               2,869,212          2,810,218           2,850,118
 Professional fees                                                  770,702            754,127             662,180
 Amortization of core deposit intangible                            716,208            716,208             716,208
 Office supplies                                                    618,608            669,130             573,447
 Other expenses                                                     609,707            632,481             588,887
 Telecommunications                                                 555,701            456,107             303,586
 Advertising                                                        455,268            429,263             429,093
                                                                -----------        -----------        ------------
Total non-interest expense                                       31,726,095         30,067,474          28,385,124
                                                                -----------        -----------        ------------

INCOME BEFORE INCOME TAXES                                        8,685,786         11,364,673          14,750,130
INCOME TAXES                                                      3,366,746          4,646,441           5,981,901
                                                                -----------        -----------        ------------
NET INCOME                                                      $ 5,319,040        $ 6,718,232        $  8,768,229
                                                                ===========        ===========        ============

BASIC EARNINGS PER COMMON SHARE                                 $      0.82        $      1.03        $       1.35
                                                                ===========        ===========        ============
DILUTED EARNINGS PER COMMON SHARE                               $      0.81        $      1.03        $       1.34
                                                                ===========        ===========        ============
DIVIDENDS DECLARED PER COMMON SHARE                             $      0.12        $      0.12        $       0.12
                                                                ===========        ===========        ============
</TABLE>

See notes to consolidated financial statements.

                                       19
<PAGE>

FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                                                           2006              2005               2004
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>               <C>                <C>
OPERATING ACTIVITIES:
Net income                                                                    $   5,319,040     $   6,718,232      $   8,768,229
Adjustments to reconcile net income to net cash by provided
operating activities:
 Provision for loan losses                                                          330,000           360,000            330,000
 Amortization and accretion of premiums and discounts on investments, net           309,693         1,751,762          4,382,268
 Amortization and accretion of other fees and costs                                 763,006           807,312            769,567
 Depreciation                                                                     2,003,485         2,007,918          1,965,197
Realized (gains) and losses on:
 Sale of loans                                                                            -                 -               (229)
 Sale and disposal of fixed assets                                                 (837,335)            6,769            (46,080)
 Sale of investment securities                                                     (364,621)                -           (682,880)
 Sale of real estate owned                                                              455                 -               (654)
(Increase) Decrease in accrued interest receivable                                 (147,983)           97,736         (1,118,359)
(Increase) Decrease in prepaid expenses and other assets                           (200,332)          510,056           (347,619)
Increase (Decrease) in accrued interest payable                                      89,392           131,692            (72,840)
(Decrease) Increase  in other liabilities                                           562,791         1,833,368            (21,078)
Benefit for deferred income taxes                                                (1,487,197)         (457,199)          (106,533)
                                                                              -------------     -------------      -------------
  Net cash provided by operating activities                                       6,340,394        13,767,646         13,818,989
                                                                              -------------     -------------      -------------

INVESTING ACTIVITIES:
Proceeds from sale of:
 Education loans                                                                          -                 -             60,279
 Real estate owned                                                                  157,761                 -             48,948
 Office property and equipment                                                    1,640,592             3,111            238,871
 Investment securities                                                           12,206,808                 -         22,870,336
Principal collected and proceeds from maturities of investment securities
  held to maturity                                                               59,104,971       266,172,752        250,288,555
Principal collected and proceeds from maturities of investment securities
  available for sale                                                             19,248,254       112,499,244         71,614,876
Principal collected on loans, net                                                97,047,011        93,277,149        110,121,450
Loans originated or acquired                                                   (105,109,852)     (117,423,133)      (126,679,593)
Purchase of investment securities and mortgage-backed securities
   held to maturity                                                             (16,014,543)     (226,985,664)      (232,157,961)
Purchase of investment securities and mortgage-backed securities available
   for sale                                                                     (10,000,000)     (128,868,417)       (88,703,074)
Redemption of Federal Home Loan Bank stock                                        1,934,900         2,001,700          1,559,500
Purchase of office property and equipment                                        (1,744,583)       (6,071,651)        (1,476,146)
                                                                              -------------     -------------      -------------
Net cash provided (used) by investing activities                                 58,471,319        (5,394,909)         7,786,041
                                                                              -------------     -------------      -------------

FINANCING ACTIVITIES:
Net (decrease) increase in demand deposits and savings accounts                 (33,865,777)        4,417,156         65,584,898
Net increase (decrease) in time deposits                                         19,901,119         1,143,448        (17,084,576)
Net decrease in FHLB advances                                                             -       (10,000,000)        (1,191,047)
Repayment of securities sold under agreement to repurchase, net                 (60,000,000)      (20,000,000)       (30,000,000)
Net proceeds from issuance of trust capital securities                           25,774,000                 -                  -
(Decrease) Increase in advances from borrowers for taxes and insurance              (46,192)          (68,037)            57,858
Purchase of treasury stock                                                          (37,646)          (34,798)                 -
Dividends paid on common stock                                                     (781,969)         (780,298)          (779,240)
Net proceeds from issuance of common stock                                          165,000           213,385             49,796
                                                                              -------------     -------------     --------------
 Net cash (used) provided by financing activities                               (48,891,465)      (25,109,144)        16,637,689
                                                                              -------------     -------------     --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                                                                                 15,920,248       (16,736,407)        38,242,719
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
                                                                                 93,840,949       110,577,356         72,334,637
                                                                              -------------     -------------     --------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                        $ 109,761,197     $  93,840,949     $  110,577,356
                                                                              =============     =============     ==============
Supplemental Disclosures:
 Cash paid for:
  Interest on deposits, advances, and other borrowings                           27,325,062        21,405,704         18,486,684
  Income taxes                                                                    3,538,800         4,727,200          5,450,000
 Non-cash investing and financing activities:
  Dividends declared and not paid at year end                                       195,849           195,486            195,063
  Non-monetary transfers from loans to real estate owned through foreclosure        158,216                 -                  -
</TABLE>


See notes to consolidated financial statements.


                                       20
<PAGE>

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

-----------------------------------------------------------------------------------------------------------------------------
                              Common                               Accumulated                                  Total
                              shares      Common       Paid-in    comprehensive    Retained        Treasury  Stockholders'
                            outstanding    stock       capital    income (loss)    earnings         stock       Equity
-----------------------------------------------------------------------------------------------------------------------------
<S>                        <C>           <C>         <C>           <C>             <C>          <C>           <C>
Balances at
  December 31, 2003          6,485,877    797,506     8,507,333       802,239       63,657,664   (10,934,999)  62,829,743
Net income                                                                           8,768,229                  8,768,229
Other comprehensive
  income, net of tax
  benefit of $331,228
  Unrealized loss
  on securities available
  for sale                                                           (531,455)                                   (531,455)
                                                                                                              -----------
Total comprehensive
  income                                                                                                        8,236,774

Dividends declared                                                                    (779,694)                  (779,694)
Exercise of stock options       16,233      1,623        48,173                                                    49,796
 ----------------------------------------------------------------------------------------------------------------------------

Balances at
  December 31, 2004          6,502,110    799,129     8,555,506       270,784       71,646,199   (10,934,999)  70,336,619
Net income                                                                           6,718,232                  6,718,232
Other comprehensive
  income, net of tax
  benefit of $946,428
  Unrealized loss
  on securities available
  for sale                                                         (1,370,414)                                 (1,370,414)
                                                                                                              -----------
Total comprehensive
  income                                                                                                        5,347,818


Dividends declared                                                                    (780,748)                  (780,748)
Exercise of stock options       15,100      1,510       211,875                                                   213,385
Purchase of common stock        (2,100)                                                              (34,798)     (34,798)
-----------------------------------------------------------------------------------------------------------------------------
Balances at
  December 31, 2005          6,515,110   $800,639    $8,767,381   $(1,099,630)     $77,583,683  $(10,969,797) $75,082,276
-----------------------------------------------------------------------------------------------------------------------------
Net income                                                                           5,319,040                  5,319,040
Other comprehensive loss
  Unrealized loss
  on securities available
  for sale, net of tax
  benefit of $94,246                                                 (136,465)                                   (136,465)

                                                                                                              -----------
Total comprehensive income                                                                                      5,182,575

Adjustment to initially
  apply SFAS 158, net of
  tax benefit of $862,779                                          (1,249,315)                                 (1,249,315)


Dividends declared                                                                    (782,332)                  (782,332)
Exercise of stock options       16,500      1,650       163,350                                                   165,000
Purchase of common stock        (2,297)                                                              (37,646)     (37,646)
-----------------------------------------------------------------------------------------------------------------------------
Balances at
  December 31, 2006          6,529,313   $802,289    $8,930,731   $(2,485,410)     $82,120,391  $(11,007,443) $78,360,558
=============================================================================================================================
</TABLE>
See notes to consolidated financial statements.


                                       21
<PAGE>

FMS  FINANCIAL  CORPORATION  AND  SUBIDIARY  NOTES  TO  CONSOLIDATED   FINANCIAL
STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESNATURE OF BUSINESS

     FMS  Financial  Corporation,  a New Jersey  corporation,  headquartered  in
Burlington,  New  Jersey,  is the holding  company for Farmers & Mechanics  Bank
("Bank"). The Bank's principal business is attracting customer deposits from the
general  public  through its forty-two  branches and investing  these  deposits,
together with funds  generated from  operations,  primarily in  residential  and
commercial mortgage loans, consumer,  commercial business and construction loans
and U.S. Government agency notes and mortgage-related securities.

PRINCIPLES OF CONSOLIDATION
     The  consolidated  financial  statements  are prepared in  accordance  with
generally accepted  accounting  principles in the United States of America.  The
consolidated   financial  statements  include  the  accounts  of  FMS  Financial
Corporation  ("Corporation") and Farmers & Mechanics Bank. Material intercompany
accounts and transactions  have been eliminated from the consolidated  financial
statements.

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

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

CASH  AND  CASH  EQUIVALENTS
     Cash and cash  equivalents  include cash and  interest-bearing  amounts due
from depository institutions and short-term funds. Interest-bearing deposits are
deposits  with  banks  that  have an  original  maturity  of 90  days  or  less.
Short-term  funds are money  market  funds and federal  funds  sold.  Generally,
federal  funds  are  purchased  and  sold  for  one-day  periods.  Cash and cash
equivalents   exclude  reverse  repurchase   agreements,   which  are  generally
classified  as  investments  held to maturity.  The Bank is required to maintain
certain average reserve balances as established by the Federal Reserve Bank. The
amount of those  balances for the reserve  computation  periods,  which  include
December 31, 2006 and 2005, were $24.2 million and $21.8 million,  respectively.
These  requirements  were  satisfied  through  the  balance  of vault cash and a
balance at the Federal Home Loan Bank.

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

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

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

LOANS,  NET
     Loans are reported at principal  outstanding  balance net of deferred  loan
origination  costs  and the  allowance  for loan  losses.  The  Bank  recognizes
interest income on loans when earned.  All loans which are 90 days delinquent as
to  principal  and/or  interest  are  placed  on a  non-accrual  status  and all
previously accrued interest is reversed.  Such interest ultimately  collected is
recorded as income in the period of recovery.  Loans  classified  as impaired or
trouble debt  restructured,  excluding loans  classified as non-accrual,  accrue
interest daily under their original or modified terms.

                                       22
<PAGE>


ALLOWANCE FOR LOAN LOSSES
     In accordance with SFAS No. 5 "Accounting for Contingencies",  an allowance
for loan losses is maintained at a level that management  considers  adequate to
provide for probable losses inherent in the portfolio based upon the portfolio's
past loss experience,  current economic  conditions and other relevant  factors.
When collection of a loan's  principal  balance or portion thereof is considered
doubtful,  management  charges  the  allowance  for loan  losses  based on their
assessment of the loan's  underlying  collateral,  if collateral  dependent,  or
present value of estimated  future cash flows.  While  management  uses the best
information  available to make  evaluations  about the adequacy of the allowance
for loan  losses,  future  adjustments  to the  allowance  may be  necessary  if
conditions  differ  substantially  from  the  assumptions  used  in  making  the
evaluations.

     In accordance  with SFAS No. 114 "Accounting by Creditors for Impairment of
a Loan-an  amendment of FASB No. 5 and 15", the Bank  considers a loan impaired,
based on current information and events, if it is probable that the Bank will be
unable to collect the  scheduled  payments  on  principal  or interest  when due
according to the  contractual  terms of the loan  agreement.  Loans are measured
based on the loans underlying  collateral,  if collateral dependent,  or present
value of  estimated  future  cash flows.  Loans  continue  to be  classified  as
impaired  unless they are brought fully current and the  collection of scheduled
interest and principal is considered probable.


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

OFFICE PROPERTIES AND EQUIPMENT
     Office  properties  and  equipment  are recorded at cost.  Depreciation  is
computed using the  straight-line  method over the expected  useful lives of the
assets  as  follows:  buildings  and  improvements  range  from 10 to 30  years,
furniture,  fixtures,  and equipment  range from 3 to 10 years,  computers are 3
years and leasehold  improvements are over the shorter of the useful life or the
term of the lease. The costs of maintenance and repairs are expensed as they are
incurred. Renewal and improvement costs are capitalized. In accordance with SFAS
No.  144,   "Accounting  for  Impairment  or  Disposal  of  Long-Lived  Assets,"
long-lived  assets are  evaluated  for  impairment  by  management on an ongoing
basis. Impairment may occur whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.


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


CORE DEPOSIT  INTANGIBLE

     Core deposit  intangible  assets of $3.6 million are  amortized  over their
useful  life  of  five  years  using  the  straight-line   method.   Accumulated
amortization was $2.4 million and $1.7 million as of December 31, 2006 and 2005,
respectively.  Amortization  expenses  for each of the years ended  December 31,
2006,  2005 and 2004 was $716 thousand.  Amortization  expense is expected to be
$716 thousand and $443 thousand for the years ended  December 31, 2007 and 2008,
respectively.  Intangibles are tested for impairment annually. There has been no
impairment recorded.

INCOME TAXES
     The  Corporation  computes its taxable income for both financial  reporting
and  federal  and state tax  purposes on the  accrual  basis.  Income  taxes for
financial  reporting  purposes  are  recorded in  accordance  with SFAS No. 109,
"Accounting for Income Taxes". The asset and liability approach  underlying SFAS
No. 109 requires the  recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary  differences  between the carrying
amounts and tax basis of the Company's assets and liabilities. These differences
between pretax  accounting income and taxable income for return purposes consist
primarily  of the  calculations  for loan loss  allowance,  real estate  losses,
depreciation,   recognition  of  income  and  expenses   associated   with  loan
origination,  profit recognition on discounted  mortgages and securities income.
Management believes the existing net deductible temporary differences which give
rise to the net deferred  income tax assets are realizable on a more likely than
not basis.

                                       23
<PAGE>

SECURITIES  SOLD  UNDER  AGREEMENTS  TO  REPURCHASE
     Securities sold under  agreements to repurchase are treated as debt and are
reflected as a liability in the Consolidated  Statements of Financial Condition.
The book value of securities pledged to secure the repurchase  agreements remain
in the securities portfolio.

ADVERTISING COSTS
     Advertising costs are expensed as incurred.

SEGMENT REPORTING

     SFAS No.  131,  Disclosures  about  Segments of an  Enterprise  and Related
Information,  establishes  standards  for the way  business  enterprises  report
information about operating  segments in annual financial  statements.  The Bank
has one operating segment, "Community Banking." All of the Bank's activities are
interrelated,  and each activity is dependent and assessed  based on how each of
the activities of the Bank supports the others. For example,  commercial lending
is  dependent  upon the ability of the Bank to fund itself with retail  deposits
and other borrowings and to manage interest rate and credit risk. This situation
is also  similar  for  consumer,  residential  and  multi-family/non-residential
mortgage lending.  Accordingly,  all significant  operating  decisions are based
upon analysis of the Bank as one operating segment.

RECLASSIFICATIONS
     Certain items in the 2005 and 2004 consolidated  financial  statements have
been  reclassified  to conform with the  presentation  in the 2006  consolidated
financial statements.  There was no impact on net income or stockholders' equity
for the reclassifications.


RECLASSIFICATION OF CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
     The Corporation reclassified the $1.4 million adjustment to initially apply
SFAS No.  158 from  the 2006  total  comprehensive  income  as  reported  in FMS
Financial  Corporation 2006 Form 10-K into a separate  adjustment of accumulated
comprehensive  loss as reported in FMS Financial  Corporation  Form 2006 10-K/A.
There  was no  impact  on net  income  or  total  stockholders'  equity  for the
reclassification.


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

REPURCHASE  PLAN
     The  Corporation  announced a Stock  Repurchase Plan on September 28, 2005.
The Board of Directors of the  Corporation  authorized  the  repurchase of up to
200,000  shares  of  common  stock in the open  market.  The  timing  of  shares
repurchased will depend on a number of factors  including,  without  limitation,
price,  corporate and regulatory  requirements and market conditions.  The stock
repurchase  program  does not have an  expiration  date  and may be  limited  or
terminated without prior notice.

RECENTLY ISSUED ACCOUNTING STANDARDS
     In December 2004, the Financial  Accounting  Standards  Board (FASB) issued
Statement  of  Financial  Accounting  Standard  (SFAS)  No.  123R,  "Share-Based
Payment" (SFAS 123R). This statement is a revision of SFAS 123,  "Accounting for
Stock-Based  Compensation,"  and supersedes APR Opinion No. 25,  "Accounting for
Stock  Issued to  Employees."  SFAS 123R  requires all  share-based  payments to
employees,  including grants of employee stock options,  to be recognized in the
financial  statements based on their fair values.  The adoption of this standard
had no effect on the  Company's  consolidated  financial  statements as no stock
options have been issued since 1998 and all outstanding  stock options are fully
vested.

     In May 2005,  the FASB issued  Statement  No. 154 (SFAS  154),  "Accounting
Changes and Error  Corrections".  SFAS 154 applies to all  voluntary  changes in
accounting principle and to changes required by an accounting pronouncement when
the  pronouncement  does not include specific  transition  provisions.  SFAS 154
requires  retrospective  application of changes in accounting principle to prior
periods' financial statements unless it is impracticable to determine either the
period-specific  effects or the  cumulative  effect of the  change.  SFAS 154 is
effective for accounting  changes and corrections of errors made in fiscal years
beginning  after  December  15,

                                       24
<PAGE>
2005, with early adoption permitted.  The Corporation's adoption of SFAS 154 did
not have a material impact on the Company's consolidated financial statements.

     In November 2005,  the FASB issued FASB Staff  Position  ("FSP") SFAS 115-1
and 124-1, "The Meaning of  Other-Than-Temporary  Impairment and Its Application
to Certain  Investments." This FSP nullifies certain  requirements of EITF-03-01
on this topic and provides  additional  guidance on when an investment in a debt
or equity security should be considered impaired and when that impairment should
be  considered  other-than-temporary  and  recognized  as a  loss  in  earnings.
Specifically,  the  guidance  clarifies  that an investor  should  recognize  an
impairment    loss   no   later   than   when   the    impairment    is   deemed
other-than-temporary, even if a decision to sell has not been made. The FSP also
required  certain  disclosures  about  unrealized  losses  that  have  not  been
recognized  as  other-than-temporary  impairments.  FSP SFAS 115-1 and 124-1 was
effective for reporting periods  beginning after December 15, 2005.  Adoption of
the FSP did not have a material impact on the Company's  consolidated  financial
statements.

     In March 2006,  the FASB issued  Statement No. 156 (SFAS 156),  "Accounting
for Servicing of Financial  Assets".  SFAS 156 amends SFAS No. 140,  "Accounting
for  Transfers  and  Servicing  of  Financial  Assets  and   Extinguishments  of
Liabilities." SFAS 156 permits, but does not require, an entity to choose either
the amortization  method or the fair value measurement method for measuring each
class of separately recognized servicing assets and servicing liabilities.  SFAS
156 is effective for fiscal years  beginning  after  September 15, 2006 and will
not have a material impact on the Company's  consolidated  financial statements.

     In July 2006,  FASB issued FASB  Interpretation  (FIN 48),  "Accounting for
Uncertainty  in Income  Taxes:  an  interpretation  of FASB  Statement  No. 109,
"Accounting  for Income Taxes".  FIN 48 clarifies the accounting for uncertainty
in income taxes  recognized  in an entity's  financial  statements in accordance
with  Statement of SFAS No. 109. FIN 48 prescribes a  recognition  threshold and
measurement attribute for the financial statement recognition and measurement of
a tax  position  taken or  expected  to be taken  in a tax  return.  FIN 48 also
provides  guidance on  derecognition,  classification,  interest and  penalties,
accounting in interim  periods,  disclosure and transition.  FIN 48 is effective
for fiscal  years  beginning  after  December  15, 2006 and is  currently  under
evaluation  by the Company and is not expected to have a material  impact on the
Company's consolidated financial statements.

     In September  2006, FASB issued  Statement No. 157 (SFAS 157),  "Fair Value
Measurements".  SFAS 157 defines  fair value and  establishes  a  framework  for
measuring fair value in generally accepted accounting principles. This Statement
does not require any new fair value measurements; however, it may change current
practices  related to the definition of fair value,  the methods used to measure
fair  value  and  expanded  disclosures  about  fair  value  measurements.  This
Statement  is  effective  for  financial  statements  issued  for  fiscal  years
beginning after November 15, 2007, and interim periods within those fiscal years
and is not  expected  to have a material  impact on the  Company's  consolidated
financial statements.

     In September  2006, FASB Issued  Statement No. 158 (SFAS 158),  "Employers'
Accounting  for  Defined  Benefit  Pension  and Other  Postretirement  Plans--an
amendment of FASB Statements No. 87, 88, 106, and 132(R)".  SFAS 158 requires an
employer to recognize the overfunded or underfunded  status of a defined benefit
postretirement  plan (other than a multiemployer  plan) as an asset or liability
in its statement of financial  position and to recognize  changes in that funded
status in the year in which the changes occur through comprehensive income. This
Statement also improves financial  reporting by requiring an employer to measure
the  funded  status  of a plan  as of the  date  of its  year-end  statement  of
financial position,  with limited  exceptions.  An employer with publicly traded
equity  securities  is required to initially  recognize  the funded  status of a
defined benefit  postretirement plan and to provide the required  disclosures as
of the end of the fiscal  year  ending  after  December  15,  2006.  The Company
adopted this Statement  effective December 31, 2006. The impact on the Company's
consolidated financial statement was to recognize and record a liability of $2.1
million for the  underfunded  pension and  postretirement  costs at December 31,
2006.

     In September  2006, the SEC staff issued Staff  Accounting  Bulletin No.108
(SAB 108) "Considering the Effects of Prior Year  Misstatements when Quantifying
Misstatements  in  Current  Year  Financial  Statements".  SAB 108 was issued to
provide  consistency  among  registrants  in  the  quantification  of  financial
statement   misstatements.   SAB  108  established  an  approach  that  requires
quantification of financial statement  misstatements based on the effects of the
misstatement  on each of the  Company's  financial  statements  and the  related
disclosures.  SAB 108 allows  registrants to initially apply the approach either
by (1) retroactively adjusting prior financial statements as if the approach had
always been used or (2) recording the  cumulative  effect of initially  applying
the approach as adjustments to the carrying  values of assets and liabilities as
of January 1, 2006 with the related  offset  recorded to the opening  balance of
retained  earnings.  Use of the  "cumulative  effect"  transition  requires full
disclosure as to the nature and amount of each individual error being corrected.
SAB 108 was  adopted  by the  Company  during  2006 and did not have a  material
impact on the Company's consolidated financial statements.

                                       25
<PAGE>

     In February 2007, FASB Issued Statement No. 159 (SFAS 159), "The Fair Value
Option for Financial Assets and Financial  Liabilities-Including an amendment of
FASB No. 115".  SFAS 159 permits  entities to choose to measure  many  financial
instruments  and certain other items at fair value.  This statement is effective
for the beginning of the first fiscal year that begins after  November 15, 2007.
Management  is currently  evaluating  the impact on the  Company's  consolidated
financial statements.

MERGER ANNOUNCED

     FMS Financial  Corporation announced on October 13, 2006 that it has agreed
to merge with Philadelphia based Beneficial Mutual Savings Bank  ("Beneficial").
Under the terms of the  merger  agreement,  Beneficial  will  conduct a minority
stock  offering  to  its  depositors,   our  shareholders  and  the  public  and
immediately thereafter will acquire FMS Financial  Corporation.  Upon completion
of the merger,  Farmers & Mechanics Bank will be merged with and into Beneficial
Mutual Savings Bank. The merger,  which is expected to close mid-year 2007, will
significantly  expand the network of  neighborhood  branches  and ATM  locations
available to our customers across the greater Delaware Valley area.


     The  completion  of the merger is subject to the  approval of the Office of
Thrift Supervision,  Federal Deposit Insurance  Corporation and the Pennsylvania
Department of Banking.  Beneficial Mutual Bancorp, Inc. will file a registration
statement, which will include a prospectus for the minority stock offering and a
proxy  statement/prospectus  to be mailed to  shareholders  of FMS in connection
with the  solicitation  of their  approval  of the  merger  agreement  and their
merger, and other relevant documents with the Securities and Exchange Commission
and the Office of Thrift Supervision with respect to the minority stock offering
and the merger.


2. EARNINGS PER SHARE

     The  following  table  sets  forth the  calculation  of basic  and  diluted
earnings per share for the years ended December 31, 2006, 2005 and 2004.
<TABLE>
<CAPTION>
                                                                   FOR THE YEAR ENDED DECEMBER 31,
                                                         -----------------------------------------------------
                                                               2006             2005              2004
--------------------------------------------------------------------------------------------------------------
<S>                                                            <C>               <C>               <C>
BASIC EARNINGS PER SHARE:
Net income available to common shareholders                    $5,319,040        $6,718,232        $8,768,229

Average common shares outstanding                               6,517,747         6,504,143         6,495,218

Net income per common share                                         $0.82             $1.03             $1.35

DILUTED EARNINGS PER SHARE:
---------------------------
Net income available to common shareholders
on a diluted basis                                             $5,319,040        $6,718,232        $8,768,229

Average common shares outstanding                               6,517,747         6,504,143         6,495,218
Additional shares considered in diluted
computation assuming exercise of stock options                      9,185            16,495            34,251
                                                               ----------        ----------        ----------
Adjusted weighted average common shares outstanding             6,526,932         6,520,638         6,529,469

Net income per common share                                         $0.81             $1.03             $1.34

</TABLE>

                                       26
<PAGE>


3. INVESTMENT SECURITIES HELD TO MATURITY

     A comparison  of amortized  cost and  estimated  market value of investment
securities held to maturity at December 31, 2006 and 2005 are as follows:
<TABLE>
<CAPTION>
                                                 DECEMBER 31, 2006
                        --------------------------------------------------------------------
                                                 GROSS           GROSS          ESTIMATED
                              AMORTIZED        UNREALIZED      UNREALIZED         MARKET
                                 COST            GAINS           LOSSES           VALUE
--------------------------------------------------------------------------------------------
<S>                        <C>                  <C>          <C>              <C>
U.S. Gov't agencies        $ 197,325,677        $      -     $ (2,778,005)    $ 194,547,672

Agency MBS's                 118,913,950         538,065       (1,472,350)      117,979,665

CMO'S                         60,057,762               -       (1,903,220)       58,154,542

Pass through
certificates                  45,553,222           4,323       (1,204,033)       44,353,512

Municipal bonds                6,590,806           1,136                -         6,591,942
--------------------------------------------------------------------------------------------
 Total                     $ 428,441,417      $  543,524     $ (7,357,608)    $ 421,627,333
============================================================================================
<CAPTION>
                                                 DECEMBER 31, 2005
                        --------------------------------------------------------------------
                                                 GROSS           GROSS          ESTIMATED
                              AMORTIZED        UNREALIZED      UNREALIZED         MARKET
                                 COST            GAINS           LOSSES           VALUE
--------------------------------------------------------------------------------------------
<S>                        <C>                <C>            <C>              <C>
U.S. Gov't agencies        $ 192,328,423      $   20,699     $ (2,164,668)    $ 190,184,454

Agency MBS's                 157,095,589       1,310,736       (1,790,650)      156,615,675

CMO'S                         71,621,287               -       (1,973,989)       69,647,298

Pass through
certificates                  51,100,285           9,879       (1,250,682)       49,859,482

Municipal bonds               11,390,725           2,302                -        11,393,027
--------------------------------------------------------------------------------------------
Total                      $ 483,536,309     $ 1,343,616     $ (7,179,989)    $ 477,699,936
============================================================================================
</TABLE>


     Investments  in CMO's are issued by Fannie Mae (FNMA),  Freddie Mac (FHLMC)
and private label non-agencies,  issued by major financial  institutions,  which
are rated AAA or AA.  During 2006,  the Bank sold $11.8 million of MBS's held to
maturity,  which resulted in a realized gain of $365 thousand. The sale of these
securities  qualified as maturities in accordance  with FASB No. 115 "Accounting
for Certain Investments in Debt and Equity Securities",  as the Bank had already
collected a  substantial  portion (in excess of 85%) of the principal due of the
scheduled payments and prepayments.  The Bank has the intent and ability to hold
these  securities to maturity.  The amortized cost and estimated market value of
investments held to maturity at December 31, 2006, by contractual maturity,  are
shown in the following table.  Expected  maturities may differ as borrowers have
the right to call or prepay certain obligations.


                             DECEMBER 31, 2006
                      --------------------------------
                         AMORTIZED       ESTIMATED
                            COST       MARKET VALUE
------------------------------------------------------
Due one year or less      $ 16,490,167   $ 16,400,156
Due one to five years       40,176,616     39,526,711
Due five to ten years       87,122,082     85,674,523
Due after ten years        284,652,552    280,025,943
------------------------------------------------------
                          $428,441,417   $421,627,333
------------------------------------------------------

                                       27
<PAGE>

4. INVESTMENT SECURITIES AVAILABLE FOR SALE

     The  amortized  cost and estimated  market value of  investment  securities
available for sale at December 31, 2006 and 2005 are as follows:
<TABLE>
<CAPTION>
                                                 DECEMBER 31, 2006
                        --------------------------------------------------------------------
                                                 GROSS             GROSS         ESTIMATED
                              AMORTIZED        UNREALIZED        UNREALIZED        MARKET
                                COST             GAINS            LOSSES           VALUE
--------------------------------------------------------------------------------------------
<S>                         <C>                 <C>           <C>              <C>
U.S. Gov't agencies         $ 65,398,776        $      -      $  (917,439)     $ 64,481,337

Agency MBS's                  44,251,261          54,318         (499,770)       43,805,809

Pass through
certificates                  19,586,361               -         (288,237)       19,298,124

CMO'S                         18,859,081               -         (438,636)       18,420,445
--------------------------------------------------------------------------------------------
Total                      $ 148,095,479      $   54,318     $ (2,144,082)    $ 146,005,715
============================================================================================
<CAPTION>

                                                 DECEMBER 31, 2005
                        --------------------------------------------------------------------
                                                 GROSS             GROSS         ESTIMATED
                              AMORTIZED        UNREALIZED        UNREALIZED        MARKET
                                COST             GAINS            LOSSES           VALUE
--------------------------------------------------------------------------------------------
<S>                         <C>                 <C>           <C>              <C>
U.S. Gov't agencies         $ 60,411,063        $      -      $  (829,667)     $ 59,581,396

Agency MBS's                  52,082,272          79,909         (519,495)       51,642,686

Pass through
certificates                  22,647,193           2,042         (231,589)       22,417,646

CMO'S                         22,350,620               -         (360,253)       21,990,367
--------------------------------------------------------------------------------------------
Total                      $ 157,491,148      $   81,951     $ (1,941,004)    $ 155,632,095
============================================================================================
</TABLE>


     Investments  in CMO's are issued by Fannie Mae (FNMA),  Freddie Mac (FHLMC)
and private label non-agencies,  issued by major financial  institutions,  which
are  rated  AAA  or AA.  The  amortized  cost  and  estimated  market  value  of
investments  available for sale at December 31, 2006, by  contractual  maturity,
are shown in the following  table.  Expected  maturities may differ as borrowers
have the right to call or prepay certain obligations.


                             DECEMBER 31, 2006
                      --------------------------------
                         AMORTIZED       ESTIMATED
                            COST       MARKET VALUE
------------------------------------------------------
Due one year or less   $         -     $         -
Due one to five years    37,924,492     37,528,226
Due five to ten years    19,087,756     18,703,043
Due after ten years      91,083,231     89,774,446
------------------------------------------------------
                       $148,095,479   $146,005,715
======================================================


     There were no sales of investment securities available for sale during 2006
or 2005.  During  2004,  the Bank sold $17.0  million  of MBSs,  CMOs and equity
securities  available  for  sale,  which  resulted  in a  realized  gain of $683
thousand.

                                       28
<PAGE>


     The following table presents the gross unrealized  losses and fair value of
the  Bank's  investments  with  unrealized  losses  that  are not  deemed  to be
other-than-temporarily impaired, aggregated by investment category and length of
time that the individual  securities have been in continuous unrealized position
at December 31, 2006. The  unrealized  losses are due to changes in market value
stemming from changes in the general level of interest  rates and are considered
to be temporary.


<TABLE>
<CAPTION>
                                                                     DECEMBER 31, 2006
                                --------------------------------------------------------------------------------------------
                                      LESS THAN 12 MONTHS           12 MONTHS OR GREATER                  TOTAL
                                --------------------------------------------------------------------------------------------
                                                  UNREALIZED                    UNREALIZED                     UNREALIZED
                                   FAIR VALUE       LOSSES       FAIR VALUE       LOSSES        FAIR VALUE       LOSSES
                                --------------------------------------------------------------------------------------------
     INVESTMENT SECURITIES
       AVAILABLE FOR SALE:
---------------------------------
<S>                                 <C>            <C>           <C>             <C>            <C>            <C>
U.S. Gov't agencies                 $ 4,950,000     $  (50,000)  $ 59,531,337    $  (867,439)   $ 64,481,337   $  (917,439)
Agency MBS's                          7,976,824        (27,402)    29,261,754       (472,368)     37,238,578      (499,770)
Pass through certificates             3,708,209        (63,448)    15,589,915       (224,789)     19,298,124      (288,237)
CMO's                                         -              -     18,420,445       (438,636)     18,420,445      (438,636)
                                --------------------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES
  AVAILABLE FOR SALE                $16,635,033     $ (140,850)  $122,803,451    $(2,003,232)   $139,438,484   $(2,144,082)
                                --------------------------------------------------------------------------------------------

     INVESTMENT SECURITIES
        HELD TO MATURITY:
---------------------------------
U.S. Gov't agencies                $ 14,832,850    $  (110,666)  $179,714,822   $ (2,667,339)  $ 194,547,672  $ (2,778,005)
Agency MBS's                          4,948,808        (16,494)    74,259,528     (1,455,856)     79,208,336    (1,472,350)
Pass through certificates               249,692         (1,101)    43,498,235     (1,202,932)     43,747,927    (1,204,033)
CMO's                                 1,188,885         (1,443)    56,965,657     (1,901,777)     58,154,542    (1,903,220)
                                --------------------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES
  HELD TO MATURITY                 $ 21,220,235    $  (129,704)  $354,438,242   $ (7,227,904)  $ 375,658,477  $ (7,357,608)
                                --------------------------------------------------------------------------------------------
TOTAL                              $ 37,855,268    $  (270,554)  $477,241,693   $ (9,231,136)  $ 515,096,961  $ (9,501,690)
                                ============================================================================================
</TABLE>

                                       29
<PAGE>

5. LOANS, NET

     Loans, net at December 31, 2006 and 2005 consist of the following:

                                    DECEMBER 31,
                         ------------------------------------
                                2006             2005
-------------------------------------------------------------
Mortgage Loans               $  288,052,449   $  286,476,251
Construction Loans                3,759,783        1,774,630
Commercial Construction           2,955,926        6,942,091
Consumer Loans                    2,250,836        2,355,697
Commercial Real Estate          132,217,307      127,704,281
Commercial Business              26,276,040       22,550,190
-------------------------------------------------------------
Subtotal                        455,512,341      447,803,140
Less:
    Deferred loan fees               22,587          168,998
    Allowance for
       possible loan
       losses                     5,390,570        5,062,785
-------------------------------------------------------------
Total loans, net             $  450,099,184   $  442,571,357
=============================================================

     At December  31, 2006 and 2005 the recorded  investment  in loans for which
impairment had been recognized in accordance  with SFAS No. 114,  "Accounting by
Creditors for  Impairment of a Loan",  amended by SFAS No. 118,  "Accounting  by
Creditors  for  Impairment  of a Loan -  Income  Recognition  and  Disclosures",
totaled  $2.9  million and $1.8  million,  respectively.  At December  31, 2006,
impaired loans of $985 thousand related to loans that were individually measured
for impairment  with a valuation  allowance of $414 thousand and $1.9 million of
loans that were collectively  measured for impairment with a valuation allowance
of $210 thousand.  At December 31, 2005, impaired loans of $985 thousand related
to loans  that  were  individually  measured  for  impairment  with a  valuation
allowance  of $414  thousand and $794  thousand of loans that were  collectively
measured for  impairment  with a valuation  allowance of $16  thousand.  For the
years ended  December  31, 2006 and 2005,  the average  recorded  investment  in
impaired loans was  approximately  $2.1 million and $2.2 million,  respectively.
During the years ended  December 31, 2006 and 2005, the  Corporation  recognized
$186 thousand and $231 thousand, respectively, of interest on impaired loans.

     The principal amount of non-accrual loans at December 31, 2006 and 2005 was
$2.9 million and $1.8  million,  respectively.  Interest  income on  non-accrual
loans that would have been  recorded  in 2006 under the  original  terms of such
loans was $184 thousand, and the interest income actually recognized in 2006 for
such loans was $142 thousand.  Interest  income on non-accrual  loans that would
have been  recorded  in 2005  under the  original  terms of such  loans was $133
thousand,  and the actual interest income  recognized in 2005 for such loans was
$101 thousand.

     Loans  pledged as  collateral  for  advances  and lines of credit  from the
Federal Home Loan Bank totaled $82.6 million and $41.4 million,  at December 31,
2006 and 2005, respectively.

                                       30
<PAGE>

     The Bank  originates and purchases both  adjustable and fixed interest rate
loans. At December 31, 2006, the composition of these loans is as follows:
<TABLE>
<CAPTION>

                                          MATURING      MATURING
                                           DURING      FROM 2008     MATURING
(IN THOUSANDS)                              2007      THROUGH 2011  AFTER 2011     TOTAL
-----------------------------------------------------------------------------------------
<S>                                      <C>           <C>          <C>         <C>
Mortgage Loans                           $   2,603     $  12,551    $ 272,898   $288,052
Construction Loans                           3,760             0            0      3,760
Commercial Construction                      2,493           463            0      2,956
Consumer Loans                                 876           785          590      2,251
Commercial Real Estate                       5,095         7,759      119,363    132,217
Commercial Business                         13,635         6,692        5,949     26,276
-----------------------------------------------------------------------------------------
              Total                      $  28,462     $  28,250    $ 398,800   $455,512
-----------------------------------------------------------------------------------------

Interest sensitivity on the above loans:
       Loans with predetermined rates    $  14,678     $  25,689    $ 282,424   $322,791
       Loans with adjustable or
           floating rates                   13,784         2,561      116,376    132,721
-----------------------------------------------------------------------------------------
              Total                      $  28,462     $  28,250    $ 398,800   $455,512
=========================================================================================
</TABLE>
     Changes in the allowance for loan losses are as follows:

                                YEARS ENDED DECEMBER 31,
                          ----------------------------------------
                              2006         2005        2004
------------------------------------------------------------------
Balance at beginning
    of year                 $ 5,062,785  $ 4,719,192  $ 4,407,552
Provision charged to
    operations                  330,000      360,000      330,000
Charge-offs                      (9,311)     (58,587)     (22,860)

Recoveries                        7,096       42,180        4,500
------------------------------------------------------------------
Balance at end of year      $ 5,390,570  $ 5,062,785  $ 4,719,192
==================================================================


6. ACCRUED INTEREST RECEIVABLE
     Accrued interest receivable at December 31, 2006 and 2005 are summarized by
major classification, as follows:
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                      ----------------------------------
                                                            2006            2005
----------------------------------------------------------------------------------------
<S>                                                       <C>              <C>
Accrued interest on loans                                 $  2,016,923     $  1,833,297
Accrued interest on investment securities held to
maturity                                                     3,231,833        3,361,066
Accrued interest on investment securities available
for sale                                                     1,123,598        1,030,008
----------------------------------------------------------------------------------------
Total accrued interest receivable                         $  6,372,354     $  6,224,371
----------------------------------------------------------------------------------------
</TABLE>


                                       31
<PAGE>


7. OFFICE PROPERTIES AND EQUIPMENT, NET


     Office  properties  and  equipment  at  December  31,  2006  and  2005  are
summarized by major classification, as follows:
<TABLE>
<CAPTION>
                                             DECEMBER 31,
                                    -------------------------------
                                         2006           2005
-------------------------------------------------------------------
<S>                                    <C>            <C>
Land, buildings and improvements       $ 39,892,255   $ 39,687,711
Furniture and equipment                   8,319,452      7,945,004
Computers                                 6,438,325      6,318,293
-------------------------------------------------------------------
Total                                    54,650,032     53,951,008

Less accumulated depreciation           (20,911,104)   (19,149,921)
-------------------------------------------------------------------
Office properties and equipment, net   $ 33,738,928   $ 34,801,087
===================================================================
</TABLE>

     Depreciation  expense totaled $2.0 million for the years ended December 31,
2006, 2005 and 2004.


8. DEPOSITS


     Deposits at December  31, 2006 and 2005  consisted of the  following  major
classifications and weighted average interest rates:

                                           DECEMBER 31, 2006
                          ----------------------------------------------
                              WEIGHTED                        PERCENT
                            AVERAGE RATE         AMOUNT       OF TOTAL
------------------------------------------------------------------------

Non-interest checking           0.00%           $ 194,206,626    20.81%
Checking accounts               2.93%             217,387,796    23.30%
Savings accounts                0.61%             175,056,992    18.76%
Money market accounts           1.22%             114,658,464    12.29%
Time deposits                   3.31%             231,792,888    24.84%
------------------------------------------------------------------------
Total                           1.73%           $ 933,102,766   100.00%
========================================================================

                                          DECEMBER 31, 2005
                          ----------------------------------------------
                              WEIGHTED                        PERCENT
                            AVERAGE RATE         AMOUNT       OF TOTAL

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

Non-interest checking           0.00%           $ 187,075,982    19.75%
Checking accounts               1.88%             226,271,954    23.89%
Savings accounts                0.59%             188,866,936    19.94%
Money market accounts           0.89%             132,960,782    14.04%
Time deposits                   2.34%             211,891,770    22.38%
------------------------------------------------------------------------
Total                           1.21%           $ 947,067,424   100.00%
========================================================================


     The aggregate  amount of time  deposits in excess of $100 thousand  totaled
$43.9  million at December  31,  2006.  Generally,  deposits  greater  than $100
thousand are not federally  insured.  Deposits from related  parties,  including
directors and named executive officers, totaled $1.7 million and $1.2 million at
December 31, 2006 and 2005, respectively. A summary of time deposits by maturity
at December 31, 2006 is as follows:


YEARS ENDED DECEMBER 31,             AMOUNT
-------------------------------------------------
2007                             $180,369,639
2008                               27,257,113
2009                               10,771,793
2010                                5,661,231
2011                                7,719,241
Thereafter                             13,871
-------------------------------------------------
Total                            $231,792,888
=================================================

                                       32
<PAGE>

     A summary of interest expense on deposits is as follows:

                                   YEARS ENDED DECEMBER 31,
                         ----------------------------------------------
                              2006           2005           2004
-----------------------------------------------------------------------
Checking accounts         $ 6,293,415     $ 4,124,244     $ 1,717,164
Savings accounts            1,137,763       1,149,484       1,070,861
Money market accounts       1,547,516       1,266,737       1,001,238
Time deposits               7,105,205       4,877,824       3,965,128
-----------------------------------------------------------------------
Total interest expense    $16,083,899     $11,418,289     $ 7,754,391
=======================================================================


9.   SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE


     At December 31, 2006, the Bank had securities  sold under the agreements to
repurchase  (repurchase  agreements) in the aggregate  amount of $115.0 million.
The repurchase  agreements are  collateralized by U.S.  Government agency notes,
MBSs,  CMOs and loans with a market value of $119.4  million.  Accrued  interest
payable  totaled $600 thousand and $1.0 million,  at December 31, 2006 and 2005,
respectively.
<TABLE>
<CAPTION>

                        YEAR ENDED DECEMBER 31, 2006
-----------------------------------------------------------------------------
                                          WEIGHTED      MATURITY    CALL
COUNTER PARTY            AMOUNT         AVERAGE RATE      DATE     FEATURE
-----------------------------------------------------------------------------
<S>                      <C>                <C>          <C>        <C>
FHLB                     $  20,000,000      5.72%        12/19/07   03/19/07
FHLB                        20,000,000      5.95%        08/30/10   03/01/07
FHLB                        20,000,000      5.54%        10/18/10   01/17/07
FHLB                        20,000,000      4.85%        12/20/10   03/20/07
FHLB                        20,000,000      5.22%        12/20/10   03/20/07
FHLB                         5,000,000      3.73%        01/05/16   01/05/07
Merrill Lynch               10,000,000      3.90%        01/06/16   01/06/08
-----------------------------------------------------------------------------
TOTAL                    $ 115,000,000      5.24%
=============================================================================
<CAPTION>

                        YEAR ENDED DECEMBER 31, 2005
-----------------------------------------------------------------------------
                                          WEIGHTED      MATURITY    CALL
COUNTER PARTY            AMOUNT         AVERAGE RATE      DATE     FEATURE
-----------------------------------------------------------------------------
<S>                      <C>                <C>          <C>        <C>
FHLB                     $  20,000,000      5.72%        12/19/07   03/19/06
FHLB                        20,000,000      5.13%        01/14/08   01/14/06
FHLB                        20,000,000      5.95%        08/30/10   03/01/06
FHLB                        20,000,000      5.54%        10/18/10   01/18/06
FHLB                        20,000,000      4.85%        12/20/10   03/20/06
FHLB                        20,000,000      5.22%        12/20/10   03/20/06
FHLB                        10,000,000      4.18%        02/28/11   02/28/06
FHLB                        15,000,000      3.84%        04/06/11   01/06/06
Merrill Lynch               10,000,000      3.81%        11/02/15   11/02/06
Merrill Lynch               10,000,000      3.89%        11/04/15   11/04/06
Merrill Lynch               10,000,000      3.91%        11/08/15   11/08/06
-----------------------------------------------------------------------------
Total                    $ 175,000,000      4.93%
=============================================================================
</TABLE>


10.  ACCRUED INTEREST PAYABLE
     Accrued  interest  payable at December 31, 2006 and 2005 are  summarized by
major classification, as follows:

                                                      DECEMBER 31,
                                            ----------------------------------
                                                  2006             2005
------------------------------------------------------------------------------
Accrued interest on deposits                      $   758,371     $   324,676

Accrued interest on repurchase agreements             600,025       1,024,636
Accrued interest on FMS Statutory Trust I
and II                                                109,349          29,041
------------------------------------------------------------------------------
Total accrued interest payable                   $  1,467,745    $  1,378,353
------------------------------------------------------------------------------


                                       33
<PAGE>


11.   INCOME TAXES


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

                                                                     DECEMBER 31,
                                 -------------------------------------------------------------------------------------
                                              2006                         2005                       2004
----------------------------------------------------------------------------------------------------------------------
                                        AMOUNT         PERCENT       AMOUNT       PERCENT       AMOUNT      PERCENT
----------------------------------------------------------------------------------------------------------------------
<S>                                      <C>              <C>         <C>            <C>        <C>            <C>
Tax at Federal tax rate:                 $   2,953,167    34.00%      $ 3,863,989    34.00%     $ 5,162,546    35.00%
Increase (decrease) from:
  State income taxes,
  net of federal income tax benefit            624,702     7.19           813,465     7.16          925,297     6.27

  Tax exempt interest income                  (96,203)    (1.11)          (45,275)    (.40)         (10,680)    (.07)

  Other                                      (114,920)    (1.32)           14,262      .13          (95,262)    (.65)
----------------------------------------------------------------------------------------------------------------------
Total                                    $   3,366,746    38.76%      $ 4,646,441    40.89%     $ 5,981,901    40.55%
======================================================================================================================
</TABLE>

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

                                                      DECEMBER 31
                                         ----------------------------------
                                                   2006             2005
---------------------------------------------------------------------------

Deferred income tax assets:
     Allowance for possible loan losses        $  2,202,048    $ 2,068,148
     Compensation and pension asset                 167,931         82,876
     Amortization of deposit premiums               789,262        635,674
     Pension and postretirement benefits          1,067,049        204,250
     Accrued expenses                               168,888        137,566
     Other                                           32,412         24,461
---------------------------------------------------------------------------
Gross deferred tax assets                      $  4,427,590    $ 3,152,975
===========================================================================
Deferred income tax liabilities:
     Prepaid deposit insurance premiums        $     13,129    $    13,129
     Depreciation                                  (102,697)       168,544
     Deferred loan fees - net                       422,320        363,661
---------------------------------------------------------------------------
Gross deferred tax liabilities                  $   332,752    $   545,334
---------------------------------------------------------------------------
Deferred income tax asset, net                 $  4,094,838    $ 2,607,641
===========================================================================

     There was no change in the valuation  allowance for the year ended December
31, 2006, 2005 and 2004.

                                       34
<PAGE>

     The following represents the components of income tax expense for the years
ended December 31, 2006, 2005 and 2004, respectively.
<TABLE>
<CAPTION>
                                                     DECEMBER 31,
                                      --------------------------------------------
                                           2006          2005           2004
----------------------------------------------------------------------------------
<S>                                      <C>            <C>           <C>
Current Federal tax provision            $ 2,975,624    $ 3,831,359   $ 4,645,184

Current State tax provision                1,015,520      1,272,280     1,443,252
----------------------------------------------------------------------------------
Total Current provision                  $ 3,991,144    $ 5,103,639   $ 6,088,436
----------------------------------------------------------------------------------

Deferred Federal tax provision (benefit)   ($555,395)     ($417,440)     ($86,817)

Deferred State tax provision (benefit)       (69,003)       (39,758)      (19,718)
----------------------------------------------------------------------------------
Total deferred provision (benefit)          (624,398)      (457,198)     (106,535)
----------------------------------------------------------------------------------
Total                                    $ 3,366,746    $ 4,646,441   $ 5,981,901
==================================================================================
</TABLE>


12.  LEASES


     The Bank leases  eleven  branch  locations,  which  expire over the next 13
years.  These leases generally  provide for the payment of taxes and maintenance
by the lessee.  Most of these operating  leases provide the Bank with the option
to renew the lease after the initial lease term.  Future minimum rental payments
under  existing  leases as of  December  31,  2006 are as  follows:

YEAR ENDING DECEMBER 31,              AMOUNT
-----------------------------------------------
2007                               $   375,505
2008                                   305,974
2009                                   250,850
2010                                   216,325
2011 and beyond                        609,317
-----------------------------------------------
TOTAL                              $ 1,757,971
===============================================

      The  leases  contain  cost of living  adjustments  based on changes in the
consumer  price  index.  The minimum  lease  payments  shown above  include base
rentals  exclusive  of any  future  adjustments.  Total  rent  expense  for  all
operating leases amounted to $442 thousand,  $363 thousand and $329 thousand for
fiscal years 2006, 2005 and 2004, respectively.

                                       35
<PAGE>

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


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

     The Bank is considered "well capitalized" by OTS regulation at December 31,
2006 and 2005.  The following  table  presents the capital ratios of the Bank at
December 31, 2006 and 2005.

<TABLE>
<CAPTION>
                                                                                       MINIMUM
                                                                                      TO BE WELL
                                                                                     CAPITALIZED
                                                               MINIMUM               UNDER PROMPT
                                                               CAPITAL            CORRECTIVE ACTION
                                       ACTUAL                 REQUIREMENT             PROVISIONS
                               ------------------------------------------------------------------------
                                  AMOUNT     RATIO        AMOUNT      RATIO         AMOUNT      RATIO
-------------------------------------------------------------------------------------------------------
DECEMBER 31, 2006 (THOUSANDS)
-------------------------------------------------------------------------------------------------------
<S>                               <C>           <C>        <C>            <C>         <C>         <C>
Tier 1 (Core) Capital:            $  94,800     7.98%      $  47,511      4.0%        $  59,389   5.0%
                                                                   .
Risk-Based Capital:               $  99,777    19.27%      $  41,416      8.0%        $  51,770  10.0%

Tier 1 Risked-Based Capital:      $  94,800    18.31%      $  20,708      4.0%        $  31,062   6.0%


Tangible Capital:                 $  94,800     7.98%      $  17,817      1.5%        $  24,377   2.0%
-------------------------------------------------------------------------------------------------------
DECEMBER 31, 2005 (THOUSANDS)
-------------------------------------------------------------------------------------------------------

Tier 1 (Core) Capital:            $  89,616     7.29%      $  49,170      4.0%        $  61,463   5.0%
                                                                   .
Risk-Based Capital:               $  94,265    18.13%      $  41,572      8.0%        $  51,966  10.0%

Tier 1 Risked-Based Capital:      $  89,616    17.24%      $  20,794      4.0%        $  31,191   6.0%

Tangible Capital:                 $  89,616     7.29%      $  18,442      1.5%        $  24,589   2.0%
=======================================================================================================
</TABLE>

     A  reconciliation  of the Bank's  GAAP  capital to the  regulatory  capital
amounts is provided in the following table:
<TABLE>
<CAPTION>

                                                         DECEMBER 31, 2006     DECEMBER 31, 2005
-------------------------------------------------------------------------------------------------
<S>                                                         <C>               <C>
BANK GAAP CAPITAL                                           $  94,220,043     $     91,137,726
Accumulated other comprehensive loss                            2,485,410            1,099,630
Less:
  Subsidiary investments not includable                          (745,645)            (745,645)
Core deposit intangible                                        (1,159,614)          (1,875,822)
-------------------------------------------------------------------------------------------------
TIER 1, TIER 1 RISK-BASED AND TANGIBLE CAPITAL              $  94,800,194     $     89,615,889
-------------------------------------------------------------------------------------------------
General valuation allowance                                     4,977,001            4,649,217
-------------------------------------------------------------------------------------------------
RISK-BASED CAPITAL                                          $  99,777,195     $     94,265,106
===============================================================================================
</TABLE>


                                       36
<PAGE>


14. RETIREMENT PLANS


     The Bank has a defined benefit pension plan for active employees.  The Bank
also provides certain health care and life insurance benefits to certain retired
employees.

     As of December  31, 2006,  the  Corporation  adopted SFAS 158,  "Employers'
Accounting for Defined Benefit and Other  Postretirement  Plans," which requires
recognition of the funded status of these plans in the consolidated statement of
financial  condition.  At December 31, 2006, the incremental  effect of applying
SFAS 158 on  individual  line items in the  Consolidated  Statement of Financial
Condition are as follows:

<TABLE>
<CAPTION>
                                                                    BEFORE                             AFTER
                                                                 APPLICATION OF                     APPLICATION OF
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION- LINE ITEMS           SFAS 158        ADJUSTMENTS        SFAS 158
---------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>               <C>               <C>
Deferred income taxes                                         $    3,232,039    $   862,799       $    4,094,838
Total assets                                                  $1,187,249,624    $   862,799       $1,188,112,423
Pension benefit liability                                     $      319,092    $ 1,968,131       $    2,287,223
Postretirement liability                                      $      500,000    $   143,983       $      643,983
Other liabilities (including benefit & postretirement
   liability shown above)                                     $    4,239,263    $ 2,112,114       $    6,351,377
Total liabilities                                             $1,107,639,751    $ 2,112,114       $1,109,751,865
Accumulated other comprehensive loss-net of deferred
 income taxes                                                 $   (1,236,095)   $(1,249,315)      $   (2,485,410)
Total stockholders' equity                                    $   79,609,873    $(1,249,315)      $   78,360,558
Total liabilities and stockholders' equity                    $1,187,249,624    $   862,799       $1,188,112,423
</TABLE>

     Amounts  recognized is accumulated other  comprehensive  income at December
31, 2006 are as follows:

                         PENSION        POST-RETIREMENT
                          PLAN               PLAN
                   ---------------------------------------
Net loss                 $  515,113       $143,983
Prior service cost        1,453,018              -


     The  estimated  net  loss,  net  prior  service  cost,  and net  transition
obligation  for the pension  benefits  that will be amortized  from  accumulated
other comprehensive  income into net periodic pension costs over the next fiscal
year are $0, $98 thousand and $0, respectively.  It is estimated that there will
not be any net loss, net prior service cost or net transition obligation for the
post-retirement   benefits  that  will  be  amortized  from  accumulated   other
comprehensive income into periodic  post-retirement  benefit costs over the next
fiscal year.



     Net pension  expense was $1.0  million,  $1.0 million and $822 thousand for
years ended December 31, 2006,  2005 and 2004,  respectively.  The components of
net pension cost are as follows:

                               YEARS ENDED DECEMBER 31,
                       ------------------------------------------
                            2006          2005         2004
-----------------------------------------------------------------
Service cost           $ 1,025,847   $   947,524      $ 871,039
Interest cost              744,708       742,271        563,963
Return on assets        (1,537,656)     (487,280)      (659,381)
Net amortization
    and deferral           786,636      (191,135)        46,634
-----------------------------------------------------------------
Net periodic
    pension cost       $ 1,019,535   $ 1,011,380      $ 822,255
=================================================================

                                       37
<PAGE>

     The following table presents a  reconciliation  of the funded status of the
defined benefit pension plan at December 31, 2006 and 2005:

                                          DECEMBER 31,
                               -----------------------------------
                                     2006              2005
------------------------------------------------------------------
Accumulated benefit obligation
Projected benefit obligation    $16,100,982         $  13,952,999
Fair value of plan assets        13,813,759            12,146,662
------------------------------------------------------------------
Unfunded of plan assets over
    projected benefit
    obligation                    2,287,223             1,806,337
Unrecognized net loss                     -               (21,883)
Unrecognized prior service cost           -            (1,551,445)
------------------------------------------------------------------
Accrued pension cost
    included in the
    consolidated
    balance sheet               $ 2,287,223               233,009
==================================================================

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

                                                     DECEMBER 31,
                                         -------------------------------
CHANGE IN PROJECTED BENEFIT OBLIGATION           2006            2005
------------------------------------------------------------------------
Projected benefit obligation
  at beginning of year                      $ 13,952,889   $ 10,844,831
Service cost                                   1,025,847        947,524
Interest cost                                    744,708        742,271
Actuarial loss                                 1,211,309      1,570,235
Benefits paid                                   (833,771)      (151,972)
------------------------------------------------------------------------
Projected benefit obligation
  at end of year                              16,100,982     13,952,889
------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
------------------------------------------------------------------------
Fair value of plan assets
  at beginning of year                        12,146,662     10,712,030
Actual return of plan assets                   1,537,656        487,280
Employer contribution                            963,212      1,099,324
Benefits paid                                   (833,771)      (151,972)
------------------------------------------------------------------------
Fair value of plan assets
  at end of year                            $ 13,813,759   $ 12,146,662
========================================================================


     Actuarial assumptions used in determining pension amounts are as follows:

                              YEARS ENDED DECEMBER 31,
                         -----------------------------------
                             2006       2005       2004
------------------------------------------------------------
Discount rate for periodic
    pension cost             5.50%      6.00%      6.00%
Discount rate for
    benefit obligation       5.50%      5.50%      6.00%
Rate of increase in
    compensation levels
    and social security
    wage base                4.00%      4.00%      4.00%
Expected long-term
    rate of return on
    plan assets              7.00%      7.00%      7.00%
------------------------------------------------------------

                                       38
<PAGE>

     In accordance with the provisions to the Statement of Financial  Accounting
Standards  No. 132  (revised)  "Employer's  Disclosure  about  Pension and Other
Postretirement  Benefits"  disclosures have been increased to include investment
strategy, asset allocation mix, contributions, measurement dates and accumulated
benefit obligation levels for pension plans.

     The Pension Investment Committee of the Corporation in conjunction with the
Board of Directors oversees the investment of the plan assets.  During 2006, the
committee  conducted a review of the portfolio structure and the strategic asset
allocation  including the relationship of plan assets to plan  liabilities.  The
goals of the asset investment strategy are to:

     * Maximize the return on assets, over the long-term, by investing primarily
in equities.  The inclusion of additional  asset classes with differing rates of
return,  volatility  and  correlation  are  utilized to reduce risk by providing
diversification relative to equities.

     * Diversify  investments  within asset classes to maximize  preservation of
principal and minimize  over-exposure to any one investment,  thereby minimizing
the impact of losses in single investments.

     *Provide a total  return  that,  over the  long-term,  provides  sufficient
assets  to fund  its  liabilities  subject  to an  appropriate  level  of  risk,
contributions and pension expense.

     The plan asset allocation percentage and market values at December 31, 2006
are as follows:

                                               % OF
                            MARKET VALUE      ASSETS
--------------------------------------------------------
Cash                        $   831,635         6.0%
Equity securities            12,931,179        93.6%
Preferred stock securities       30,438         0.2%
Closed-end funds                 20,507         0.2%
--------------------------------------------------------
Total Plan Assets           $13,813,759       100.00%
========================================================

     The Bank regularly monitors our pension asset allocation. Senior management
review  performance  results at least  quarterly.  As of December 31, 2006,  our
target asset allocation was 94% U.S. common stock equities, 0.2% preferred stock
equities, 0.2% mutual funds and 5.5% in cash and cash equivalents.

     Funding policy for the qualified plan is to make annual  contributions that
satisfy the minimum funding  requirements of Employee Retirement Income Security
Act 1974 ("ERISA") but that do not exceed the maximum  deductible  limits of the
Internal Revenue Code. The contributions to the pension plan are determined each
year as a result of an actuarial  valuation of the plan. In 2006 and 2005,  $955
thousand and $1.0 million,  respectively  were contributed by the Corporation to
meet the pension funding requirements.  The contribution to the pension plan for
2007 is expected  to be  approximately  $779  thousand.  The  pension  plan will
maintain  compliance with the ERISA as amended,  and any applicable  regulations
and laws.  Total  pension  benefits  expected  to be paid in each year from 2007
through 2011 are $287 thousand, $349 thousand, $408 thousand, $439 thousand, and
$477 thousand,  respectively.  The aggregate expected benefits to be paid in the
five years from 2012 through 2016 are $3.0 million.

     The Bank also maintains a 401(k) plan, which is a defined contribution plan
established  in 2003.  All  employees are eligible to  participate  in this plan
after completing one year of service and are age twenty one or older. The Bank's
contribution  equals the first 3% of the employee's  contributions and match 50%
above 3% up to 7% of their  compensation  for the plan year.  Participant's  are
vested in their and the Bank's contribution immediately.  Plan expense, included
in salaries and  employee  benefits was $285  thousand,  $302  thousand and $281
thousand for the years ended December 31, 2006, 2005 and 2004.


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


     The net  periodic  postretirement  benefit  costs  includes  the  following
components:


                                           DECEMBER 31,
                               --------------------------------------
                                   2006        2005         2004
---------------------------------------------------------------------
Interest cost                   $24,520     $ 25,163      $ 51,547
Amortization of prior service    (7,064)     (11,339)      (11,339)
Amortization of loss             (3,860)      19,517        15,776
---------------------------------------------------------------------
Net periodic post-retirement
    benefit cost                $13,596     $ 33,341      $ 55,984
=====================================================================

                                       39
<PAGE>

     The  assumed  discount  rate  used  in the  calculation  for  net  periodic
postretirement  benefit  costs was 5.50% for 2006 and 2005.  The assumed  health
care cost trend rate for 2006 was 10.0% and was graded  down in 0.5%  increments
per year to an ultimate rate of 5.0% per year. The impact of a 1.0% increase and
decreases in the assumed health care cost trend for each future year would be as
follows:
                                             DECEMBER 31, 2006
                                    ------------------------------------
                                      1.0% INCREASE    1.0% DECREASE
------------------------------------------------------------------------
Accumulated postretirement obligation    $47,674          $42,860
Service and interest Cost                $ 2,485          $ 2,234
=======================================================================

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

                                            DECEMBER 31,
                                     ----------------------------
                                         2006          2005
-----------------------------------------------------------------
Accumulated post-retirement
    benefit obligation                $(643,983)    $(480,053)
Unrecognized prior service cost               -        (7,063)
Unrecognized net gain                         -       (70,969)
-----------------------------------------------------------------
Accrued post-retirement benefit
    cost                              $(643,983)    $(558,085)
=================================================================


     The  assumed  discount  rate used in the  calculation  for the  accumulated
postretirement benefit obligations was 5.50% as of December 31, 2006 and 2005.

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

                                                DECEMBER 31,
                                        -----------------------------
CHANGE IN PROJECTED BENEFIT OBLIGATION       2006          2005
---------------------------------------------------------------------
Projected benefit obligation
  at beginning of year                   $480,053      $ 744,827
Service cost                             $      -      $       -
Interest cost                            $ 24,520      $  25,163
Actuarial loss (gain)                    $207,892      $(246,625)
Benefits paid                            $(68,482)     $ (43,312)
---------------------------------------------------------------------
Projected benefit obligation
  at end of year                         $643,983      $ 480,053
---------------------------------------------------------------------
CHANGE IN PLAN ASSETS
---------------------------------------------------------------------
Fair value of plan assets
  at beginning of year                   $      -      $       -
Actual return of plan assets             $      -      $       -
Employer contribution                    $ 68,482      $  43,312
Benefits paid                            $(68,482)     $ (43,312)
---------------------------------------------------------------------
Fair value of plan assets
  at end of year                                -              -
=====================================================================

     The expected cost of postretirement benefits in each year from 2007 through
2011  are $71  thousand,  $72  thousand,  $71  thousand,  $70  thousand  and $68
thousand,  respectively.  The aggregate expected benefits to be paid in the five
years from 2012 through 2016 are $293 thousand.

                                       40
<PAGE>


15. LONG-TERM DEBT


     The  Corporation  established  FMS  Statutory  Trust 1 ("Trust I") in March
2002.  The trust issued $25.0  million of floating  rate capital  securities  to
institutional   investors  and  $774  thousand  of  common   securities  to  the
Corporation.  The  proceeds  of  these  were  used  by  the  Trust  to  purchase
subordinated  debentures  issued by the  Corporation.  The Corporation  used the
debenture proceeds to pay down the $10.0 million of 10% subordinated debentures,
expansion of the Bank's operations and general corporate  purposes.  The Trust's
capital  securities are fully guaranteed by the  Corporation's  debentures.  The
interest  rates reset every three months to LIBOR plus 360 basis points and will
not exceed 11.0% through the first five years from issuance.  As of December 31,
2006 and  2005,  the  interest  rate was  8.97%  and  8.12%,  respectively.  The
debentures are redeemable at the Corporation's option any time after March 2007.
The redemption of the debentures would result in the mandatory redemption of the
Trust's capital and common securities at par.

     The  Corporation  established  FMS Statutory  Trust II ("Trust II") in June
2006.  The trust issued $25.0  million of floating  rate capital  securities  to
institutional   investors  and  $774  thousand  of  common   securities  to  the
Corporation.  The proceeds of these were used by the Trust for general corporate
purposes.   The  Trust's  capital   securities  are  fully   guaranteed  by  the
Corporation's  debentures.  The interest rates reset every three months to LIBOR
plus 158 basis points.  As of December 31, 2006 the interest rate was 6.94%. The
debentures are redeemable at the Corporation's  option any time after June 2011.
The redemption of the debentures would result in the mandatory redemption of the
Trust's capital and common securities at par.

     As a  result  of the  deconsolidation  of the  Trust  under  FIN  46R as of
December 31, 2003, the Corporation  recognized in its Consolidated  Statement of
Financial  Condition its  investment  in FMS Statutory  Trust I and II, which is
presented in other assets and the subordinated  debenture  liability owed to the
Trust.  The  deconsolidation  of the Trust did not have any other  impact in the
consolidated financial statements.

                                       41
<PAGE>

16.  FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

CASH AND CASH EQUIVALENTS:  The carrying value is a reasonable  estimate of fair
value.

INVESTMENT  SECURITIES HELD TO MATURITY AND SECURITIES  AVAILABLE FOR SALE: Fair
value is equal to quoted market prices.

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

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

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

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: For investment securities with a
quoted market price,  fair value is equal to quoted market  prices.  If a quoted
market  price is not  available,  fair value is estimated  using  quoted  market
prices for similar securities.

FMS STATUTORY  TRUST I AND II DEBENTURES:  Fair value is estimated  using quoted
market prices for similar securities.

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

     At December 31, 2006 and December  31,  2005,  the carrying  amount and the
estimated market value of Corporation's financial instruments are as follows:
<TABLE>
<CAPTION>
                                                                DECEMBER 31, 2006                     DECEMBER 31, 2005
                                                      --------------------------------------- ----------------------------------
                                                           CARRYING           ESTIMATED           CARRYING        ESTIMATED
                                                            AMOUNT          MARKET VALUE           AMOUNT        MARKET VALUE
                                                      --------------------------------------- ----------------------------------
<S>                                                    <C>                <C>                  <C>              <C>
Financial assets:
    Cash and cash equivalents                          $     109,761,197  $      109,761,197   $    93,840,949  $    93,840,949
    Investment securities held to maturity and
    investment
       securities available for sale                   $     574,447,132  $      567,633,048   $   639,168,404  $   633,332,032
    FHLB Stock                                         $       6,313,520  $        6,313,520   $     8,248,420  $     8,248,420

    Loans, net of unearned income                      $     455,489,754  $      449,681,000   $   447,634,142  $   445,616,000
       Less: Allowance for loan losses                 $      (5,390,570) $       (5,390,570)  $    (5,062,785) $    (5,062,785)
    Loans, net                                         $     450,099,184  $      444,290,430   $   442,571,357  $   440,553,215
Financial liabilities:
    Deposits
       Checking, passbook, and money market accounts   $     701,309,878  $      701,309,878   $   735,175,654  $   735,175,655
       Certificates                                    $     231,792,888  $      230,923,000   $   211,891,770  $   210,789,000
    Securities sold under agreements to repurchase     $     115,000,000  $      116,690,444   $   175,000,000  $   178,419,000
    Trust capital securities-FMS Statutory
       Trust I and II                                  $      51,548,000  $       51,403,666   $    25,774,000  $    26,670,935
Off-balance sheet financial instruments:
    Commitments to extend credit                       $      35,547,494  $       35,547,494   $    54,113,170  $    54,113,170
    Standby letters of credit                          $       6,568,883  $        6,568,883   $     6,905,486  $     6,905,486
</TABLE>

                                       42
<PAGE>


17.  COMMITMENTS AND CONTINGENCIES


     The Bank has outstanding  loan  commitments of $35.5 million as of December
31, 2006. Of these  commitments  outstanding,  the  breakdown  between fixed and
variable rate loans is as follows:

<TABLE>
<CAPTION>
                                               DECEMBER 31, 2006
                      -----------------------------------------------------------------
                                                                        INTEREST RATE
                           FIXED          VARIABLE                     RANGE-FIXED RATE
                           RATE             RATE            TOTAL        COMMITMENTS
---------------------------------------------------------------------------------------
<S>                      <C>             <C>              <C>             <C>    <C>
Commitments to:
       fund loans        $2,445,572      $ 3,571,000      $  6,016,572    6.125%-7.50%
Unused lines:
       Construction       1,722,940        3,901,232         5,624,172    5.75%-8.75%
       Equity line of
         credit loans             -       23,906,750        23,906,750             -
---------------------------------------------------------------------------------------
Total                    $4,168,512      $31,378,982      $ 35,547,494    5.75%-8.75%
=======================================================================================
</TABLE>



     In addition to outstanding  loan  commitments,  the Bank as of December 31,
2006, issued $6.6 million in standby letters of credit to guarantee  performance
of bank customers to third parties.

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


18.  LITIGATION


     In the normal course of business,  the  Corporation is subjected to various
legal  proceedings.  There were no  significant  pending  legal  proceedings  at
December  31,  2006,  which  are  expected  to  have a  material  impact  on the
Corporation's financial position or results of operations.


19.  LOANS TO EXECUTIVE OFFICERS AND DIRECTORS


     Regulation O provides that all loans to executive officers and directors be
made on  substantially  the same terms and  conditions  as are  available to the
general public. However, executive officers are permitted to participate in rate
discount programs  available to all employees.  The rate discounts are available
to  employees  as long as they  are  employed  at the  Bank.  If  employment  is
terminated,  the rate discount ceases from the date of termination.  At December
31,  2006 and  2005,  loans  made to  directors  and  executive  officers  whose
indebtedness  exceeded $60 thousand  amounted to $3.3 million and $5.2  million,
respectively.  During 2006, new loans to these individuals totaled $722 thousand
and repayments totaled $2.6 million.

                                       43
<PAGE>


20.  STOCK OPTIONS


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

     The option  price per share for  options  granted  may not be less than the
fair market  value of the common stock on the date of grant.  All stock  options
are dilutive and included in the  calculation  of earnings per share.  All stock
options have been  adjusted  for all stock  splits.  At December  31, 2006,  the
option  exercise  prices were  $10.00.  Options are fully  vested at the date of
grant and must be  exercised  within  ten years.  There were no options  granted
during 2006, 2005 and 2004.

     The following table summarizes  information about stock options outstanding
at December 31, 2006.

  EXERCISE    OUTSTANDING   AVERAGE   EXERCISABLE
    PRICE       OPTIONS     LIFE *      OPTIONS
-----------------------------------------------------

 $10.00        17,500        1.8        17,500
=====================================================

* Average contractual life in years


     A  summary  of the  status of the  Corporation's  Stock  Option  Plan as of
December  31, 2006,  2005 and 2004 and changes  during the years ending on those
dates is presented below.
<TABLE>
<CAPTION>

                                       YEARS ENDED DECEMBER 31,
                     -----------------------------------------------------------
                             2006                2005                2004
--------------------------------------------------------------------------------
                               WEIGHTED             WEIGHTED           WEIGHTED
                                AVERAGE             AVERAGE             AVERAGE
                               EXERCISE             EXERCISE           EXERCISE
                      SHARES     PRICE    SHARES     PRICE     SHARES    PRICE
--------------------------------------------------------------------------------
<S>                   <C>        <C>      <C>         <C>       <C>       <C>
Outstanding at the
  beginning of the
  year                36,500     $10.00   65,600      $ 8.31    75,250    $8.06

Options exercised    (16,500)     10.00  (15,100)       5.90    (4,650)    7.49

Options surrendered   (2,500)     10.00  (14,000)       6.50    (5,000)    5.33
--------------------------------------------------------------------------------
Outstanding at the
  end of the year     17,500     $10.00   36,500      $10.00    65,600    $8.31
================================================================================
</TABLE>

                                       44
<PAGE>


21.  RISKS AND UNCERTAINTIES


     Generally  accepted  accounting   principles  require  management  to  make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities and disclosures of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reported  period.  Actual results could differ from these  estimates.
Significant  estimates are made by management in  determining  the allowance for
loan losses, pension benefit obligations, postretirement benefits, income taxes,
and carrying values of real estate owned.

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

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

     The Bank sponsors pension and other  retirement  plans. The Bank's external
actuarial  consultants  use certain  statistical  factors to estimate the future
benefit  obligations.  The assumptions used could differ  materially from actual
results and may impact the amount of pension expense recorded by the Bank.

     The Bank is self insured for a portion of its current years' losses related
to its medical programs. In estimating the Bank's self-insurance  accruals,  the
Bank  utilizes  estimates  of expected  losses,  which are based on  statistical
analysis  of  historical  data.  These  assumptions  are closely  monitored  and
adjusted when  warranted by changing  circumstances.  Should a greater amount of
claims occur  compared to what was  estimated or medical costs  increase  beyond
what was expected, accruals might not be sufficient, and additional expenses may
be recorded.  Medical costs are  anticipated to increase very modestly in fiscal
year 2007.

     The Bank is subject to claims and  lawsuits in the  ordinary  course of its
business. A determination of the amount accrued, if any, for these contingencies
is made after  analysis of each  matter.  The Bank  continually  evaluates  such
accruals and may increase or decrease accrued amounts, as we deem appropriate.


                                       45
<PAGE>


22.  PARENT COMPANY FINANCIAL INFORMATION


     The financial statements for FMS Financial Corporation are as follows:
<TABLE>
<CAPTION>

                                                                                                DECEMBER 31,
                                                                                      --------------------------------------
FMS FINANCIAL CORPORATION STATEMENTS OF FINANCIAL CONDITION                             2006                   2005
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>                    <C>
ASSETS:
    Cash and cash equivalents                                                         $     1,502,610        $    1,337,624
    Investment in subsidiary                                                               95,768,042            91,911,725
    Intercompany receivable, net                                                           32,151,523             7,172,564
    FMS Statutory Trust 1 issue costs, net                                                     78,582               484,467
    Other                                                                                     712,999               174,423
                                                                                      ---------------        --------------

TOTAL ASSETS                                                                          $   130,213,756        $  101,080,803
                                                                                      ===============        ==============


LIABILITIES:
    FMS Statutory Trust I and II debentures                                           $    51,548,000        $   25,774,000
    Dividends payable                                                                         195,849               195,486
    Accrued interest payable                                                                  109,349                29,041
                                                                                      ---------------        --------------

TOTAL LIABILITIES                                                                          51,853,198            25,998,527
                                                                                      ---------------        --------------


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 8,022,892 and 8,006,392 and shares outstanding 6,529,313 and 6,515,110
       as of December 31, 2006 and 2005, respectively                                         802,289               800,639
    Paid-in capital in excess of  par                                                       8,930,731             8,767,381
    Accumulated comprehensive loss - net of deferred income taxes                          (2,485,410)           (1,099,630)
    Retained earning                                                                       82,120,391            77,583,683
    Less:Treasury Stock (1,493,579 and 1,491,282 shares, at cost at December 31,
      2006 and 2005, respectively)                                                        (11,007,443)          (10,969,797)
                                                                                      ---------------        --------------

TOTAL STOCKHOLDERS' EQUITY                                                                 78,360,558            75,082,276
                                                                                      ---------------        --------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                            $   130,213,756        $  101,080,803
                                                                                      ===============        ==============
</TABLE>

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

                                       46
<PAGE>

<TABLE>
<CAPTION>
                                                                               DECEMBER 31,
                                                         ---------------------------------------------------------
FMS FINANCIAL CORPORATION STATEMENTS OF OPERATIONS              2006               2005               2004
------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                  <C>                <C>
Interest income                                                  $     2,559          $      -           $      -
Intercompany interest income                                       1,478,959           414,140            320,582
Interest expense                                                  (3,566,290)       (1,834,528)        (1,368,591)
Other expense                                                        (12,284)                -                  -
Dividends from subsidiary                                          2,400,000         1,200,000          2,400,000
Equity in undistributed income of subsidiary                       4,303,097         6,442,469          7,056,742
                                                       -----------------------------------------------------------
Income before taxes                                                4,606,041         6,222,081          8,408,733
Income tax benefit                                                   712,999           496,151            359,496
------------------------------------------------------------------------------------------------------------------
NET INCOME                                                      $  5,319,040      $  6,718,232       $  8,768,229
==================================================================================================================
</TABLE>

These  statements  should be read in conjunction with the other notes related to
the consolidated financial statements.
<TABLE>
<CAPTION>
                                                                                DECEMBER 31,
                                                          ----------------------------------------------------------
FMS FINANCIAL CORPORATION STATEMENTS OF CASH FLOWS               2006               2005                2004
--------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                 <C>                <C>
OPERATING ACTIVITIES
Net income                                                      $  5,319,040         $ 6,718,232        $ 8,768,229
Adjustments to reconcile net income to net cash provided
   by operating activities:
Equity in undistributed earnings of the subsidiary                (4,303,097)         (6,442,469)        (7,056,742)
Amortization of  issue costs                                         405,885              77,844             77,843
Increase in interest payable                                          80,308               7,050              4,915
Increase in intercompany receivable, net                         (24,978,959)           (414,140)        (1,320,582)
Other                                                               (538,576)            513,708           (359,496)
                                                                ------------         -----------        -----------

    Net cash provided by operating activities                    (24,015,399)            460,225            114,167
                                                                ------------         -----------        -----------
FINANCING ACTIVITIES
Purchase of treasury stock                                           (37,646)            (34,798)                 -
Proceeds from issuance of trust capital securities                25,000,000                   -                  -
Investment in subsidiary                                            (165,000)           (213,385)           (49,796)
Cash dividends paid on common stock                                 (781,969)           (780,298)          (779,240)
Proceeds from issuance of stock                                      165,000             213,385             49,796
                                                                ------------         -----------        -----------
    Net cash provided (used) by financing activities              24,180,385            (815,096)          (779,240)
                                                                ------------         -----------        -----------


INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                     164,986            (354,871)          (665,073)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                       1,337,624           1,692,495          2,357,568
                                                                ------------         -----------        -----------
CASH AND CASH EQUIVALENTS, END OF YEAR                          $  1,502,610         $ 1,337,624        $ 1,692,495
                                                                ============         ===========        ===========
</TABLE>
These  statements  should be read in conjunction with the other notes related to
the consolidated financial statements.

                                       47
<PAGE>


23.     CONSOLIDATED SUMMARY OF QUARTERLY EARNINGS (UNAUDITED)

The following table presents summarized quarterly data for 2006 and 2005:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                                           1ST                2ND               3RD                4TH         TOTAL
                2006                     QUARTER            QUARTER           QUARTER            QUARTER        YEAR
-----------------------------------------------------------------------------------------------------------------------
                                                         (IN THOUSANDS, EXCEPT PER AMOUNTS)
<S>                                       <C>               <C>                <C>               <C>          <C>
Total interest income                     $ 15,177          $ 15,294           $ 15,436          $ 15,086     $ 60,993
Total interest expense                       6,345             6,710              7,129             7,231       27,415
                                          --------          --------           --------          --------     --------
Net interest income                          8,832             8,584              8,307             7,855       33,578
Provision for loan losses                       90                90                 90                60          330
                                          --------          --------           --------          --------     --------
Net interest income after provision
    for loan losses                          8,742             8,494              8,217             7,795       33,248
Total non-interest income                    1,398             1,922              1,793             2,051        7,164
Total non-interest expense                   7,944             7,945              8,027             7,810       31,726
                                          --------          --------           --------          --------     --------
Income before income taxes                   2,196             2,471              1,983             2,036        8,686
Federal and state income taxes                 862               961                736               808        3,367
                                          --------          --------           --------          --------     --------
Net income                                $  1,334          $  1,510           $  1,247          $  1,228     $  5,319
                                          --------          --------           --------          --------     --------
Basic earnings per common share           $   0.20          $   0.23           $   0.19          $   0.20     $   0.82
                                          ========          ========           ========          ========     ========
Diluted earnings per common share         $   0.20          $   0.23           $   0.19          $   0.19     $   0.81
                                          ========          ========           ========          ========     ========
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------
                                           1ST                2ND               3RD                4TH          TOTAL
                2005                     QUARTER            QUARTER           QUARTER            QUARTER        YEAR
-----------------------------------------------------------------------------------------------------------------------
                                                              (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                       <C>               <C>                <C>               <C>          <C>
Total interest income                     $ 14,017          $ 14,327           $ 14,598          $ 14,964     $  57,906
Total interest expense                       4,967             5,134              5,420             6,016        21,537
                                          --------          --------           --------          --------     ---------
Net interest income                          9,050             9,193              9,178             8,948        36,369
Provision for loan losses                       90                90                 90                90           360
                                          --------          --------           --------          --------     ---------
Net interest income after provision
    for loan losses                          8,960             9,103              9,088             8,858        36,009
Total non-interest income                    1,308             1,416              1,373             1,326         5,423
Total non-interest expense                   7,382             7,395              7,585             7,705        30,067
                                          --------          --------           --------          --------     ---------
Income before income taxes                   2,886             3,124              2,876             2,479        11,365
Federal and state income taxes               1,185             1,282              1,170             1,010         4,647
                                          --------          --------           --------          --------     ---------
Net income                                $  1,701          $  1,842           $  1,706          $  1,469     $   6,718
                                          ========          ========           ========          ========     =========

Basic earnings per common share           $   0.26          $   0.28           $   0.26          $   0.23     $    1.03
                                          ========          ========           ========          ========     =========

Diluted earnings per common share         $   0.26          $   0.28           $   0.26          $   0.23     $    1.03
                                          ========          ========           ========          ========     =========
</TABLE>

                                       48
<PAGE>


24.  SUBSEQUENT EVENT (UNAUDITED)

     On March 7, 2007, the Company announced that it intends to close eleven New
Jersey branch locations of its wholly-owned bank subsidiary, Farmers & Mechanics
Bank, including all seven Wal-Mart branch locations, at an estimated net cost of
approximately  $1.5  million  or $.23 per share,  substantially  all of which is
expected to be incurred  and recorded  during the quarter  ending June 30, 2007.
The costs  associated  with the branch  closings  consist  primarily of employee
costs,  fixed  assets and early lease  cancellation  fees as all of the Wal-Mart
branches are operated under long-term leases. The Company also announced that it
had entered into an agreement with Beneficial Mutual Saving Bank "Beneficial" to
indemnify the Company for any and all costs  associated with the branch closures
in the event that the proposed merger with Beneficial in not consummated for any
reason.

                                     49
<PAGE>

                                    PART III


ITEM 11. EXECUTIVE COMPENSATION
-------------------------------

     SUMMARY  COMPENSATION  TABLE.  The following  table sets forth the cash and
non-cash  compensation for the year ended December 31, 2006 awarded to the chief
executive  officer,  the principal  financial  officer and other named executive
officers  (collectively,  the  "Named  Executive  Officers")  who served in such
capacity  during  such  period  and  received  total  compensation  in excess of
$100,000 during the year ended December 31, 2006.
<TABLE>
<CAPTION>
                                                                        Change in Pension
                                                                            Value and
                                                                           Nonqualified
                                                                             Deferred
                                                                           Compensation        All Other
Name and Principal Position         Year       Salary        Bonus          Earnings         Compensation           Total
---------------------------         ----       ------        -----          --------         ------------           -----

<S>                                <C>       <C>           <C>             <C>                <C>                  <C>
Craig W. Yates                     2006      $205,000      $10,000         $124,703           $10,000   (1)        $349,703
   President and CEO

Channing L. Smith                  2006      $100,452      $ 7,000         $ 46,461           $ 5,128   (1)        $159,041
  Vice President and Chief
  Financial Officer

James E. Igo                       2006      $123,505      $10,000         $ 27,657           $ 7,377   (1)(2)     $168,539
  Senior Vice President and
  Senior Lending Officer

Thomas M. Topley                   2006      $117,084      $10,000         $ 19,292           $ 7,927   (1)        $154,303
  Senior Vice President of
  Operations and Corporate
  Secretary

(1)  Includes  the value of the  Corporations  matching  contribution  to 401(k)
     retirement plan
(2)  Includes payment for unused vacation
</TABLE>


                                       50
<PAGE>

All  Other  Compensation  consists  of the value of the  Corporation's  matching
contribution to the 401(k) retirement plan and amounts paid for unused vacation:

                                                         UNUSED
NAME                          YEAR        401(K)        VACATION
----                          ----        ------        --------

Craig W. Yates                2006        $10,000         $0

Channing L. Smith             2006        $ 5,128         $0

James E. Igo                  2006        $ 6,625       $752

Thomas M. Topley              2006        $ 7,927         $0

     GRANTS OF PLAN  BASED  AWARDS  DURING  2006.  There were no grants of stock
options to any Named Executive Officer during 2006.

     OUTSTANDING  EQUITY AWARDS AT DECEMBER 31, 2006.  The following  table sets
forth  information  concerning  the  exercise of options by the Chief  Executive
Officer and the other Named  Executive  Officers during the last fiscal year, as
well as the value of such  options held by such persons at the end of the fiscal
year.  None of the Named Executive  Officers had any outstanding  unvested stock
awards.
<TABLE>
<CAPTION>

                            Option Awards
                            ------------------------------------------------------------------
                                                          Equity
                                                          Incentive
                            Number of     Number of       Plan Awards:
                            Securities    Securities      Number of
                            Underlying    Underlying      Securities
                            Unexercised   Unexercised     Underlying
                            Options       Options         Unexercised   Option     Option
                                                          Unearned      Exercise   Expiration
Name                        Exercisable   Unexercisable   Options       Price      Date
----                        -----------   -------------   --------      -----      ----
<S>                               <C>         <C>           <C>          <C>
Craig W. Yates                    0           0             0            $0
Channing L. Smith             5,000           0             0          10.00      10/27/2007
James E. Igo                  3,000           0             0          10.00      10/27/2007
Thomas M. Topley                  0           0             0             0

</TABLE>

                                       51
<PAGE>

EXERCISES OF OPTIONS AND VESTING OF SHARES DURING 2006
<TABLE>
<CAPTION>
                                       Option Awards                            Stock Awards
                            -----------------------------------        --------------------------------------
                               Number of                                  Number of
                            Shares Acquired   Value Realized           Shares Acquired       Value Realized
Name                          on Exercise        on Exercise              on Vesting           on Vesting
----                          ----------        -----------               ----------           ----------
<S>                                <C>              <C>                       <C>                  <C>
Craig W. Yates                     0                $0                        0                    $0
Channing L. Smith                  0                 0                        0                     0
James E. Igo                       0                 0                        0                     0
Thomas M. Topley                  SAR             22,810                      0                     0
</TABLE>


PENSION  BENEFITS.  The  following  table sets forth  information  regarding the
present value of each Named Executive  Officer's  accumulated  benefit under the
Bank's pension plan.  None of the Named  Executive  Officers  participate in any
nonqualified  defined contribution or other nonqualified  deferred  compensation
plan.
<TABLE>
<CAPTION>

                                                          Number of        Present
                                                          Years            Value of         Payments
                                                          Credited         Accumulated      During Last
Name                      Plan Name                       Service          Benefit          Fiscal Year
----                      ---------                       -------          -------          -----------

<S>                       <C>                                <C>           <C>                 <C>
Craig W. Yates            Farmers & Mechanics Bank           16            $864,852            $0
                          Pension Plan
Channing L. Smith         Farmers & Mechanics Bank           13             280,423             0
                          Pension Plan
James E. Igo              Farmers & Mechanics Bank           15             188,953             0
                          Pension Plan
Thomas M. Topley          Farmers & Mechanics Bank           15             126,085             0
                          Pension Plan
</TABLE>


COMPENSATION COMMITTEE, INTERLOCKS AND INSIDER PARTICIPATION

     The  Corporation's   Compensation  Committee  serves  as  the  Compensation
Committee  for executive  officers of the  Corporation  and the Bank.  George J.
Barber, a director and member of the Compensation Committee, served as President
of the Bank from 1973 until his retirement in 1986.

     No member of the Committee is, or was during 2006, an executive  officer of
another Corporation whose board of directors has a comparable committee on which
one of the  Corporation's  executive  officers  serves.  None  of the  executive
officers of the  Corporation  is, or was during  2006,  a member of a comparable
compensation  committee of a  Corporation  of which any of the  directors of the
Corporation is an executive officer.

COMPENSATION DISCUSSION AND ANALYSIS

     The  responsibility of the Compensation  Committee of the Corporation is to
determine the compensation levels of the executive officers.  The overall policy
of the executive  compensation program is to closely align the compensation paid
to executive officers with the short-term and long-term performance goals of the
Corporation  and to allow the Bank to attract and retain key executives who will
drive long-term success and create shareholder value.


                                       52
<PAGE>

     The executive  compensation program has in the past included three elements
that taken together  constitute a flexible and balanced method of establishing a
total compensation  opportunity for executive  officers.  These elements are (1)
base salary,  (2) annual bonus plan award,  and (3) long-term  incentive  award,
which in the past have been stock option  grants.  The Committee  determines the
level of  compensation  for each  executive  annually  after  reviewing  various
surveys  of  compensation  paid to  executives  performing  similar  duties  for
depository  institutions and their holding  companies,  with particular focus on
the level of  compensation  paid by  comparable  institutions  in and around the
Corporations market area.

     BASE SALARY - Base Salaries of executive  officers are established based on
the scope of responsibility and competitive market  compensation.  Based on 2006
performance,  all executives  received salary  increases for 2007 except for Mr.
Craig W. Yates. The salary increases for executive officers were increased using
the same merit increase  percentages  applicable to other Bank employees ranging
from 3% to 5%.

     ANNUAL  BONUS PLAN - The  purpose  of the  annual  bonus plan is to provide
motivation,  and to reward and retain  individuals  by  providing a  competitive
compensation  package. The actual bonus awards for 2006 are shown in the "Bonus"
column of the Summary Compensation Table.


         LONG-TERM INCENTIVE PLAN - In past years prior to the expiration of the
FMS  Financial  stock  option plan in 1998,  stock  options had been  granted to
officers,  including  executive officers and certain other employees to motivate
and to  reward  them for  increases  in  stockholder  value  and to align  their
personal financial  interests with those of the stockholders of the Corporation.
All stock options were granted with an exercise price equal to the closing price
of FMS  Financial  Corporation  Common Stock on the date of grant.  Accordingly,
those  stock  options  had value  only if the market  price of the common  stock
increases after that date. No options have been granted since 1998.


     The Compensation  Committee  anticipates that all compensation  paid by the
Company is deductible  for federal  income tax purposes in  accordance  with the
limitations  included  under  the  Internal  Revenue  Code of 1986,  as  amended
("Code"), including Sections 162(m) (limitations on compensation in excess of $1
and $280 thousand  (limitations on payments made in conjunction with a change in
control).

     The Company does not maintain employment contracts, severance agreements or
change in control agreements for its executive officers. Annually, the President
makes his  recommendations to the Compensation  Committee with respect to salary
increases,  bonus awards and stock  option  awards for the  Company's  executive
officers. The Compensation Committee makes a final determination on such matters
as well as any compensation actions regarding the President.  The President does
not participate in the Compensation  Committee's  deliberations  with respect to
his compensation arrangements.

COMPENSATION COMMITTEE REPORT

     The Corporation's  executive  officers consist of Craig W. Yates (President
and Chief  Executive  Officer),  Channing  L. Smith  (Vice  President  and Chief
Financial  Officer),  James E. Igo (Senior  Vice  President  and Senior  Lending
Officer) and Thomas M. Topley (Senior Vice President of Operations and Corporate
Secretary).  The  Compensation  Committee  of  the  Corporation  determines  the
compensation of the executive officers.  This committee meets at the end of each
year to  determine  the level of any salary  increase  to take  effect as of the
beginning of the following  year.  The committee  also approves any  perquisites
payable to these  executive  officers.  All of the  directors,  except  Craig W.
Yates, serve on the Compensation Committee.


                                       53
<PAGE>

     The  Compensation  Committee has reviewed and  discussed the  "Compensation
Discussion and Analysis" set forth above with  management.  Based on this review
and discussion, the compensation committee recommended to the Board of Directors
that the  Compensation  Discussion and Analysis be included in the Annual Report
on Form 10-K.

         Compensation Committee:

                  Dominic W. Flamini
                  George J. Barber
                  Edward Staats
                  Vincent R. Farias
                  Mary Wells
                  Roy D. Yates
                  Joseph W. Clarke, Jr.

BOARD OF DIRECTORS COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                               CHANGE IN
                                                                             PENSION VALUE
                                                                             & NONQUALIFIED
                                                              NON-EQUITY        DEFERRED
                       FEE EARNED      STOCK      OPTION   INCENTIVE PLAN    COMPENSATION       ALL OTHER
        NAME        OR PAID IN CASH    AWARDS     AWARDS     COMPENSATION       EARNINGS      COMPENSATION (1)    TOTAL
        ----        ---------------    ------     -------  ---------------      --------      ----------------    -----
<S>                  <C>               <C>        <C>        <C>               <C>               <C>             <C>
Roy D. Yates         $18,000           $    -     $    -     $      -          $     -           $      -        $18,000
George J. Barber     $12,000           $    -     $    -     $      -          $     -           $ 12,417        $24,417
Joseph W. Clarke Jr. $12,000           $    -     $    -     $      -          $     -           $      -        $12,000
Vincent R. Farias    $12,000           $    -     $    -     $      -          $     -           $      -        $12,000
Dominic W. Flamini   $12,000           $    -     $    -     $      -          $     -           $ 12,413        $24,413
Edward J. Staats Jr. $12,000           $    -     $    -     $      -          $     -           $      -        $12,000
Mary Wells           $12,000           $    -     $    -     $      -          $     -           $      -        $12,000
Wayne H. Page        $ 8,000           $    -     $    -     $      -          $     -           $ 12,413        $20,413

(1) Amounts paid for Health insurance Premiums
</TABLE>


DIRECTORS' COMPENSATION

         For 2006,  Directors received $12,000 as directors of FMS Financial and
Farmers & Mechanics  Bank.  The  President  does not receive  director  fees for
attendance at Board or committee  meetings.  The Chairman of the Board  received
$6,000 in addition  to  directors'  fees for serving as Chairman  for the fiscal
year ended  December 31, 2006.  Total fees paid to directors for the fiscal year
ended  December 31, 2006 were $98,000.  In addition to cash fees  received,  FMS
Financial  provides  certain  health care benefits to certain  Directors.  Total
health insurance  premiums paid for directors for the fiscal year ended December
31, 2006 were $37,243.



                                       54
<PAGE>


                                     PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
---------------------------------------------------

     (a)  Listed below are all financial  statements  and exhibits filed as part
          of this report, and are incorporated by reference.

          1.   The  consolidated   statements  of  financial  condition  of  FMS
               Financial  Corporation and subsidiary as of December 31, 2006 and
               2005, and the related consolidated  statements of income, changes
               in  stockholders'  equity and cash flows for each of the years in
               the three year period ended December 31, 2006,  together with the
               related notes and the Independent  Registered  Public  Accounting
               Firms'  auditors'  report  of  PricewaterhouseCoopers   LLP  with
               respect to 2005 and Grant Thornton LLP with respect to 2006.

          2.   Schedules omitted, as they are not applicable.

          3.   Exhibits
<TABLE>
<CAPTION>
               The following Exhibits are filed as part of this report:

               <S>            <C>
               2        Agreement and Plan of Merger ***
               3.1      Certificate of Incorporation*
               3.2      Bylaws*
               10.1     Stock Option and Incentive Plan**
               21       Subsidiaries of the Registrant ****
               23.1     Consent of Grant Thornton LLP
               23.2     Consent of PricewaterhouseCoopers LLP
               31       Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
               32       Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
              -------
               *        Incorporated by reference to the Registrant's Form S-1 Registration Statement No. 33-24340.
               **       Incorporated by reference to the Registrant's Form S-8 Registration Statement No. 33-24340.
               ***      Incorporated by references to the Registrant's Form 8-K filed with the SEC on October 13, 2006.
               ****     Incorporated by reference to the Original Filing.
</TABLE>


                                       55
<PAGE>

                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) 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 as of May 14, 2007.

                             FMS FINANCIAL CORPORATION


                              By:   /s/ Craig W. Yates
                                    -------------------------------------------
                                    Craig W. Yates, President and
                                    Chief Executive Officer
                                    (Duly Authorized Representative)


                                       56