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

                                    FORM 10-K
(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>

                                     PART I

FORWARD-LOOKING STATEMENTS

     FMS Financial Corporation (the "Corporation" or "Registrant") may from time
to time make written or oral "forward-looking  statements," including statements
contained  in  the  Corporation's  filings  with  the  Securities  and  Exchange
Commission (including this Annual Report on Form 10-K and the exhibits thereto),
in its reports to stockholders and in other  communications  by the Corporation,
which are made in good faith by the  Corporation  pursuant to the "safe  harbor"
provisions of the private securities litigation reform act of 1995.

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

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

ITEM 1.  BUSINESS
-----------------

GENERAL

     The Corporation, a New Jersey corporation, headquartered in Burlington, New
Jersey,  is the holding  company for Farmers and  Mechanics  Bank (the  "Bank"),
which was founded in 1871 under the name of Farmers' and Mechanics' Building and
Loan Association. The Corporation conducts no significant business or operations
of its own other than holding all of the  outstanding  common stock of the Bank.
As a result,  references to the Corporation or Registrant generally refer to the
consolidated entity, which includes the main operating company, the Bank, unless
the context indicates otherwise.

     The Registrant  principally  operates through its forty-two banking offices
located in Burlington, Camden and Mercer Counties, New Jersey. The Registrant is
primarily engaged in the business of attracting deposits from the general public
and originating loans, which are secured by residential real estate. To a lesser
extent, the Registrant also originates  consumer,  commercial business loans and
construction   loans   and   invests   in   U.S.   government   securities   and
mortgage-related securities.


                                       2
<PAGE>

PENDING MERGER

     The  Registrant  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 the Registrant.  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 customers  across the
greater Delaware Valley area.

     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 (the "SEC")
with respect to the minority stock offering and the merger.

COMPETITION

     The  Registrant's  primary market area consists of  Burlington,  Camden and
Mercer Counties,  New Jersey, and is one of many financial  institutions serving
this market area. The competition for deposit  products comes from other insured
financial  institutions such as commercial banks, thrift institutions and credit
unions in the  Registrant's  market area.  Deposit  competition  also includes a
number of insurance  products sold by local agents and investment  products such
as mutual funds and other  securities sold by local and regional  brokers.  Loan
competition comes from other insured  financial  institutions such as commercial
banks, thrift institutions and credit unions.

LENDING ACTIVITIES

ANALYSIS OF LOAN PORTFOLIO

     The following  table sets forth the  composition of the  Registrant's  loan
portfolio in dollar amounts and in  percentages of the respective  portfolios at
the dates  indicated.  Except as shown below,  there were no  concentrations  of
loans exceeding 10% of the Registrant's assets.
<TABLE>
<CAPTION>
                                                      December 31,
                               ------------------------------------------------------------------
                                      2006                  2005                   2004
                              ----------------------  ---------------------  --------------------
                               Carrying   Percent     Carrying   Percent     Carrying   Percent
                                Value     of Total     Value     of Total     Value     of Total
                                -----     --------     -----     --------     -----     --------
                                                        (In thousands)
<S>                           <C>         <C>      <C>           <C>      <C>           <C>
MORTGAGE LOANS:
  One-to-four family.....     $288,052    63.24%   $286,476      63.97%   $275,843      65.08%
  Commercial real estate.      132,217    29.02     127,704      28.52     116,380      27.46
  Commercial construction        2,956      .65       6,942       1.55      11,971       2.82
  Construction...........        3,760      .83       1,775        .40         897        .21
                              --------   ------    --------     ------    --------     ------
      Total mortgage loans     426,985    93.74     422,897      94.44     405,091      95.57
                              --------   ------    --------     ------    --------     ------

CONSUMER AND OTHER LOANS:
  Consumer...............        2,251      .49       2,356        .53       2,472        .58
  Commercial business....       26,276     5.77      22,550       5.03      16,312       3.85
                              --------   ------    --------     ------    --------     ------
   Total consumer and other
         loans...........       28,527     6.26      24,906       5.56      18,784       4.43
                              --------   ------    --------     ------    --------     ------
      Total loans........     $455,512   100.00%   $447,803     100.00%   $423,875     100.00%
                              ========   ======    ========     ======    ========     ======

<CAPTION>
                                               December 31,
                               ----------------------------------------------
                                      2003                    2002
                                ---------------------- ----------------------
                                Carrying    Percent     Carrying   Percent
                                 Value      of Total     Value     Of Total
                                 -----      --------     -----     --------

<S>                           <C>           <C>      <C>           <C>
MORTGAGE LOANS:
  One-to-four family.....     $280,664      68.84%   $272,777      74.38%
  Commercial real estate.      104,352      25.60      76,354      20.82
  Commercial construction        5,994       1.47       1,157        .32
  Construction...........        1,324        .32         306        .08
                              --------     ------    --------     ------
      Total mortgage loans     392,334      96.23     350,594      95.60
                              --------     ------    --------     ------
CONSUMER AND OTHER LOANS:
  Consumer...............        3,187        .78       3,522        .96
  Commercial business....       12,180       2.99      12,621       3.44
   Total consumer and other
         loans...........       15,367       3.77      16,143       4.40
                              --------     ------    --------     ------
      Total loans........     $407,701     100.00%   $366,737     100.00%
                              ========     ======    ========     ======
</TABLE>

                                       3
<PAGE>
         LOAN MATURITY  TABLE.  The following  table sets forth  maturities  and
interest rate  sensitivity  for all categories of loans as of December 31, 2006.
Scheduled  repayments are reported in the maturity  category in which payment is
due. Demand loans, loans having no stated maturity,  and overdrafts are reported
as due in one year or less.
<TABLE>
<CAPTION>
                              One-to     Commercial    Commercial                          Commercial     Total
                           Four Family  Real Estate   Construction  Construction  Consumer  Business   Construction  Total
                           -----------  -----------   ------------  ------------  --------  --------   ------------  -----
                                                                       (In thousands)
<S>                          <C>          <C>          <C>            <C>        <C>        <C>         <C>         <C>
1 year or less............   $  2,603     $  5,095     $  2,493       $  3,760   $    876   $ 13,635    $  6,253    $ 28,462
                             ---------     -------      -------       --------   --------   --------    --------    --------
After 1 year:.............
  1 to 5 years............     12,551        7,759          463             --        785      6,692         463      28,250
  After 5 years...........    272,898      119,363           --             --        590      5,949          --     398,800
                             ---------     -------      -------       --------   --------   --------    --------    --------
Total due after one year..    285,449      127,122          463             --      1,375     12,641         463     427,050
                             ---------     -------      -------       --------   --------   --------    --------    --------
Total amount due..........   $288,052     $132,217     $  2,956       $  3,760   $  2,251   $ 26,276    $  6,716    $455,512
                             ========     ========     ========       ========   ========   ========    ========    ========
</TABLE>

     LOAN SENSITIVITY  TABLE. The following table sets forth, as of December 31,
2006,  the dollar  amount of all loans due after  December 31, 2007,  based upon
fixed rates of interest or floating or adjustable interest rates.
<TABLE>
<CAPTION>
                                                      Floating or
                                  Fixed Rates       Adjustable Rates       Total
                                  -----------       ----------------       -----
                                                    (In Thousands)

<S>                                  <C>               <C>               <C>
One-to-four family.........          $248,500          $ 36,949          $285,449
Commercial real estate.....            47,830            79,292           127,122
Commercial construction....               457                 6               463
Construction...............                --                --                --
Consumer...................             1,040               335             1,375
Commercial business........            10,286             2,355            12,641
                                     --------          --------          --------
     Total.................          $308,113          $118,937          $427,050
                                     ========          ========          ========
</TABLE>

     ONE-TO-FOUR  FAMILY  LOANS.  The  Registrant's   primary  lending  activity
consists of the  origination of one-to-four  family  residential  mortgage loans
("residential  loans") secured by the property in the Registrant's  market area.
The Registrant's  residential loan portfolio also includes second mortgage loans
and home  equity  loans  (including  home  equity  lines of credit  loans).  The
Registrant  generally  originates  mortgage  loans with terms of 15 to 30 years,
amortized  on a monthly  basis,  with  principal  and  interest  due each month.
Typically,  residential  loans  remain  outstanding  for  significantly  shorter
periods than their  contractual  terms because borrowers may refinance or prepay
loans at their option.

     The Registrant  presently offers  residential  loans that adjust every year
after an initial  fixed term of one,  two,  five or seven years,  at an interest
rate indexed higher than the  corresponding  U.S.  Treasury  security index. The
interest rates on these  mortgages  adjust  annually after the one, two, five or
seven year  anniversary date of the loan with an interest rate adjustment cap of
1.5% per year and  presently  not to exceed a rate of 11.5% over the life of the
loan. At December 31, 2006,  adjustable-rate  residential  first  mortgage loans
amounted  to $21.9  million or 4.82% of the total  residential  loan  portfolio.
These  loans  are  generally  not   originated   under  terms,   conditions  and
documentation,  which  permit  their sale in the  secondary  mortgage  market to
FreddieMac and FannieMae.

                                       4
<PAGE>

     Fixed-rate   mortgage  loans  are  generally   underwritten   according  to
FreddieMac and FannieMae guidelines.  The Registrant periodically sells selected
fixed-rate  residential loans, without recourse, to provide additional funds for
lending and to  restructure  the loan  portfolio to improve  interest rate risk.
Generally,  if the property is not owner-occupied,  a higher rate of interest is
charged on such loans. At December 31, 2006,  $225.2  million,  or 49.45% of the
total  residential  loan  portfolio,  consisted  of long-term  fixed-rate  first
mortgage loans, none of which were classified as held for sale.

     The Registrant's lending policies generally limit the maximum loan-to-value
ratio on owner-occupied residential first mortgage loans to 97% of the lesser of
the appraised value or purchase price,  with the condition that private mortgage
insurance  is  required  on loans  with  loan-to-value  ratios in excess of 80%.
Mortgage loans on investment  properties are made at loan-to-value  ratios up to
70%. The loan-to-value ratio, maturity and other provisions of the loans made by
the  Registrant  have  generally  reflected  the policy of making  less than the
maximum loan  permissible  under  applicable  regulations,  in  accordance  with
established  lending  practices,  market  conditions and underwriting  standards
maintained  by  the  Registrant.  The  Registrant  requires  fire  and  casualty
insurance on all  properties  securing real estate loans and also performs title
searches to ensure its lien position.

     The Registrant  actively solicits and originates home equity loans and home
equity  lines  of  credit  secured  by  the  equity  in the  borrower's  primary
residence. These loans generally have terms of 10 to 15 years, some of which are
fixed rates and some of which have rates that adjust  based upon the prime rate.
At December  31,  2006,  the  Registrant  had home equity loans in the amount of
$25.7 million,  or 5.64%, of its  residential  loan portfolio and approved $38.2
million in home equity lines of credit, of which $15.2 million was outstanding.

     COMMERCIAL  REAL  ESTATE  LOANS.  Commercial  real  estate  loans are loans
secured by commercial real estate (e.g.,  shopping centers,  medical  buildings,
retail offices) and multi-family  dwelling units (e.g.,  apartment projects with
more than four units), in the Registrant's  market area.  Commercial real estate
loans and  multi-family  residential  loans have been made in amounts up to $6.6
million,  with most of such loans ranging in size from $100,000 to $2.0 million.
Loans on commercial  properties are generally originated in amounts up to 75% of
the  appraised  value  of  the  property.   Commercial  real  estate  loans  and
multi-family  residential  loans are generally  made at rates which adjust above
the prime  interest rate  (generally 1% to 2%) or a specified  treasury index or
are balloon loans with fixed  interest rates which mature in three to five years
with  principal  amortization  for a period of up to 25 years.  At December  31,
2006, the Registrant's commercial real estate loan portfolio consisted of $128.3
million of commercial real estate and $3.9 million of multi-family loans.

     Loans secured by commercial real estate are generally  larger and involve a
greater degree of risk than one-to-four family  residential  mortgage loans. Of
primary  concern,  in commercial and  multi-family  real estate lending,  is the
borrower's  creditworthiness  and the feasibility and cash flow potential of the
property.  Loans secured by income producing properties are generally larger and
involve greater risks than residential  mortgage loans because payments on loans
secured  by income  producing  properties  are  often  dependent  on  successful
operation or management of the properties.  As a result, repayment of such loans
may be subject to a greater extent than residential real estate loans to adverse
conditions in the real estate market or the economy.

     CONSTRUCTION  LOANS.  The  Registrant   originates  loans  to  finance  the
construction  of one-to-four family  dwellings  and/or  commercial real estate.
Construction  loans to builders are generally made only if the Registrant  makes
the  permanent  mortgage  loan or if the builder has a contract for sale and the
purchaser has received a permanent  mortgage  commitment.  Interim  construction
loans to builders  generally


                                       5
<PAGE>

have terms of up to nine months and interest  rates which adjust above the prime
interest rate (generally 1% to 2%).

     Construction  financing is generally  considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a  construction  loan is  dependent  largely upon the accuracy of the
initial  estimate of the  property's  value at  completion of  construction  and
development and the estimated cost (including interest) of construction.  During
the  construction  phase,  a number of factors  could  result in delays and cost
overruns.  If the estimate of  construction  costs proves to be inaccurate,  the
Registrant  may be  required  to advance  funds  beyond  the  amount  originally
committed  to permit  completion  of the  development.  If the estimate of value
proves to be inaccurate,  the  Registrant may be confronted,  at or prior to the
maturity of the loan,  with a project having a value,  which is  insufficient to
assure full repayment.

     CONSUMER LOANS.  Regulations permit federally chartered thrift institutions
to make  secured and  unsecured  consumer  loans up to 35% of the  institution's
assets.  The  Registrant  makes various types of secured and unsecured  consumer
loans including  education  loans,  lines of credit,  automobile  loans (new and
used) and loans secured by deposit accounts. Consumer loans generally have terms
of six months to five years,  some of which are at fixed rates and some of which
have rates that adjust periodically.

     Consumer loans may entail greater risk than residential loans, particularly
in the case of  consumer  loans that are  unsecured  or  secured by assets  that
depreciate rapidly. Repossessed collateral for a defaulted consumer loan may not
be  sufficient  for  repayment  of  the  outstanding  loan,  and  the  remaining
deficiency may not be collectible.

     COMMERCIAL  BUSINESS LOANS.  Commercial  business loans are underwritten on
the basis of the  borrower's  ability to service  such debt from  income and are
generally made to small and mid-sized  companies located within the Registrant's
primary lending area.  Generally,  the Registrant requires additional collateral
of equipment, chattel or other assets before making a commercial business loan.

     LOAN  COMMITMENTS.  The Registrant  issues loan origination  commitments to
real estate developers and qualified  borrowers  primarily for the construction,
purchase and refinancing of residential  real estate and commercial real estate.
Such  commitments are made on specified terms and conditions,  including in most
cases, the payment of a  non-refundable  commitment fee based on a percentage of
the amount of committed funds.  Generally,  the commitment  requires  acceptance
within 15 days of the date of issuance. At December 31, 2006, the Registrant had
$6.0  million  of  commitments  to  cover  originations  and  $29.5  million  in
undisbursed  funds on  outstanding  lines of credit.  Management  believes  that
virtually all of the Registrant's commitments will be funded.

ORIGINATION OF LOANS

     Commercial loan origination comes from a variety of sources,  including the
Registrant's  existing  customer  base,  referrals  from  real  estate  offices,
accountants,  financial  advisers,  attorneys,  builders and walk in business as
well  as  solicitations  by  the  Registrant's  business  development  officers.
Residential  mortgage loan customers are derived in a similar  manner.  Consumer
loans are directly  obtained through the Registrant's  network of branch offices
and advertising.

     All applications  are processed in accordance with established  policies of
the  Registrant,  including  the review of credit  references,  verification  of
information  provided  and,  where  real  estate is  involved,  the

                                       6
<PAGE>

review of an appraisal  completed by an independent third party appraiser from a
list of approved appraisers that the Registrant maintains.

     Loan  approvals may be approved by loan  officers up to their  individually
assigned  lending limit,  which are  established  and modified  periodically  to
reflect the officer's  expertise  and  experience.  Certain  officers have joint
lending  authorities  that exceed  their  individual  authorities.  The Board of
Directors  approves  loans above the  individual  and joint  authorities  of the
officers. The Board reviews on an annual basis the loan approval authorities.

NON-PERFORMING AND PROBLEM ASSETS

     When a loan is more than 30 days  delinquent,  the borrower is contacted by
mail or phone and payment is requested. If the delinquency continues, subsequent
efforts are made to contact the delinquent borrower.  In certain instances,  the
Registrant may modify the loan or grant a limited moratorium on loan payments to
enable the borrower to reorganize their financial affairs. If the loan continues
in a  delinquent  status  for 90 days or more,  the  Registrant  generally  will
initiate foreclosure proceedings.

     Loans are generally  placed on non-accrual  status when either principal or
interest is 90 days or more past due.  Interest accrued and unpaid at the time a
loan is placed on non-accrual  status is charged against interest  income.  Such
interest,  when  ultimately  collected,  is  credited  to income  in the  period
received.  At December  31,  2006,  the Bank had $2.9 million of loans that were
held on a non-accrual  basis.  Gross interest income of $184 thousand would have
been  recorded  during the year ended  December 31, 2006 if these loans had been
performing in accordance with their terms.  Interest income of $142 thousand was
recorded on these loans during the year ended December 31, 2006.

     NON-PERFORMING ASSETS. The following table sets forth information regarding
non-accrual  loans,  troubled debt  restructured and real estate owned assets by
the Registrant at the dates indicated.
<TABLE>
<CAPTION>
                                                                           At December 31,
                                                   -------------------------------------------------------------
                                                      2006         2005         2004         2003         2002
                                                   ---------     --------    ---------    ---------    ---------
                                                                    (Dollars in thousands)
<S>                                                <C>           <C>         <C>          <C>          <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
   One-to-four family.........................     $   1,056     $    794    $     819    $     507    $     960
   Commercial real estate.....................         1,800          985          985        1,189        1,786
   Consumer and other.........................            --           --           --           --           12
                                                   ---------     --------    ---------    ---------    ---------
      Total mortgage non-accrual loans........     $   2,856     $  1,779    $   1,804    $   1,696    $   2,758
                                                   ---------     --------    ---------    ---------    ---------
Troubled debt restructurings..................     $      33     $    176    $     718    $   1,027    $     987
Real estate owned, net........................            --           --           --           48          291
Other non-performing assets...................            --           --           --           --           88
                                                   ---------     --------    ---------    ---------    ---------
Total non-performing assets...................     $   2,889     $  1,955    $   2,522    $   2,771    $   4,124
                                                   ---------     --------    ---------    ---------    ---------

Total non-accrual loans to net loans..........           .63%         .40%         .43%         .42%         .76%
                                                   =========     ========    =========    =========    =========
Total non-accrual loans to total assets.......           .24%         .14%         .14%         .14%         .24%
                                                   =========     ========    =========    =========    =========
Total non-performing assets to total assets...           .24%         .16%         .20%         .23%         .37%
                                                   =========     ========    =========    =========    =========
</TABLE>

     CLASSIFIED  ASSETS.  The  Office of Thrift  Supervision  (OTS)  regulations
provide for a classification  system for problem assets of insured  institutions
which  covers all problem  assets.  Under this  classification  system,  problem
assets of insured  institutions are classified as "substandard,"  "doubtful," or
"loss." An asset is considered  substandard if it is  inadequately  protected by
the  current net worth and paying  capacity of the obligor or of the  collateral
pledged, if any. Substandard assets include those characterized by the


                                       7
<PAGE>

"distinct  possibility" that the insured institution will sustain "some loss" if
the  deficiencies are not corrected.  Assets  classified as doubtful have all of
the  weaknesses  inherent  in  those  classified  substandard,  with  the  added
characteristic  that the weaknesses  present make  "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable  and  improbable."  Assets  classified as loss are those considered
"uncollectible"  and of such  little  value  that  their  continuance  as assets
without the  establishment  of a specific loss reserve is not warranted.  Assets
may be designated "special mention" because of potential  weaknesses that do not
currently warrant classification in one of the aforementioned categories.

     When an  insured  institution  classifies  problem  assets  as loss,  it is
required  either to establish a specific  allowance  for losses equal to 100% of
that  portion  of the asset so  classified  or to  charge  off such  amount.  An
institution's  determination  as to the  classification  of its  assets  and the
amount of its valuation allowances is subject to review by the OTS.

     Management's evaluation of the classification of assets and the adequacy of
the reserve  for loan losses is reviewed by the Board on a regular  basis and by
the regulatory agencies as part of their examination process.

     The  following  table  sets  forth the  Registrant's  classified  assets in
accordance with its classification system.

                                        At December 31, 2006
                                        --------------------
                                          (In thousands)
Special mention...............              $      860
Substandard...................                   5,659
Doubtful......................                     755
Loss..........................                      --
                                            ----------
         Total................              $    7,274
                                            ==========

At  December  31,  2006,  the  Bank did not have any  loans  not  classified  as
non-accrual,  90 days past due or restructured but where known information about
possible credit problems of borrowers caused management to have serious concerns
as to the ability of the borrowers to comply with present loan  repayment  terms
and may result in disclosure as non-accrual, 90 days past due or restructured.

     PROVISION  FOR LOAN  LOSSES.  A  provision  for loan  losses is  charged to
operations  based on  management's  evaluation  of the  probable  losses  in the
Registrant's  loan portfolio.  Such  evaluation,  which includes a review of all
loans  of  which  full  collectibility  of  interest  and  principal  may not be
reasonably assured, considers the Registrant's past loan loss experience,  known
and inherent  risks in the  portfolio,  adverse  situations  that may affect the
borrower's ability to repay, estimated value of any underlying  collateral,  and
current economic conditions.

     Management  will continue to review the entire loan  portfolio to determine
the extent,  if any, to which further  additional  loss provisions may be deemed
necessary.  There can be no  assurance  that the  allowance  for losses  will be
adequate to cover losses,  which may in fact be realized in the future, and that
additional provisions for losses will not be required.

                                       8
<PAGE>

     The following  table sets forth an analysis of the  Registrant's  allowance
for loan losses for the periods indicated.
<TABLE>
<CAPTION>
                                                                For the Year Ended December 31,
                                              ---------------------------------------------------------------------
                                                2006            2005            2004           2003          2002
                                              --------        --------        --------       --------      --------
                                                                      (Dollars in thousands)
<S>                                           <C>             <C>             <C>            <C>           <C>
Balance at beginning of period..............  $  5,063        $  4,719        $  4,408       $  4,317      $  4,231
Loans charged-off:
  One-to-four family........................        --              (9)             (3)            --           (10)
  Commercial real estate....................        --              --              --             --            --
  Construction..............................        --              --              --             --            --
  Consumer..................................        (9)            (45)             (6)            (4)          (10)
  Commercial business.......................        --              (4)            (14)          (184)          (58)
                                              --------        --------        --------       --------      --------
    Total charge-offs.......................        (9)            (58)            (23)          (188)          (78)
Recoveries..................................         7              42               4              9            15
                                              --------        --------        --------       --------      --------
Net loans charged-off.......................        (2)            (16)            (19)          (179)          (63)
                                              --------        --------        --------       --------      --------
Provision for loan losses...................       330             360             330            270           149
                                              --------        --------        --------       --------      --------
Balance at end of period....................  $  5,391        $  5,063        $  4,719       $  4,408      $  4,317
                                              ========        ========        ========       ========      ========
Ratio of net charge-offs to average loans
  outstanding during the period.............     .0004%           .005%           .005%          .046%         .017%
                                              ========        ========        ========       ========      =========
</TABLE>

                                       9
<PAGE>
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

         The following  table sets forth the breakdown of the allowance for loan
losses by loan category and the percent of loans in each category to total loans
receivable  for the periods  indicated.  The allocation of the allowance to each
category is not necessarily indicative of future losses.
<TABLE>
<CAPTION>
                                                            At December 31,
                                   -----------------------------------------------------------------------
                                            2006                   2005                     2004
                                   ----------------------  ----------------------   ----------------------
                                             Percent of              Percent of              Percent of
                                              Loans to                Loans to                Loans to
                                     Amount  Total Loans    Amount  Total Loans      Amount  Total Loans
                                     ------  -----------    ------  -----------      ------  -----------
                                                            (Dollars in thousands)
<S>                                <C>          <C>        <C>          <C>       <C>            <C>
  Loans:

  One-to-four family..........     $  1,580     63.24%     $  1,694     63.97%    $    986       65.08%
  Commercial real estate......        3,243     29.02         2,792     28.52        2,883       27.46
  Commercial construction.....          107       .65           279      1.55          582        2.82
  Construction................           90       .83             8       .40            2         .21
  Consumer and other..........           18       .49            19       .53           22         .58
  Commercial business.........          353      5.77           271      5.03          244        3.85
                                   --------    ------      --------    ------     --------      ------
      Total allowance for loan
        losses...............      $  5,391    100.00%     $  5,063    100.00%    $  4,719      100.00%
                                   ========    ======      ========    ======     ========      ======

<CAPTION>
                                                   At December 31,
                                     -----------------------------------------------
                                            2003                     2002
                                     ---------------------- ------------------------
                                              Percent of                  Percent of
                                              Loans to                   Loans to
                                    Amount    Total Loans    Amount      Total Loans
                                    ------    -----------    ------      -----------
                                                   (Dollars in thousands)
<S>                                <C>            <C>     <C>              <C>
  Loans:

  One-to-four family..........     $ 1,446        68.84%  $  1,672         74.38%
  Commercial real estate......       2,540        25.60      2,284         20.82
  Commercial construction.....         194         1.47         69           .32
  Construction................          25          .32         34           .08
  Consumer and other..........          24          .78         28           .96
  Commercial business.........         179         2.99        230          3.44
                                   -------       ------   --------        ------
      Total allowance for loan
        losses...............      $ 4,408       100.00%  $  4,317        100.00%
                                   =======       ======   ========        ======
</TABLE>


                                       10
<PAGE>

INVESTMENT ACTIVITIES

     The Registrant is required under federal  regulations to maintain a minimum
amount of liquid assets which may be invested in specified short-term securities
and certain other investments.  The level of liquid assets varies depending upon
several  factors,  including:  (i) the yields on investment  alternatives,  (ii)
management's  judgment as to the  attractiveness of the yields then available in
relation to other  opportunities,  (iii) expectation of future yield levels, and
(iv)  management's  projections as to the short-term demand for funds to be used
in loan  origination  and other  activities.  Investment  securities,  including
mortgage-backed  securities,  are classified at the time of purchase, based upon
management's  intentions  and  abilities,  as  securities  held to  maturity  or
securities  available  for sale.  Debt  securities  acquired with the intent and
ability to hold to maturity are classified as held to maturity and are stated at
cost and adjusted for  amortization of premium and accretion of discount,  which
are  computed  using the level yield method and  recognized  as  adjustments  of
interest income.  All other debt securities are classified as available for sale
to serve principally as a source of liquidity.

     Current   regulatory  and  accounting   guidelines   regarding   investment
securities  (including  mortgage  backed  securities)  require the Registrant to
categorize  securities as "held to maturity," "available for sale" or "trading."
As of December 31, 2006, the  Registrant  had securities  classified as "held to
maturity" and  "available  for sale" in the amount of $428.4  million and $146.0
million,  respectively and had no securities classified as "trading." Securities
classified as "available for sale" are reported for financial reporting purposes
at the fair market value with their net  unrealized  gain or loss  included as a
separate component of stockholders' equity, net of income taxes. At December 31,
2006, the  Registrant's  securities  available for sale had an amortized cost of
$148.1 million and market value of $146.0 million (net  unrealized  loss of $1.2
million,  net of income taxes).  The changes in market value in the Registrant's
available for sale portfolio  reflect normal market  conditions and vary, either
positively or negatively, based primarily on changes in general levels of market
interest rates relative to the yields of the portfolio. Additionally, changes in
the  market  value  of   securities   available  for  sale  do  not  affect  the
Corporation's   income  nor  does  it  affect  the  Bank's  regulatory   capital
requirements or its loan-to-one borrower limit.

     The   Registrant's   investment   securities    "available-for-sale"    and
"held-to-maturity"  portfolios at December 31, 2006, did not contain  securities
of any issuer with an aggregate book value in excess of 10% of the  Registrant's
equity, excluding those issued by the United States government agencies.

     At December 31, 2006, the Registrant's  investment portfolio policy allowed
investments in instruments  such as: (i) U.S.  Treasury  obligations,  (ii) U.S.
federal agency or federally sponsored agency obligations,  (iii) local municipal
obligations,  (iv) mortgage-backed  securities,  (v) banker's acceptances,  (vi)
certificates  of  deposit,  and (vii)  investment  grade  corporate  bonds,  and
commercial paper. The board of directors may authorize additional investments.

     As a  source  of  liquidity  and to  supplement  the  Registrant's  lending
activities,   the  Registrant   has  invested  in  residential   mortgage-backed
securities.  Mortgage-backed  securities  can serve as collateral for borrowings
and, through repayments,  as a source of liquidity.  Mortgage-backed  securities
represent a participation  interest in a pool of  single-family or other type of
mortgages.  Principal  and  interest  payments  are  passed  from  the  mortgage
originators, through intermediaries (generally quasi-governmental agencies) that
pool and repackage the  participation  interests in the form of  securities,  to
investors,  like us. The  quasi-governmental  agencies  guarantee the payment of
principal  and  interest to  investors  and include  Federal  National  Mortgage
Association  ("FNMA"),  Government National Mortgage Association  ("GNMA"),  and
Federal Home Loan Mortgage Corporation ("FHLMC").

                                       11
<PAGE>

     Mortgage-backed  securities  typically  are issued  with  stated  principal
amounts.  The  securities  are backed by pools of mortgages that have loans with
interest  rates that are  within a set range and have  varying  maturities.  The
underlying  pool of mortgages can be composed of either fixed rate or adjustable
rate mortgage  loans.  Mortgage-backed  securities are generally  referred to as
mortgage participation certificates or pass-through  certificates.  The interest
rate risk  characteristics of the underlying pool of mortgages (i.e., fixed rate
or adjustable  rate) and the prepayment  risk, are passed on to the  certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying  mortgages.  Expected  maturities will differ from contractual
maturities due to scheduled  repayments and because borrowers may have the right
to  call  or  prepay   obligations   with  or  without   prepayment   penalties.
Mortgage-backed  securities issued by GNMA, FNMA and FHLMC make up a majority of
the pass-through certificates market.

     The  Registrant  also  invests in  mortgage-related  securities,  primarily
collateralized mortgage obligations ("CMOs"),  issued or sponsored by GNMA, FNMA
and FHLMC,  as well as private  issuers.  CMOs are a type of debt  security that
aggregates  pools  of  mortgages  and  mortgage-backed  securities  and  creates
different  classes of CMO securities  with varying  maturities and  amortization
schedules as well as a residual  interest with each class having  different risk
characteristics.  The cash  flows from the  underlying  collateral  are  usually
divided into "tranches" or classes whereby  tranches have descending  priorities
with  respect to the  distribution  of principal  and interest  repayment of the
underlying  mortgages and mortgage backed  securities as opposed to pass-through
mortgage-backed  securities  where  cash flows are  distributed  pro rata to all
security  holders.  Unlike  mortgage-backed  securities  from which cash flow is
received and prepayment risk is shared pro rata by all securities holders,  cash
flows from the mortgages and mortgage-backed securities underlying CMOs are paid
in  accordance  with a  predetermined  priority  to  investors  holding  various
tranches of such  securities or obligations.  A particular  tranche or class may
carry  prepayment  risk,  which may be  different  from  that of the  underlying
collateral  and other  tranches.  CMOs  attempt to  moderate  reinvestment  risk
associated  with   conventional   mortgage-backed   securities   resulting  from
unexpected  prepayment activity.  Management believes these securities represent
attractive alternatives relative to other investments due to the wide variety of
maturity, repayment and interest rate options available.

     The  following  table sets  forth the  carrying  value of the  Registrant's
investment  securities  held to maturity,  securities  available for sale,  FHLB
stock,  and interest  bearing  deposits and overnight  investments  at the dates
indicated.
<TABLE>
<CAPTION>
                                                           At December 31,
                                             ------------------------------------------------
                                                2006              2005               2004
                                             ----------        ----------         ----------
                                                              (In thousands)
<S>                                          <C>               <C>                <C>
Investment securities held to maturity:
  U.S. government and agency securities..... $  197,326        $  192,328         $  164,381
  CMOs......................................     60,058            71,621             87,413
  Municipal bonds...........................      6,591            11,391              3,039
  Mortgage-backed securities................    164,467           208,196            269,222
Investment securities available for sale:
  U.S. government and agency securities.....     64,481            59,581             30,317
  CMOs......................................     18,420            21,990             37,602
  Mortgage-backed securities................     63,104            74,060             74,081
                                             ----------        ----------         ----------
      Total investment securities...........    574,447           639,167            666,055
  FHLB stock................................      6,314             8,248             10,250
  Interest bearing deposits and
    overnight investments...................     54,491            39,296             64,142
                                             ----------        ----------         ----------
Total investments........................... $  635,252        $  686,711         $  740,447
                                             ==========        ==========         ==========
</TABLE>

                                       12
<PAGE>
     The following table sets forth the scheduled  maturities,  carrying values,
market values and average yields for the Registrant's  investment  securities at
December 31, 2006.  The  following  table does not take into  consideration  the
effects of unscheduled repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>
                                      One Year or Less          One to Five Years         Five to Ten Years
                                  ----------------------       ---------------------      ------------------
                                  Carrying       Average       Carrying       Average     Carrying    Average
                                    Value         Yield          Value         Yield       Value       Yield
                                   -------       -------        -------       -------     -------     -------
                                                               (Dollars in thousands)
<S>                                 <C>           <C>          <C>             <C>          <C>           <C>
Investment securities held to
Maturity:
 U.S. government and
   agency obligations............   $  9,999      4.00%        $ 19,996        4.66%        $ 76,749      5.29
 Municipal bonds.................      6,491      4.00              100        4.30               --       --
 CMO's...........................         --       --             1,004        4.00            4,669      3.93
 Mortgage-backed securities......         --       --            19,076        4.29            5,704      5.53
 Pass through certificates.......         --       --                --         --                --       --

Investment securities available
 for sale:
 U.S. government and
   agency obligations............         --       --            34,746        4.50           14,359      5.04
 CMO's...........................         --       --               404        4.25            2,836      4.59
 Mortgage-backed securities......         --       --             2,378        4.72            1,508      5.00
 Pass through certificates.......         --       --                --         --                --       --
 FHLB stock......................         --       --                --         --                --       --
 Interest-bearing deposits
   and overnight investment......     54,491      5.20               --         --                --       --
                                     -------                    -------                     --------
   Total.................            $70,981                    $77,704                     $105,825
                                     =======                    =======                     ========
<CAPTION>
                                    More than Ten Years             Total Investment Securities
                                   ---------------------        --------------------------------
                                    Carrying      Average       Carrying      Market     Average
                                     Value         Yield         Value        Value       Yield
                                     -----         -----        -------       ------      -----
                                                       (Dollars in thousands)
<S>                                   <C>            <C>         <C>           <C>           <C>
Investment securities held to
Maturity:
 U.S. government and
   agency obligations............     $ 90,582       5.91%       $197,326      $194,548     5.45%
 Municipal bonds.................           --        --            6,591         6,592     4.00
 CMO's...........................       54,385       4.49          60,058        58,155     4.44
 Mortgage-backed securities......       94,134       5.45         118,914       117,980     5.27
 Pass through certificates.......       45,553       4.74          45,553        44,354     4.74

Investment securities available
 for sale:
 U.S. government and
   agency obligations............       15,376       5.47          64,481        64,481     4.85
 CMO's...........................       15,180       4.78          18,420        18,420     4.74
 Mortgage-backed securities......       39,920       5.37          43,806        43,806     5.32
 Pass through certificates.......       19,298       5.07          19,298        19,298     5.07
 FHLB stock......................        6,314       6.25           6,314         6,314     6.25
 Interest-bearing deposits
    and overnight investment.....           --        --           54,491        54,491     5.20
                                      --------                   --------     ---------
   Total.................             $380,742                   $635,252     $628,439
                                      ========                   ========     =========
</TABLE>

                                       13
<PAGE>

SOURCES OF FUNDS

     GENERAL.  Deposits are the major external source of the Registrant's  funds
for lending and other investment  purposes.  Funds are derived from amortization
and  prepayment of loans and  maturities of investment  securities,  borrowings,
mortgage-backed  securities and operations.  Scheduled loan principal repayments
are a relatively stable source of funds,  while deposit inflows and outflows and
loan  prepayments  are  significantly  influenced by general  interest rates and
market conditions.

     DEPOSITS.  Deposits are attracted from within the Registrant's market areas
of Burlington, Camden and Mercer Counties, New Jersey, through the offering of a
broad selection of deposit  instruments  including  regular  checking  accounts,
non-interest  checking  accounts,   money  market  accounts,   regular  passbook
accounts,  certificates of deposit and IRA accounts.  Deposit account terms vary
according  to the  minimum  balance  required,  the time  periods the funds must
remain on deposit and the interest  rate,  among other  factors.  The Registrant
regularly  evaluates  the  internal  cost of funds,  surveys  rates  offered  by
competing  institutions,  reviews the  Registrant's  cash flow  requirements for
lending and  liquidity and executes  rate changes when deemed  appropriate.  The
Registrant does not have any brokered  deposits and has no present  intention to
accept or solicit such deposits.

     CERTIFICATES  OF  DEPOSIT  IN  EXCESS  OF  $100,000.  The  following  table
indicates the amount of the Registrant's  certificates of deposit of $100,000 or
more by time remaining until maturity as of December 31, 2006.
<TABLE>
<CAPTION>

Maturity Period of Deposits                                                 Certificates of
---------------------------                                                 ---------------
                                                                                Deposit
                                                                                -------
                                                                             (In thousands)
<S>                                                                           <C>
Three months or less.................................................         $     17,332
Three through six months.............................................               14,291
Six through twelve months............................................                5,705
Over twelve months...................................................                6,620
                                                                              ------------
     Total...........................................................         $     43,948
                                                                              ============
</TABLE>

                                       14
<PAGE>

     DEPOSIT  RATE.  The  following  table  sets forth the  distribution  of the
Registrant's  average balance of deposit accounts at the dates indicated and the
weighted average nominal interest rates on each category of deposits presented.
<TABLE>
<CAPTION>
                                                                     At December 31,
                                        -----------------------------------------------------------------------------
                                                             2006                                   2005
                                        -------------------------------------   -------------------------------------
                                                                    Weighted                                Weighted
                                                      Percent of     Average                   Percent of     Average
                                          Average        Total       Nominal      Average        Total       Nominal
                                          Balance      Deposits       Rate        Balance      Deposits       Rate
                                          -------      --------     --------      -------      --------    ----------
                                                                  (Dollars In thousands)
<S>                                     <C>              <C>           <C>      <C>               <C>         <C>
Passbook and regular savings.......     $  177,914       19.14%        0.45%    $  185,680        19.61%      0.43%
Checking accounts..................        214,569       23.09         2.93        219,153        23.14       1.88
Noninterest checking...............        185,343       19.94         0.00        180,803        19.09       0.00
Money market deposit accounts......        127,365       13.70         1.22        142,137        15.01       0.89
Certificates of deposit............        214,651       23.09         3.31        208,825        22.05       2.34
Surrogate statement................          9,687        1.04         3.45         10,350         1.10       3.45
                                        ----------      ------                  ----------       ------
  Total Deposits...................     $  929,529      100.00%        1.73%    $  946,948       100.00%      1.21%
                                        ==========      ======                  ==========       ======


<CAPTION>
                                                     At December 31,
                                        -------------------------------------
                                                        2004
                                        -------------------------------------
                                                                    Weighted
                                                       Percent of     Average
                                          Average        Total       Nominal
                                          Balance      Deposits       Rate
                                          -------      --------    ----------
                                                (Dollars In thousands)
<S>                                     <C>               <C>         <C>
Passbook and regular savings.......     $  182,873        19.95%      0.43%
Checking accounts..................        198,700        21.68       0.86
Noninterest checking...............        167,638        18.29       0.00
Money market deposit accounts......        139,038        15.17       0.72
Certificates of deposit............        216,906        23.67       1.83
Surrogate statement................         11,373         1.24       2.55
                                        ----------       ------
  Total Deposits...................     $  916,528       100.00%      0.84%
                                        ==========       ======


</TABLE>

SECURITIES SOLD UNDER  AGREEMENTS TO REPURCHASE.  The following table sets forth
information  regarding  the  balances  and rates on our  securities  sold  under
agreement to repurchase.
<TABLE>
<CAPTION>
                                                                                     At or for the
                                                                                Year Ended December 31,
                                                                         ----------------------------------------
                                                                         2006             2005            2004
                                                                         ----------------------------------------
                                                                                  (Dollars in thousands)
<S>                                                                       <C>              <C>             <C>
  Average balance outstanding, during the period.......................   $152,709       $164,513        $211,725
  Maximum amount outstanding
    at any month-end during the period.................................   $175,000       $175,000        $225,000
  Balance outstanding at end of period.................................   $115,000       $175,000        $195,000
  Weighted average interest rate during the period.....................       5.01%          4.93%           4.24%
  Weighted average interest rate at end of period......................       5.24%          4.93%           4.49%
</TABLE>

                                       15
<PAGE>

PERSONNEL

     As of December 31, 2006, the Registrant had 344 full-time employees and 240
part-time  employees.   The  employees  are  not  represented  by  a  collective
bargaining  unit.  Management  believes its  relationship  with its employees is
good.

                           REGULATION AND SUPERVISION

     Set forth below is a brief description of certain laws, which relate to the
regulation of the Corporation and the Bank. The description  does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.

HOLDING COMPANY REGULATION

     GENERAL.  The  Corporation is a unitary  savings and loan holding  company,
subject to  regulation  and  supervision  by the OTS. In  addition,  the OTS has
enforcement  authority  over the  Corporation  and any  non-savings  institution
subsidiaries.  This permits the OTS to restrict or prohibit  activities  that it
determines to be a serious risk to Farmers & Mechanics  Bank. This regulation is
intended  primarily for the protection of the depositors and not for the benefit
of stockholders of the Corporation.

     ACTIVITIES  RESTRICTIONS.  As a  grandfathered  unitary  savings  and  loan
holding  company under the GLB Act, the  Corporation is generally not subject to
any  restrictions  on its  business  activities  or  those  of  its  non-savings
institution  subsidiaries.  However, if the Corporation were to fail to meet the
Qualified  Thrift Lender Test,  then it would become  subject to the  activities
restrictions  of the  Home  Owners'  Loan Act  applicable  to  multiple  holding
companies. See "Regulation of the Bank -- Qualified Thrift Lender Test."

     If the Corporation were to acquire control of another savings  association,
it would  lose  its  grandfathered  status  under  the GLB Act and its  business
activities  would  be  restricted  to  certain   activities   specified  by  OTS
regulation,  which include performing  services and holding properties used by a
savings institution  subsidiary,  certain activities  authorized for savings and
loan  holding  companies  as  of  March  5,  1987,  and  nonbanking   activities
permissible for bank holding companies  pursuant to the Bank Holding Company Act
of 1956 (the "BHC Act") or authorized for financial holding  companies  pursuant
to the GLB Act.  Furthermore,  no company may acquire control of the Corporation
unless the acquiring  company was a unitary  savings and loan holding company on
May 4, 1999 (or became a unitary savings and loan holding company pursuant to an
application pending as of that date) or the acquiring company is only engaged in
activities that are permitted for multiple savings and loan holding companies or
for financial holding companies under the BHC Act as amended by the GLB Act.

     MERGERS AND ACQUISITIONS. The Corporation must obtain approval from the OTS
before acquiring more than 5% of the voting stock of another savings institution
or savings and loan holding  company or acquiring such an institution or holding
company by merger,  consolidation  or purchase of its assets.  In  evaluating an
application for the Corporation to acquire control of a savings institution, the
OTS would consider the financial and managerial  resources and future  prospects
of FMS  Financial  Corporation  and the  target  institution,  the effect of the
acquisition on the risk to the insurance funds, the convenience and the needs of
the community and competitive factors.

     THE USA PATRIOT ACT. In response to the events of September  11, 2001,  the
Uniting and  Strengthening  America by Providing  Appropriate  Tools Required to
Intercept and Obstruct Terrorism Act

                                       16
<PAGE>

of 2001,  or the USA Patriot Act,  was signed into law on October 26, 2001.  The
USA  Patriot Act gives the federal  government  new powers to address  terrorist
threats through  enhanced  domestic  security  measures,  expanded  surveillance
powers,  increased  information  sharing  and  broadened  anti-money  laundering
requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA
Patriot Act takes measures intended to encourage  information sharing among bank
regulatory agencies and law enforcement bodies.  Further,  certain provisions of
Title  III  impose  affirmative  obligations  on  a  broad  range  of  financial
institutions,  including banks, thrifts,  brokers, dealers, credit unions, money
transfer agents and parties registered under the Commodity Exchange Act.

     Among  other  requirements,  Title III of the USA  Patriot  Act imposes the
following requirements with respect to financial institutions:

     o Pursuant  to Section  352,  all  financial  institutions  must  establish
anti-money  laundering programs that include, at minimum: (i) internal policies,
procedures,  and controls; (ii) specific designation of an anti-money laundering
compliance  officer;  (iii)  ongoing  employee  training  programs;  and (iv) an
independent audit function to test the anti-money laundering program.

     o Section 326 authorizes  the Secretary of the  Department of Treasury,  in
conjunction  with other bank regulators,  to issue  regulations that provide for
minimum  standards  with  respect  to  customer  identification  at the time new
accounts are opened.

     o Section 312 requires  financial  institutions  that establish,  maintain,
administer or manage private banking accounts or correspondence  accounts in the
United States for non-United States persons or their representatives  (including
foreign  individuals  visiting  the  United  States) to  establish  appropriate,
specific, and, where necessary,  enhanced due diligence policies, procedures and
controls designed to detect and report money laundering.

     o Effective December 25, 2001,  financial  institutions are prohibited from
establishing,  maintaining, administering or managing correspondent accounts for
foreign shell banks (foreign  banks that do not have a physical  presence in any
country), and will be subject to certain record keeping obligations with respect
to correspondent accounts of foreign banks.

     o  Bank   regulators   are   directed  to  consider  a  holding   company's
effectiveness  in combating money  laundering when ruling on Federal Reserve Act
and Bank Merger Act applications.

     SARBANES-OXLEY ACT OF 2002. On July 30, 2002, the President signed into law
the  Sarbanes-Oxley  Act of 2002  (the  "Act"),  which  implemented  legislative
reforms intended to address  corporate and accounting  fraud. In addition to the
establishment of a new accounting  oversight board to enforce auditing,  quality
control and independence standards and which is funded by fees from all publicly
traded companies,  the Act places certain  restrictions on the scope of services
that may be provided by accounting  firms to their public company audit clients.
Any  non-audit  services  being  provided to a public  company audit client will
require preapproval by the company's audit committee. In addition, the Act makes
certain changes to the requirements for partner rotation after a period of time.
The Act requires chief executive officers and chief financial officers, or their
equivalent,  to certify to the accuracy of periodic  reports filed with the SEC,
subject to civil and criminal  penalties if they knowingly or willingly  violate
this certification requirement.  In addition, under the Act, counsel is required
to report evidence of a material violation of the securities laws or a breach of
fiduciary  duty by a company to its chief  executive  officer or its chief legal
officer,  and, if such officer does not  appropriately  respond,  to report such
evidence  to the audit  committee  or other  similar  committee  of the board of
directors or the board itself.

                                       17
<PAGE>

     Under the Act,  longer  prison  terms  apply to  corporate  executives  who
violate federal  securities laws; the period during which certain types of suits
can be brought against a company or its officers is extended; and bonuses issued
to top executives prior to restatement of a company's  financial  statements are
now subject to disgorgement if such restatement was due to corporate misconduct.
Executives  are also  prohibited  from insider  trading during  retirement  plan
"blackout"  periods,  and  loans to  company  executives  (other  than  loans by
financial   institutions   permitted  by  federal  rules  and  regulations)  are
restricted.  In addition, a provision directs that civil penalties levied by the
SEC as a result  of any  judicial  or  administrative  action  under  the Act be
deposited to a fund for the benefit of harmed  investors.  The Federal  Accounts
for Investor  Restitution  provision also requires the SEC to develop methods of
improving  collection  rates.  The  legislation  accelerates  the time frame for
disclosures by public companies,  as they must immediately disclose any material
changes in their  financial  condition or  operations.  Directors  and executive
officers  must also  provide  information  for most  changes in  ownership  in a
company's securities within two business days of the change.

     The Act also increases the oversight of, and codifies certain  requirements
relating to audit  committees of public companies and how they interact with the
company's  "registered  public accounting firm." Audit Committee members must be
independent  and are absolutely  barred from accepting  consulting,  advisory or
other  compensatory fees from the issuer.  In addition,  companies must disclose
whether at least one member of the  committee is a  "financial  expert" (as such
term is defined  by the SEC) and if not,  why not.  Under the Act,  a  company's
registered public accounting firm will be prohibited from performing statutorily
mandated audit services for a company if such company's chief executive officer,
chief financial  officer,  comptroller,  chief accounting  officer or any person
serving in equivalent  positions had been employed by such firm and participated
in the audit of such company  during the  one-year  period  preceding  the audit
initiation  date. The Act also prohibits any officer or director of a company or
any other  person  acting  under  their  direction  from  taking  any  action to
fraudulently influence, coerce, manipulate or mislead any independent accountant
engaged in the audit of the company's  financial  statements  for the purpose of
rendering the financial statements materially misleading.  The Act also requires
the SEC to prescribe  rules requiring  inclusion of any internal  control report
and  assessment  by management  in the annual  report to  shareholders.  The Act
requires the company's  registered  public accounting firm that issues the audit
report to  attest to and  report on  management's  assessment  of the  company's
internal controls. It is anticipated that the Corporation will be subject to all
of the requirements of the Act during 2008.

REGULATION OF THE BANK

     GENERAL. As a federally chartered savings bank with deposits insured by the
FDIC, the Bank is subject to extensive  regulation by the OTS and FDIC.  Lending
activities and other  investments  must comply with federal and state  statutory
and regulatory requirements. The Bank is also subject to reserve requirements of
the Federal Reserve  System.  Federal  regulation and supervision  establishes a
comprehensive  framework of activities in which an institution can engage and is
intended  primarily  for  the  protection  of the  Deposit  Insurance  Fund  and
depositors.  The  regulatory  structure  also gives the  regulatory  authorities
extensive  discretion  in  connection  with their  supervisory  and  enforcement
activities  and  examination  policies,  including  policies with respect to the
classification  of assets and the  establishment  of adequate loan loss reserves
for regulatory purposes.

     The OTS regularly  examines the Bank and prepares reports for consideration
by the Bank's Board of Directors on  deficiencies,  if any,  found in the Bank's
operations.  The Bank's  relationship  with its depositors and borrowers is also
regulated by federal and state law,  especially in such matters as the ownership
of savings accounts and the form and content of the Bank's mortgage documents.

                                       18
<PAGE>

     The Bank must file  reports  with the OTS  concerning  its  activities  and
financial condition, and must obtain regulatory approvals prior to entering into
certain  transactions  such as mergers with or  acquisitions  of other financial
institutions.  Any change in such  regulations,  whether by the OTS, the FDIC or
the United States  Congress,  could have a material  adverse impact on the Bank,
the Corporation, and their operations.

     DEPOSIT INSURANCE.  The Bank's deposits are insured to applicable limits by
the Federal Deposit  Insurance  Corporation.  Although the FDIC is authorized to
assess  premiums  under a  risk-based  system for such deposit  insurance,  most
insured  depository  institutions have not been required to pay premiums for the
last ten years.  The Federal  Deposit  Insurance  Reform Act of 2005,  which was
signed into law on February 15, 2006, has resulted in significant changes to the
federal  deposit  insurance  program:  (i)  effective  March 31, 2006,  the Bank
Insurance  Fund (which  formerly  insured the deposits of banks) and the Savings
Association  Insurance  Fund (which  formerly  insured  the  deposits of savings
associations  like the Bank) were merged into a new  combined  fund,  called the
Deposit  Insurance Fund; (ii) the current  $100,000 deposit  insurance  coverage
will be indexed for inflation  (with  adjustments  every five years,  commencing
January 1, 2011); and (iii) deposit insurance  coverage for retirement  accounts
has been  increased  to  $250,000  per  participant  subject to  adjustment  for
inflation.  The FDIC has been given greater  latitude in setting the  assessment
rates for insured depository institutions, which could be used to impose minimum
assessments.

     The FDIC is authorized  to set the reserve ratio for the Deposit  Insurance
Fund annually at between 1.15% and 1.5% of estimated  insured  deposits.  If the
Deposit Insurance Fund's reserves exceed the designated  reserve ratio, the FDIC
is required to pay out all or, if the reserve ratio is less than 1.5%, a portion
of the excess as a  dividend  to insured  depository  institutions  based on the
percentage  of  insured   deposits  held  on  December  31,  1996  adjusted  for
subsequently  paid  premiums.  Insured  depository  institutions  that  were  in
existence on December 31, 1996 and paid assessments prior to that date (or their
successors) are entitled to a one-time credit against future  assessments  based
on their past  contributions  to the BIF or the  Savings  Association  Insurance
Fund.

     In addition, all FDIC-insured  institutions are required to pay assessments
to the  FDIC  to  fund  interest  payments  on  bonds  issued  by the  Financing
Corporation  ("FICO"),  an  agency  of the  Federal  government  established  to
recapitalize the predecessor to the SAIF. The FICO assessment  rates,  which are
determined quarterly, averaged 0.0128% of insured deposits in fiscal 2006. These
assessments will continue until the FICO bonds mature in 2017.

     Pursuant  to the  Reform  Act,  the FDIC has  determined  to  maintain  the
designated  reserve ratio at its current 1.25%.  The FDIC has also adopted a new
risk-based  premium system that provides for quarterly  assessments  based on an
insured  institution's  ranking  in one of four risk  categories  based on their
examination  ratings and capital  ratios.  Beginning  in 2007,  well-capitalized
institutions  with the CAMELS ratings of 1 or 2 will be grouped in Risk Category
I and will be assessed  for deposit  insurance at an annual rate of between five
and seven basis points with the assessment rate for an individual institution to
be  determined  according  to a  formula  based  on a  weighted  average  of the
institution's  individual  CAMEL  component  ratings plus either five  financial
ratios or the  average  ratings  of its  long-term  debt.  Institutions  in Risk
Categories  II,  III and IV will be  assessed  at annual  rates of 10, 28 and 43
basis points, respectively.

     REGULATORY CAPITAL  REQUIREMENTS.  OTS capital  regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of adjusted  total assets,  (2) Tier 1, or "core,"  capital equal to at least 4%
(3% if the institution has received the highest rating, "composite 1 CAMELS,"

                                       19
<PAGE>

on its most recent  examination)  of adjusted  total assets,  and (3) risk-based
capital equal to 8% of total risk-weighted assets.

     Tangible  capital is defined as core  capital  less all  intangible  assets
(including  supervisory  goodwill),  less certain mortgage  servicing rights and
less certain investments. Core capital is defined as common stockholders' equity
(including  retained  earnings),  noncumulative  perpetual  preferred  stock and
minority interests in the equity accounts of consolidated subsidiaries,  certain
nonwithdrawable accounts and pledged deposits of mutual savings associations and
qualifying supervisory goodwill,  less nonqualifying  intangible assets, certain
mortgage servicing rights,  certain  investments and unrealized gains and losses
on certain available-for-sale securities.

     The  risk-based  capital  standard  for savings  institutions  requires the
maintenance of total  risk-based  capital (which is defined as core capital plus
supplementary  capital)  of  8%  of  risk-weighted  assets.  The  components  of
supplementary capital include, among other items, cumulative perpetual preferred
stock,  perpetual  subordinated debt, mandatory  convertible  subordinated debt,
intermediate-term  preferred  stock,  and the portion of the  allowance for loan
losses not  designated  for  specific  loan  losses (up to a maximum of 1.25% of
risk-weighted  assets) and up to 45% of unrealized  gains on equity  securities.
Overall,  supplementary  capital is limited to 100% of core  capital.  A savings
association  must calculate its  risk-weighted  assets by multiplying each asset
and  off-balance  sheet item by various risk factors as  determined  by the OTS,
which range from 0% for cash to 100% for  delinquent  loans,  property  acquired
through foreclosure, commercial loans, and other assets.

     DIVIDEND  AND  OTHER  CAPITAL  DISTRIBUTION  LIMITATIONS.  The OTS  imposes
various  restrictions or requirements on the ability of savings  institutions to
make capital distributions including cash dividends.

     A savings  association  that is a subsidiary  of a savings and loan holding
company,  such as the Bank, must file an application or a notice with the OTS at
least 30 days before making a capital distribution. A savings association is not
required to file an application  for  permission to make a capital  distribution
and need only  file a notice  if the  following  conditions  are met:  (1) it is
eligible for  expedited  treatment  under OTS  regulations,  (2) it would remain
adequately  capitalized  after the  distribution,  (3) the annual  amount of its
capital  distributions does not exceed net income for that year to date added to
retained  net  income  for  the  two  preceding   years,  and  (4)  the  capital
distribution  would not violate any  agreements  between the OTS and the savings
association  or any OTS  regulations.  Any  other  situation  would  require  an
application to the OTS.

     In addition,  the OTS could prohibit a proposed  capital  distribution  if,
after  making the  distribution,  which  would  otherwise  be  permitted  by the
regulation,  the OTS determines that the distribution would constitute an unsafe
or unsound practice.

     A  federal  savings   institution  is  prohibited  from  making  a  capital
distribution if, after making the distribution,  the institution would be unable
to meet any one of its  minimum  regulatory  capital  requirements.  Further,  a
federal savings institution cannot distribute  regulatory capital that is needed
for its liquidation account.

     QUALIFIED THRIFT LENDER TEST.  Savings  institutions  must meet a qualified
thrift  lender  ("QTL")  test or they become  subject to the  business  activity
restrictions  and branching rules  applicable to national banks. To qualify as a
QTL, a savings  institution  must either (i) be deemed a "domestic  building and
loan association" under the Internal Revenue Code by maintaining at least 60% of
its  total  assets  in  specified  types  of  assets,  including  cash,  certain
government securities,  loans secured by and other assets related to

                                       20
<PAGE>

residential real property,  educational loans and investments in premises of the
institution or (ii) satisfy the statutory QTL test set forth in the Home Owners'
Loan Act by  maintaining  at least  65% of its  "portfolio  assets"  in  certain
"Qualified Thrift  Investments"  (defined to include  residential  mortgages and
related equity investments,  certain mortgage-related securities, small business
loans,  student  loans and  credit  card  loans,  and 50% of  certain  community
development loans). For purposes of the statutory QTL test, portfolio assets are
defined  as  total  assets  minus  intangible  assets,   property  used  by  the
institution  in conducting  its  business,  and liquid assets up to 20% of total
assets.  A savings  institution  must  maintain its status as a QTL on a monthly
basis in at least nine out of every 12 months. As of December 31, 2006, the Bank
was in compliance with its QTL requirement.

     FEDERAL  HOME  LOAN  BANK  SYSTEM.  The Bank is a member of the FHLB of New
York,  which is one of 12  regional  FHLBs that  administer  the home  financing
credit  function  of  savings  associations.  Each FHLB  serves as a reserve  or
central bank for its members within its assigned region.  It is funded primarily
from  proceeds  derived from the sale of  consolidated  obligations  of the FHLB
System.  It makes loans to members (i.e.,  advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.

     As a member,  the Bank is required to purchase  and  maintain  stock in the
FHLB of New York in an amount equal to the greater of 1% of its aggregate unpaid
residential  mortgage loans, home purchase  contracts or similar  obligations at
the beginning of each year, or 5% of its outstanding advances.

     FEDERAL RESERVE SYSTEM.  The Federal Reserve System requires all depository
institutions  to maintain  non-interest  bearing  reserves at  specified  levels
against  their  transaction  accounts  (primarily  checking,  NOW and  Super NOW
checking  accounts) and non-personal time deposits.  The balances  maintained to
meet the reserve  requirements imposed by the Federal Reserve System may be used
to satisfy the liquidity  requirements  that are imposed by the OTS. At December
31, 2006, the Bank was in compliance with these requirements.

ITEM 1A. RISK FACTORS
---------------------

     Investing in our securities may involve certain risks,  including the risks
described below. You should carefully  consider these risk factors together with
all other  available  information  and data  before  you decide to invest in our
securities.

WE REALIZE INCOME PRIMARILY FROM THE DIFFERENCE BETWEEN INTEREST EARNED ON LOANS
AND  INVESTMENTS  AND INTEREST PAID ON DEPOSITS AND  BORROWINGS,  AND CHANGES IN
INTEREST RATES MAY ADVERSELY AFFECT OUR PROFITABILITY AND ASSETS.

     Changes in prevailing  interest rates may hurt our business.  We derive our
income  mainly from the  difference  or spread  between the  interest  earned on
loans,  securities  and other  interest-earning  assets,  and  interest  paid on
deposits,  borrowings and other  interest-bearing  liabilities.  In general, the
larger the spread,  the more we earn. When market rates of interest change,  the
interest  we receive on our assets and the  interest  we pay on our  liabilities
will fluctuate.  This can cause decreases in our spread and can adversely affect
our income.

     Interest  rates  affect  how much  money we can  lend.  For  example,  when
interest rates rise, the cost of borrowing  increases and loan originations tend
to decrease. In addition,  changes in interest rates can affect the average life
of loans and  investment  securities.  A reduction in interest  rates  generally
results in increased  prepayments of loans and  mortgage-backed  securities,  as
borrowers  refinance  their debt in order

                                       21
<PAGE>

to reduce  their  borrowing  cost.  This causes  reinvestment  risk,  because we
generally are not able to reinvest  prepayments  at rates that are comparable to
the  rates we earned  on the  prepaid  loans or  securities.  Changes  in market
interest  rates could also affect the value of our financial  assets.  If we are
unsuccessful in managing the effects of changes in interest rates, our financial
condition and results of operations could suffer.

IF WE EXPERIENCE  LOAN LOSSES IN EXCESS OF OUR  ALLOWANCE,  OUR EARNINGS WILL BE
ADVERSELY AFFECTED.

     The risk of credit losses on loans varies with, among other things, general
economic  conditions,  the type of loan being made, the  creditworthiness of the
borrower  over the term of the loan and, in the case of a  collateralized  loan,
the value and marketability of the collateral for the loan. Management maintains
an  allowance  for loan  losses  based  upon,  among  other  things,  historical
experience,  an  evaluation  of  economic  conditions  and  regular  reviews  of
delinquencies and loan portfolio  quality.  Based upon such factors,  management
makes various assumptions and judgments about the ultimate collectibility of the
loan portfolio and provides an allowance for loan losses based upon a percentage
of  the  outstanding  balances  and  for  specific  loans  when  their  ultimate
collectibility  is considered  questionable.  If  management's  assumptions  and
judgments  prove to be incorrect and the allowance for loan losses is inadequate
to absorb future losses,  or if the bank  regulatory  authorities  require us to
increase the allowance for loan losses as a part of their  examination  process,
our earnings and capital could be significantly and adversely affected.

     As of December 31, 2006,  our allowance  for loan losses was  approximately
$5.4 million, which represented 1.18% of outstanding loans. At such date, we had
12 nonperforming loans totaling $2.9 million. We actively manage our non-accrual
loans in an effort to minimize credit losses.  Although management believes that
its  allowance for loan losses is adequate,  there can be no assurance  that the
allowance will prove sufficient to cover future loan losses.  Further,  although
management  uses the best  information  available  to make  determinations  with
respect to the allowance for loan losses, future adjustments may be necessary if
economic  conditions differ  substantially  from the assumptions used or adverse
developments  arise with  respect to our  non-performing  or  performing  loans.
Material  additions to our  allowance for loan losses would result in a decrease
in our net income and capital,  and could have a material  adverse effect on our
financial condition and results of operations.

     A  PORTION  OF OUR  TOTAL  LOAN  PORTFOLIO  CONSISTS  OF  MULTI-FAMILY  AND
COMMERCIAL REAL ESTATE LOANS AND COMMERCIAL LOANS. THE REPAYMENT RISK RELATED TO
THESE  TYPES OF LOANS IS  CONSIDERED  TO BE  GREATER  THAN THE RISK  RELATED  TO
ONE-TO-FOUR FAMILY RESIDENTIAL LOANS.

     At December 31, 2006,  our loan  portfolio  included  approximately  $158.5
million of multi-family and commercial real estate loans and commercial business
loans, or 34.79% of our total loan portfolio.

     Unlike one-to-four  family residential  mortgage loans, which generally are
made on the basis of the  borrower's  ability to make  repayment from his or her
employment  and other income and which are secured by real property  whose value
tends  to be more  easily  ascertainable,  the  repayment  of  multi-family  and
commercial  real  estate  loans  and  commercial  business  loans  typically  is
dependent on the successful operations and income stream of the borrower and the
real estate securing the loan as collateral, which can be significantly affected
by economic conditions. In addition, these loans generally carry larger balances
to single  borrowers or related  groups of  borrowers  than  one-to-four  family
loans.  Any late  payments or the  failure to repay such loans  would  adversely
affect our earnings.

                                       22
<PAGE>

OUR BUSINESS IS GEOGRAPHICALLY  CONCENTRATED AND IS SUBJECT TO REGIONAL ECONOMIC
FACTORS THAT COULD HAVE AN ADVERSE IMPACT ON OUR BUSINESS.

     Substantially  all of our business is with customers in Burlington,  Camden
and Mercer Counties,  New Jersey.  Most of our customers are consumers and small
and  medium-sized  businesses  which are  dependent  upon the regional  economy.
Adverse  changes in  economic  and  business  conditions  in our  markets  could
adversely affect our borrowers, their ability to repay their loans and to borrow
additional funds, and consequently our financial condition and performance.

     In addition to the financial strength and cash flow  characteristics of the
borrower in each case,  we often  secure our loans with real estate  collateral,
most of which is located in Burlington,  Camden and Mercer Counties, New Jersey.
As of December 31, 2006,  approximately  93.7% of our loans had real estate as a
primary,  secondary or tertiary component of collateral.  Real estate values and
real estate  markets are generally  affected by, among other things,  changes in
national, regional or local economic conditions,  fluctuations in interest rates
and the availability of loans to potential  purchasers,  changes in tax laws and
other governmental  statutes,  regulations and policies, and acts of nature. The
real estate collateral in each case provides an alternate source of repayment in
the event of default  by the  borrower.  If real  estate  prices in our  markets
decline,  the value of the real estate  collateral  securing  our loans could be
reduced. If we are required to liquidate the collateral securing a loan during a
period of reduced  real estate  values to satisfy  the debt,  our  earnings  and
capital  could be adversely  affected.  A decline in local  economic  conditions
could adversely affect the values of such real estate.  Consequently,  a decline
in local  economic  conditions  may have a greater  effect on our  earnings  and
capital than on the earnings and capital of larger financial  institutions whose
real estate loan portfolios are geographically diverse.

RISING  INTEREST  RATES WOULD LIKELY HURT OUR PROFITS AND MAY AFFECT OUR ABILITY
TO PAY DIVIDENDS OR UNDERTAKE OTHER CORPORATE TRANSACTIONS.

     Although we have paid cash dividends on a quarterly basis since 1995, there
is no assurance that we will continue to pay cash  dividends.  To be profitable,
we must earn more in interest and fees than we pay in interest and expenses.  If
interest rates rise, the interest we pay on interest-bearing  liabilities,  such
as deposits and  borrowings,  may increase more quickly than interest  earned on
interest-earning  assets,  such as loans and  investment  securities.  This will
reduce  our net  interest  income  and  thereby  reduce  our net  income  in the
short-term.  In addition,  rising interest rates are likely to reduce our income
via a  reduction  in the  demand  for  loans  and the  value  of our  investment
securities and make it more difficult for our borrowers to repay their loans. As
a result,  this  could  restrict  the  capital  resources  of the Bank and could
require us to contribute  additional capital to the Bank or may prevent the Bank
from paying dividends to us. This could restrict our ability to pay dividends or
undertake other  corporate  transactions.  Future payment of cash dividends,  if
any,  will be at the  discretion of the Board of Directors and will be dependent
upon our financial  condition,  results of operations,  capital requirements and
such  other  factors  as the  Board may deem  relevant  and will be  subject  to
applicable federal and state laws that impose restrictions on our ability to pay
dividends.

AS A PUBLIC COMPANY, WE ARE SUBJECT TO NUMEROUS REPORTING  REQUIREMENTS THAT ARE
CURRENTLY EVOLVING AND COULD  SUBSTANTIALLY  INCREASE OUR OPERATING EXPENSES AND
DIVERT MANAGEMENT'S ATTENTION FROM THE OPERATION OF OUR BUSINESS.

     The  Sarbanes-Oxley  Act has  required  changes  in  some of our  corporate
governance,  securities disclosure and compliance practices.  In response to the
requirements  of the  Sarbanes-Oxley  Act,  the SEC has  promulgated  new  rules
covering  a  variety  of   subjects.   Compliance   with  these  new  rules  has

                                       23
<PAGE>

significantly  increased our legal and financial and  accounting  costs,  and we
expect these  increased  costs to continue.  In  addition,  compliance  with the
requirements  has taken a significant  amount of  management's  and the Board of
Directors' time and resources.  Likewise,  these  developments  may make it more
difficult  for us to  attract  and  retain  qualified  members  of our  board of
directors, particularly independent directors, or qualified executive officers.

     As directed by Section 404 of the Sarbanes-Oxley Act, the SEC adopted rules
requiring  public  companies to include a report of  management on the company's
internal  control over financial  reporting in their annual reports on Form 10-K
that contains an assessment by management of the  effectiveness of the company's
internal  control over  financial  reporting.  In addition,  in the future,  the
public  accounting firm auditing the Corporation's  financial  statements may be
required to attest to and report on management's assessment of the effectiveness
of the  Corporation's  internal  control  over  financial  reporting.  The costs
associated with the implementation of this requirement,  including documentation
and  testing,  have not been  estimated by us. If we are ever unable to conclude
that we have  effective  internal  control over  financial  reporting or, if our
independent  auditors are unable to provide us with an unqualified  report as to
the  effectiveness  of our internal  control over  financial  reporting  for any
future year-ends as required by Section 404,  investors could lose confidence in
the reliability of our financial statements, which could result in a decrease in
the value of our securities.

WE OPERATE IN A HIGHLY  REGULATED  ENVIRONMENT AND MAY BE ADVERSELY  AFFECTED BY
CHANGES IN LAWS AND REGULATIONS.

     We are subject to extensive regulation,  supervision and examination by the
Office of Thrift  Supervision,  our  chartering  authority,  and by the  Federal
Deposit  Insurance  Corporation,  as insurer  of our  deposits.  As a  federally
chartered  holding  company,  we are subject to regulation  and oversight by the
Office of  Thrift  Supervision.  Such  regulation  and  supervision  govern  the
activities in which an institution and its holding  companies may engage and are
intended  primarily for the  protection of the  insurance  fund and  depositors.
Regulatory  authorities  have  extensive  discretion  in  connection  with their
supervisory and enforcement activities, including the imposition of restrictions
on  the  operation  of an  institution,  the  classification  of  assets  by the
institution and the adequacy of an institution's  allowance for loan losses. Any
change in such  regulation  and  oversight,  whether  in the form of  regulatory
policy,  regulations,  or  legislation,  including  changes  in the  regulations
governing  savings and loan holding  companies,  could have a material impact on
the Corporation and the Bank, and their operations.

STRONG   COMPETITION   WITHIN  OUR   MARKET   AREA  MAY  LIMIT  OUR  GROWTH  AND
PROFITABILITY.

     Competition in the banking and financial services industry in New Jersey is
intense,  competing  for  deposits  and loans  with  commercial  banks,  savings
associations  and other  financial  entities.  Competition  for  deposits  comes
primarily from commercial  banks,  savings  associations,  credit unions,  money
market and mutual funds and other investment alternatives. Competition for loans
comes primarily from commercial banks,  savings  associations,  mortgage banking
firms,  credit  unions  and  other  financial  intermediaries.   Many  of  these
competitors have  substantially  greater resources and lending limits than we do
and may offer certain services that we do not or cannot provide. There are large
competitors  operating  throughout  our total  market  area,  including  Bank of
America,  Commerce  Bank,  Wachovia  Bank, and PNC Bank, and we also face strong
competition  from  other  community   institutions  in  certain  counties.   Our
profitability  depends upon our continued ability to successfully compete in our
market area.

                                       24
<PAGE>


WE MAY ISSUE ADDITIONAL  SHARES OF COMMON STOCK,  WHICH MAY DILUTE THE OWNERSHIP
AND VOTING POWER OF OUR SHAREHOLDERS AND THE BOOK VALUE OF OUR COMMON STOCK.

     We are  currently  authorized  to issue up to  10,000,000  shares of common
stock of which 6,535,313 shares were outstanding at December 31, 2006. Our Board
of Directors has authority, without action or vote of the shareholders, to issue
all or part of the authorized but unissued  shares.  A total of 17,500 shares of
common stock have been  reserved  for  issuance  under  options  outstanding  on
December  31,  2006.  As of December  31,  2006,  options to purchase a total of
17,500 shares were  exercisable  and had an exercise  price of $10.00.  Any such
issuance will dilute the percentage  ownership  interest of shareholders and may
further dilute the book value of our common stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS
----------------------------------

Not applicable.

ITEM 2.  PROPERTIES
-------------------

     The Registrant conducts its business through its two administrative offices
located in  Burlington,  New Jersey and its 42 branch  locations in  Burlington,
Camden and Mercer  Counties,  New  Jersey.  All of the  Registrant's  office and
branch  facilities are owned by the Registrant,  except for eleven branch office
locations,  two located in  Lumberton  and the others  located in  Medford,  Mt.
Holly,  Burlington,  Cherry Hill, Hamilton,  Cinnaminson,  Delanco,  Audubon and
Marlton,  New  Jersey.  Management  of the  Registrant  considers  the  physical
condition of each of the  Registrant's  administrative  and branch offices to be
good and adequate for the conduct of the Registrant's business.

ITEM 3.  LEGAL PROCEEDINGS
--------------------------

     The  Registrant  is  periodically  involved as a plaintiff  or defendant in
various  legal  actions,   such  as  actions  to  enforce  liens,   condemnation
proceedings  on properties in which the  Registrant  holds  mortgage  interests,
matters  involving the making and servicing of mortgage  loans and other matters
incident to the  Registrant's  business.  In the opinion of management,  none of
these actions individually or in the aggregate is believed to be material to the
financial condition or results of operations of the Registrant.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------

     No matters were  submitted to a vote of security  holders during the fourth
quarter of the fiscal year ended December 31, 2006.

                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S  COMMON EQUITY,  RELATED STOCKHOLDER MATTERS
--------------------------------------------------------------------------------
AND ISSUER PURCHASES OF EQUITY SECURITIES
-----------------------------------------

     MARKET FOR COMMON  EQUITY.  The common stock of the  Corporation  is traded
over-the-counter  and is listed on the  Nasdaq  Global  Market  under the symbol
"FMCO".  Daily  quotations are included in the Nasdaq Global Market stock tables
published in the Wall Street Journal and other leading newspapers.


                                       25
<PAGE>

     The  number of record  holders  of common  stock of the  Corporation  as of
December 31, 2006 was  approximately  666, not including those shares registered
in names of various investment brokers held in account for their customers.

     The following table sets forth the range of closing prices,  as reported by
Nasdaq and cash dividends declared,  for the periods ended December 31, 2006 and
2005:

                               2006
                    ------------------------------------------
QUARTER ENDED         HIGH          LOW     DIVIDENDS DECLARED
--------------------------------------------------------------
MARCH 31,            $19.64       $17.10        $0.03
JUNE 30,             $19.84       $16.12        $0.03
SEPTEMBER 30,        $21.90       $16.25        $0.03
DECEMBER 31,         $31.87       $22.56        $0.03
--------------------------------------------------------------

                               2005
                    ------------------------------------------
QUARTER ENDED         HIGH         LOW      DIVIDENDS DECLARED
--------------------------------------------------------------
March 31,            $22.73      $19.72         $0.03
June 30,             $19.80      $16.52         $0.03
September 30,        $18.00      $16.78         $0.03
December 31,         $18.09      $16.02         $0.03
--------------------------------------------------------------


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

     As of December 31, 2006 the Bank was a Tier 1 capital compliant institution
and had available  $30.3 million for  dividends to the  Corporation,  subject to
nonobjection by the OTS. It is not likely that the  Corporation  would request a
dividend of that  magnitude.  The  Corporation  is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders,  but is subject to
the  requirements  of New Jersey  law,  which  permits  the  Corporation  to pay
dividends  in cash on shares out of the  Corporation's  surplus,  defined as the
excess of net assets of the Corporation over stated capital.

                                       26
<PAGE>


     The  following  table  sets  forth  as of  December  31,  2006  information
regarding compensation plans under which equity securities of the Registrant are
authorized for issuance.
<TABLE>
<CAPTION>
                                                    (a)                   (b)                      (c)
                                                                                             Number of securities
                                                                                             remaining available
                                           Number of securities                              for future issuance
                                             to be issued upon      Weighted-average       under equity compensation
                                                exercise of         exercise price of          plans (excluding
                                           outstanding options,    outstanding options,      securities reflected in
                                           warrants and rights     warrants and rights            column (a))
                                           --------------------    -------------------           -----------
<S>                                               <C>                     <C>                          <C>
Equity compensation plans
  Approved by shareholders
Stock Option and
  Incentive Plan.....................              17,500                 $10.00                       0
Equity compensation plans
  not approved by shareholders                       N/A                     N/A                      N/A
                                                   ------                 ------                      ---
     TOTAL..........................               17,500                 $10.00                      0
                                                   ======                 ======                      ===
</TABLE>

     (b)  USE OF PROCEEDS. Not applicable.

     (c)  ISSUER PURCHASE OF EQUITY SECURITIES. There were no shares repurchased
          during the fourth quarter of 2006.

                                       27
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA
--------------------------------
<TABLE>
<CAPTION>
                                                                    At or For the Year Ended December 31,
                                                      ------------------------------------------------------------------
                                                          2006         2005          2004         2003         2002
                                                          ----         ----          ----         ----         ----
                                                                (Dollars in thousands, except per share data)
<S>                                                   <C>          <C>           <C>          <C>          <C>
  FINANCIAL CONDITION:
  Assets............................................  $ 1,188,112  $ 1,231,263   $ 1,250,006  $ 1,225,557  $ 1,126,557
  Loans receivable, net.............................      450,099      442,571       418,799      402,606      361,674
  Deposits..........................................      933,103      947,067       941,507      893,006      800,340
  Stockholders' equity..............................       78,361       75,082        70,337       62,830       57,638

  OPERATIONS:
  Interest income...................................  $    60,993  $    57,906   $    55,819  $    50,814  $    57,748
  Interest expense..................................       27,415       21,537        18,414       19,362       24,756
  Net interest income...............................       33,578       36,369        37,405       31,452       32,992
  Net income........................................        5,319        6,718         8,768        6,201        7,961
  Basic earnings per common share...................         0.82         1.03          1.35         0.96         1.22
  Diluted earnings per common share.................         0.81         1.03          1.34         0.95         1.21
  Dividends declared per common share...............         0.12         0.12          0.12         0.12         0.12
  Weighted average common shares outstanding........        6,518        6,504         6,495        6,477        6,548
  Weighted average common shares and
     common stock equivalents outstanding...........        6,527        6,521         6,529        6,515        6,577

  OTHER SELECTED DATA:
  Net interest rate spread..........................         3.05%        3.23%         3.29%        2.98%        3.44%
  Net interest margin...............................         3.03         3.22          3.26         2.92         3.40
  Return on average assets..........................         0.45         0.55          0.71         0.49         0.77
  Return on average equity..........................         6.95         9.22         13.21         9.52        14.61
  Dividend payout ratio.............................        14.81        11.65          8.95        12.63         9.92
  Equity-to-asset ratio.............................         6.60         6.10          5.63         5.13         5.12
  Number of employees (full-time equivalents).......          519          525           515          522          480
</TABLE>


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.

                                       28
<PAGE>

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

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

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
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

                                       29
<PAGE>

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.

                                       30
<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>
                                       31
<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

                                       32
<PAGE>

in 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.

                                       33
<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.

                                       34
<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.

                                       35
<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


                                       36
<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.

                                       37
<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 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.

     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>

                                       38
<PAGE>

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.

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

                                       39
<PAGE>

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.

     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.

                                       40
<PAGE>

ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
--------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------

     On June 19,  2006,  the Audit  Committee  of the Board of  Directors of the
Corporation  dismissed  PricewaterhouseCoopers  LLP  ("PwC") as its  independent
registered public accounting firm.

     PwC's reports on the Registrant's consolidated financial statements for the
fiscal  years  ended  December  31,  2005 and 2004,  did not  contain an adverse
opinion or  disclaimer  of  opinion,  and were not  qualified  or modified as to
uncertainty, audit scope or accounting principle.

     During the fiscal  years ended  December 31, 2005 and 2004 and through June
19,  2006,  there were no  disagreements  with PwC on any matters of  accounting
principles or practices,  financial statement  disclosure,  or auditing scope or
procedure,  which, if not resolved to the satisfaction of PwC, would have caused
them to make a reference  thereto in their reports on the  financial  statements
for such years.  During the fiscal  years ended  December  31, 2005 and 2004 and
through  June 19,  2006,  there  were no  reportable  events  described  in Item
304(a)(1)(v)  of Regulation  S-K. The  Registrant has received a letter from PwC
stating that it agrees with the foregoing disclosure,  which letter was filed as
Exhibit 16 to the Form 8-K filed on June 23, 2006.

     Effective June 19, 2006, the Audit Committee of the  Registrant's  Board of
Directors  approved the  engagement  of Grant  Thornton  LLP as its  independent
registered  public  accounting firm.  During the fiscal years ended December 31,
2005 and 2004 and through June 19,  2006,  the  Registrant  did not consult with
Grant  Thornton  LLP  regarding  any of the  matters or events set forth in Item
304(a)(2)(i) or (ii) of Regulation S-K.

ITEM 9A. CONTROLS AND PROCEDURES
--------------------------------

     The  Corporation's  management  evaluated,  with the  participation  of the
Corporation's   Chief  Executive  Officer  and  Chief  Financial  Officer,   the
effectiveness of the Corporation's disclosure controls and procedures, as of the
end of the period covered by this report.  Based on that  evaluation,  the Chief
Executive  Officer and Chief Financial  Officer concluded that the Corporation's
disclosure  controls and  procedures  are  effective to ensure that  information
required to be  disclosed  by the  Corporation  in the reports  that it files or
submits  under  the  Securities  Exchange  Act of 1934 is  recorded,  processed,
summarized and reported within the time periods specified in the SEC's rules and
forms.

     There were no changes in the Corporation's  internal control over financial
reporting that occurred during the  Corporation's  last fiscal quarter that have
materially  affected,  or  are  reasonably  likely  to  materially  affect,  the
Corporation's internal control over financial reporting.

ITEM 9B. OTHER INFORMATION
--------------------------

     None.

                                       41
<PAGE>

                                    PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
---------------------------------------------------------------

     Set forth below is information  about the directors and executive  officers
and significant  employees of the Corporation.  The Certificate of Incorporation
require that the Board of Directors  be divided  into three  classes,  as nearly
equal in number as possible,  each class to serve for a three-year period,  with
approximately  one-third  of the  directors  elected  each  year.  The  Board of
Directors  currently consists of nine members.  Each director is also a director
of the Bank.
<TABLE>
<CAPTION>

                                                                                                    Current Term
Name                                    Age       Positions with the Corporation                    To Expire
----                                    ---       ------------------------------                    ---------

<S>                                     <C>       <C>                                               <C>
George J. Barber                        85        Director                                          2007
Dominic W. Flamini                      68        Director                                          2007
Roy D. Yates                            44        Chairman of the Board                             2007
Joseph W. Clarke, Jr.                   69        Director                                          2008
Edward J. Staats, Jr.                   62        Director                                          2008
Mary Wells                              64        Director                                          2008
Craig W. Yates                          64        President and Chief Executive Officer             2008
Vincent R. Farias                       60        Director                                          2009
James E. Igo                            50        Senior Vice President and Senior Lending Officer  N/A
Thomas M. Topley                        46        Senior Vice President of Operations and           N/A
                                                  Corporate Secretary
Channing L. Smith                       63        Vice President and Chief Financial Officer        N/A
</TABLE>


     The principal  occupation  of each  director and  executive  officer of the
Corporation for the last five years is set forth below.

     GEORGE J. BARBER serves as a director of the  Corporation.  Previously,  he
was Chairman of the Board of the  Corporation and was President of the Bank from
1973 until his retirement in 1986.

     DOMINIC W.  FLAMINI  is the  President  and owner of First U.S.  Management
Corporation,  a real estate  development  and  property  management  Corporation
located in Moorestown,  New Jersey.  Mr. Flamini is a residential and commercial
mortgage  broker for the Avis  Mortgage  Group located in Haddon  Township,  New
Jersey.

     ROY D. YATES  serves as Chairman of the Board.  Mr. Yates is a Professor of
Electrical  and Computer  Engineering at Rutgers  University in Piscataway,  New
Jersey. Roy D. Yates is the nephew of Craig W. Yates.

     JOSEPH W. CLARKE, JR. is an attorney with Clarke Law Offices, PA located in
Haddonfield, New Jersey.

     EDWARD J. STAATS, JR. is Superintendent of Bridges for Burlington County.

     MARY  WELLS is the  President  Emeritus  of Family  Service  of  Burlington
County.

                                       42
<PAGE>

     CRAIG W.  YATES  serves as  President  and Chief  Executive  Officer of the
Corporation  and the Bank.  He became a director of the Bank in January  1990, a
director of the  Corporation in April 1990 and President of the  Corporation and
the Bank on December  31,  1990.  In his  capacity as  President,  Mr.  Yates is
responsible for the operations of the  Corporation  pursuant to the policies and
procedures adopted by the Board of Directors.

     VINCENT R. FARIAS is the  President  and owner of Farias Surf and Sport,  a
retail/rental  establishment  located in Beverly,  New Jersey with facilities in
several  New Jersey  coastal  towns.  Mr.  Farias is a member of the  Burlington
County Board of Freeholders.

     JAMES E. IGO has  served as  Senior  Vice  President  and  Senior  Mortgage
Lending Officer of the Corporation and the Bank since November 1991.

     THOMAS M. TOPLEY has served as Senior Vice  President of  Operations  since
April 1993 and as  Corporate  Secretary  of the  Corporation  and the Bank since
April 1992.  From June 1990 to April 1993,  Mr. Topley served as Vice  President
and Controller for the Bank.

     CHANNING L. SMITH has served as Vice President and Chief Financial  Officer
of the  Corporation  and the Bank since October 1994.  In this  capacity,  he is
responsible for the management of the accounting,  treasury,  and investments of
the  Corporation and the Bank. From April 1993 to October 1994, Mr. Smith served
as Controller of the Corporation and the Bank.

AUDIT COMMITTEE

     The Audit Committee currently consists of Directors Staats,  Wells, Farias,
Flamini, Barber, Clarke and Roy D. Yates, each of whom has been determined to be
independent in accordance with the rules of the Nasdaq Global Market.  The Board
of Directors has  determined  that Mr. Barber is an "audit  committee  financial
expert" as defined in the regulations of the Securities and Exchange Commission.

     The Audit Committee is responsible for  recommending the appointment of the
Corporation's  independent  accountants and meeting with such  accountants  with
respect to the scope and review of the annual audit. Additional responsibilities
of the Audit  Committee  are to  ensure  that the  Board of  Directors  receives
objective  information  regarding  policies,  procedures  and  activities of the
Corporation with respect to auditing, accounting,  internal accounting controls,
financial  reporting,  regulatory  matters  and  such  other  activities  of the
Corporation  as may be directed by the Board of Directors.  The Audit  Committee
met five (5) times during the year ended December 31, 2006.

     The Board of Directors has adopted a formal written Audit Committee charter
and has reviewed and assessed the adequacy of this formal written  charter on an
annual basis.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Exchange Act, requires the Corporation's directors and
executive  officers to file  reports of  ownership  and changes in  ownership of
their equity  securities of the  Corporation  with the  Securities  and Exchange
Commission and to furnish the  Corporation  with copies of such reports.  To the
best of the  Corporation's  knowledge,  all of the filings by the  Corporation's
directors and executive  officers,  with the exception of the filing of two Form
4's by Mr. Roy D.  Yates,  were made on a timely  basis  during the 2006  fiscal
year. Other than as disclosed under Item 12, the Corporation is not aware of any
other

                                       43
<PAGE>

beneficial owners, as defined in the Exchange Act regulations,  of more then ten
percent of its Common Stock.

CODE OF ETHICS

     The  Corporation has adopted a Code of Ethics that applies to its principal
executive officer,  principal financial officer, principal accounting officer or
controller or persons performing similar functions.  A copy of the Corporation's
Code of Ethics will be  furnished,  without  charge,  to any person who requests
such copy by writing to the Secretary, FMS Financial Corporation, 3 Sunset Road,
Burlington, New Jersey 08016.

CORPORATE GOVERNANCE

     There have been no material  changes to the  procedures  by which  security
holders may recommend  nominees to the Registrant's Board of Directors since the
date of the Registrant's last proxy statement mailed to its stockholders.

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>


                                       44
<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>


                                       45
<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.

                                       46
<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,  stock options have 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 have been 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 have value only if the market price of
the common stock increases after that date.

     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.

                                       47
<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>


                                       48
<PAGE>

ITEM 12.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
--------------------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS.
----------------------------

     (a) Security Ownership of Certain Beneficial Owners

     The following table sets forth, as of December 31, 2006,  persons or groups
who own more than 5% of the  Common  Stock and the  ownership  of all  executive
officers and directors of the Corporation as a group. Other than as noted below,
management knows of no person or group that owns more than 5% of the outstanding
shares of Common Stock at December 31, 2006.

                                                                 Percent of
                                                                 Shares of
Name and Address                      Amount and Nature          Common Stock
of Beneficial Owner                   of Beneficial Ownership    Outstanding(%)
-------------------                   -----------------------    --------------

Craig W. Yates                        1,386,889   (1)(2)           21.18%
440 Addison Park Lane
Boca Raton, Florida 33432

Frances E. Yates                      596,700  (1)(3)               9.11%
30 Anna Street
Ocean Ridge, Florida  33435

Roy D. Yates                          467,156 (4)                   7.14%
26 Navajo Road
E. Brunswick, New Jersey 08816

All Executive Officers and Directors  1,960,932(5)                 29.95%
as a Group (11 persons)
----------
(1)  Frances E. Yates is the sister of Craig W. Yates. Pursuant to Schedules 13D
     filed by each  individual,  each disclaims  beneficial  ownership of Common
     Stock owned by the other.
(2)  Excludes  210,000 shares owned by adult children.  Craig W. Yates disclaims
     beneficial ownership of shares held by his adult children.
(3)  The  information  as to Frances E.  Yates is derived  from a Schedule  13D,
     dated March 1, 2000.  Frances Yates has direct  ownership of 388,500 shares
     with sole  voting and  dispositive  power.  She also has shared  voting and
     dispositive  power for 148,200  shares held in trusts for her two sons.  In
     addition,  her former husband,  Edward  Ackerman,  owns 60,000 shares.  Mr.
     Ackerman disclaims beneficial ownership of any shares other than the 60,000
     shares he owns.
(4)  Roy D. Yates is the nephew of Craig W. Yates.  Includes 169,800 shares held
     as  Co-Executor  of Estate of Charles B.  Yates and 36,606  shares  held by
     minor children of Mr. Roy D. Yates.
(5)  Includes  shares of Common  Stock  held  directly  as well as by spouses or
     minor children,  in trust and other indirect  ownership,  over which shares
     the  individuals  effectively  exercise sole voting and  investment  power,
     unless  otherwise  indicated.  Includes options to purchase 8,000 shares of
     Common Stock that may be  exercised  within 60 days of December 31, 2006 to
     purchase shares of Common Stock under the 1988 stock option plan.

                                       49
<PAGE>

         (b)      Security Ownership of Management

     The following table provides information as of December 31, 2006 concerning
ownership of the Corporation's Common Stock (which constitutes its only class of
equity  securities) each of its directors,  the Named Executive Officers and all
executive  officers and directors as a group. Each person listed has sole voting
and  investment  power with  respect to the shares  listed  across from his name
except as noted otherwise.

                                            Beneficial Ownership (1)
                                      -----------------------------------------
                                                              Percentage of
                                                              Shares
 Name                                 Number of Shares        Outstanding (2)
 ----                                 ----------------        ---------------

 Vincent R. Farias                          4,525                 (7)
 George J. Barber                          21,157                 (7)
 Dominic W. Flamini                         1,100                 (7)
 Roy D. Yates                             467,156  (3)            7.14%
 Joseph W. Clarke, Jr.                        200                 (7)
 Edward J. Staats, Jr.                     10,000                 (7)
 Mary Wells                                   835                 (7)
 Craig W. Yates                         1,386,889  (4)           21.18%
 James E. Igo                              34,747  (5)            (7)
 Thomas M. Topley                          15,655                 (7)
 Channing L. Smith                         18,668  (6)            (7)

 All directors and executive            1,960,932                29.95%
   Officers as a group (11 persons)

--------------
(1)  Beneficial  ownership as of December 31,  2006.  Includes  shares of Common
     Stock held directly as well as by spouses or minor children,  in trust, and
     other indirect  ownership,  over which shares the  individuals  effectively
     exercise  sole or shared  voting and  investment  power,  unless  otherwise
     indicated.
(2)  In  calculating  percentage  ownership  for a given  individual or group of
     individuals,  the number of shares of the Common Stock outstanding includes
     unissued shares subject to options  exercisable  within 60 days of December
     31, 2006 held by that individual or group.
(3)  Roy D. Yates is the nephew of Craig W. Yates.
(4)  Excludes  210,000 shares owned by adult children.  Craig W. Yates disclaims
     beneficial ownership of shares held by his adult children.
(5)  Includes  options to acquire  3,000 shares that may be exercised  within 60
     days of December 31, 2006 for Mr. Igo.
(6)  Includes  options to acquire  5,000 shares that may be exercised  within 60
     days of December 31, 2006 for Mr. Smith.
(7)  Less than 1% of Common Stock Outstanding


                                       50
<PAGE>
     (c)  Changes in Control

          Other than the  pending  merger  with  Beneficial,  management  of the
          Corporation  knows of no  arrangements,  including  any  pledge by any
          person of securities of the Corporation, the operation of which may at
          a subsequent date result in a change in control of the Registrant.

     (d)  Securities Authorized for Issuance Under Equity Compensation Plans.

          See Item 5(a).

ITEM  13.  CERTAIN   RELATIONSHIPS  AND  RELATED   TRANSACTIONS,   AND  DIRECTOR
--------------------------------------------------------------------------------
INDEPENDENCE
------------

     The Bank,  like many financial  institutions,  grants loans to its officers
and directors. All loans by the Bank to its directors and executive officers are
subject  to OTS  regulations  restricting  loans  and  other  transactions  with
affiliated  persons of the  Corporation.  Savings  institutions are permitted to
make  loans  to  executive  officers,   directors  and  principal   shareholders
("insiders")  on  preferential  terms,  provided the extension of credit is made
pursuant  to a  benefit  or  compensation  program  of the Bank  that is  widely
available  to  employees  of the  Bank  or its  affiliates  and  does  not  give
preference  to any insider over other  employees of the Bank or  affiliate.  The
Bank  maintains a benefits  program  whereby  mortgage  loans are offered to all
employees and directors at a discount of the then-prevailing rate at the time of
grant. This rate is only available during the term of the employee's  employment
or the director's board membership. Upon termination, resignation or retirement,
the  rate  reverts  to the  market  rate  that  existed  at the time the loan is
granted.  All other loans to insiders  have been made in the ordinary  course of
business, and on substantially the same terms and conditions, including interest
rates  and  collateral,   as  those   prevailing  at  the  time  for  comparable
transactions  with the Bank's other customers,  and do not involve more than the
normal risk of collectibility, nor present other unfavorable features.

     Set  forth  below  is  certain  information   relating  to  loans  made  on
preferential  terms to executive  officers and directors of the  Corporation and
its subsidiaries  whose total aggregate loan balances  exceeded  $120,000 at any
time during the year ended December 31, 2006.
<TABLE>
<CAPTION>
                                                                          Highest                               Market
                                                              Original    Unpaid Balance                        Interest
                                                 Date         Loan        Since        Balance at  Interest     Rate at Date
Name and Position          Loan Type             Originated    Amount     12/31/05     12/31/06    Rate Paid    Originated (%)
-----------------          ---------             ----------   --------    -----------  --------    ---------    --------------
<S>                        <C>                   <C>          <C>         <C>          <C>          <C>           <C>
James E. Igo               First mortgage on
  Senior Vice President    primary residence     08/01/03     $169,000     $129,854    $112,405      3.625%        4.625%
  and Senior Lending
  Officer
Thomas M. Topley           First Mortgage on     04/08/03     $200,000     $159,640    $151,254      3.750%        4.750%
  Senior Vice President    primary residence
  of Operations and
  Corporate Secretary
</TABLE>

DIRECTOR INDEPENDENCE

     The Board of Directors  has  determined  that all of its members other than
Mr. Craig W. Yates are "independent  directors" in accordance with the standards
of the Nasdaq  Global  Market.  There are no  directors  that are members of the
Audit,  Compensation  or  Nominating  Committees  that  are not  independent  in
accordance with the standards established by the Nasdaq Global Market.

                                       51
<PAGE>

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
-----------------------------------------------

     Effective  July 30,  2002,  the  Securities  and  Exchange  Act of 1934 was
amended by the  Sarbanes-Oxley  Act of 2002 to require all auditing services and
non-audit services provided by an issuer's independent auditor to be approved by
the issuer's  audit  committee  prior to such services  being  rendered or to be
approved  pursuant to  pre-approval  policies and procedures  established by the
issuer's audit  committee.  The Audit Committee has not adopted any pre-approval
policies and procedures for audit and non-audit  services to be performed by the
independent  accountants.  Such  services  are  approved in advance by the Audit
Committee itself. No services were approved pursuant to the de minimus exception
of the Sarbanes-Oxley Act of 2002.

     Audit  Fees.   The  aggregate   fees  billed  by  Grant  Thornton  LLP  for
professional  services  rendered  for  the  audit  of the  Corporation's  annual
consolidated  financial  statements  and  for  the  review  of the  consolidated
financial  statements  included in the  Corporation's  Quarterly Reports on Form
10-Q for the fiscal year ended December 31, 2006 were $183,750

     The aggregate fees billed by PwC for professional services rendered for the
audit of the Corporation's annual consolidated  financial statements and for the
review of the consolidated  financial  statements  included in the Corporation's
Quarterly  Reports on Form 10-Q for the fiscal years ended December 31, 2006 and
2005 were $22,000 and $210,536, respectively.

     Audit  Related  Fees.  There were no fees billed by Grant  Thornton LLP for
assurance  and  related  services  related to the audit of the annual  financial
statements or to the review of the quarterly  financial  statements for the year
ended December 31, 2006.

     There were no fees billed by PwC for assurance and related services related
to the  audit  of the  annual  financial  statements  or to  the  review  of the
quarterly financial statements for the years ended December 31, 2006 and 2005.

     Tax Fees.  There were no fees billed by Grant Thornton LLP for professional
services  rendered for tax  compliance,  tax advice or tax planning for the year
ended  December  31,  2006.

     There were no fees billed by PwC for professional services rendered for tax
compliance, tax advice or tax planning for the years ended December 31, 2006 and
2005.

     All  Other  Fees.  There  were no fees  billed  by Grant  Thornton  LLP for
professional  services rendered for services or products other than those listed
under the captions "Audit Fees," "Audit-Related Fees" and "Tax Fees" for the
year ended December 31, 2006.

     There were no fees billed by PwC for  professional  services  rendered  for
services or products  other than those listed under the captions  "Audit  Fees,"
"Audit-Related  Fees" and "Tax Fees" for the years ended  December  31, 2006 and
2005.


                                       52
<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.
</TABLE>


                                       53
<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....................F-1
Report of Independent Registered Public Accounting Firm....................F-2
Consolidated Statements of Financial Condition.............................F-4
Consolidated Statements of Operations......................................F-5
Consolidated Statements of Cash Flows......................................F-6
Consolidated Statements of Changes in Stockholders' Equity.................F-7
Notes to Consolidated Financial Statements.................................F-8

                                       54
<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


                                      F-1
<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


                                      F-2
<PAGE>


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>

                                      F-3
<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
                                                                                      ==============         ==============

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.

                                      F-4
<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.

                                      F-5
<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.


                                      F-6
<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)
Adjustment to initially
  apply SFAS 158, net of
  tax benefit of $862,779                                          (1,249,315)                                 (1,249,315)
                                                                                                              -----------
Total comprehensive
  income                                                                                                        3,933,260

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.


                                      F-7
<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.

                                      F-8
<PAGE>

ALLOWANCE FOR LOAN LOSSES
     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.

     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  for  impairment  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 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.

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.

                                      F-9
<PAGE>

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.

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,  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

                                      F-10
<PAGE>

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.

     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.

     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  with
respect to the minority stock offering and the merger.

                                      F-11
<PAGE>
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>


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>

     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

                                      F-12
<PAGE>

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

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>


     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.

                                      F-13
<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>

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

                                      F-14
<PAGE>

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.

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

                                      F-15
<PAGE>

6. 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.

7. 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.  Deposits from related  parties 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
=================================================

                                      F-16
<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
=======================================================================

8.   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>

                                      F-17
<PAGE>

9.   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.


                                      F-18
<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>


10.  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.

11.  STOCKHOLDERS' EQUITY

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

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

                                      F-19
<PAGE>

     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 Equity:                  $  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 Equity:                  $  89,616     7.29%      $  18,442      1.5%        $  24,589   2.0%
=======================================================================================================

</TABLE>


12. 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
Other liabilities                                             $    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>


                                      F-20
<PAGE>

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

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

                                      F-21
<PAGE>

     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%
------------------------------------------------------------

     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.

                                      F-22
<PAGE>
     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 as a
liability.

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

     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.

                                      F-23
<PAGE>
     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.

13. 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.

14.  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.

                                      F-24
<PAGE>
     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>

                                      F-25
<PAGE>

15.  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:

                                     DECEMBER 31, 2006

                      -------------------------------------------------
                           FIXED          VARIABLE
                           RATE             RATE            TOTAL
-----------------------------------------------------------------------
Commitments to:
       fund loans        $2,445,572      $ 3,571,000      $  6,016,572
Unused lines:
       Construction       1,722,940        3,901,232         5,624,172
       Equity line of
         credit loans             -       23,906,750        23,906,750
-----------------------------------------------------------------------
Total                    $4,168,512      $31,378,982      $ 35,547,494
=======================================================================


     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.

16.  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.

17.  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.

18.  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.

                                      F-26
<PAGE>

     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>

19.  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.

                                      F-27
<PAGE>

     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.


20.  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>


                                      F-28
<PAGE>
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 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>

                                      F-29
<PAGE>
These  statements  should be read in conjunction with the other notes related to
the consolidated financial statements.

21.  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  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.


MANAGEMENT  REPORT

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

FINANCIAL   STATEMENTS

Management of FMS Financial  Corporation and Subsidiary  ("the  Corporation") is
responsible  for  the  preparation,  integrity,  and  fair  presentation  of its
published consolidated  financial statements,  and Thrift Financial Report (TFR)
filed with the Office of Thrift  Supervision,  as of December 31, 2006,  and for
the year then ended. The published  consolidated  financial statements have been
prepared in accordance with generally accepted  accounting  principles,  and the
Thrift  Financial  Report has been  prepared  in  accordance  with the Office of
Thrift Supervision  reporting  instructions,  and, as such, include some amounts
that are based upon judgments and estimates of management.

INTERNAL CONTROL STRUCTURE OVER FINANCIAL REPORTING

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

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

Management  assessed its internal control structure over financial  reporting as
of December  31,  2006.  This  assessment  was based on criteria  for  effective
internal   control   over   financial    reporting    described   in   "Internal
Control-Integrated Framework" issued by the Committee of Sponsoring Organization
of the Treadway Commission.  Based on this assessment,  management believes that
the  Corporation   maintained  an  effective  internal  control  structure  over
financial reporting as of December 31, 2006.

COMPLIANCE  WITH  LAWS  AND   REGULATIONS

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

Management  assessed its  compliance  with the designated  laws and  regulations
relating to safety and soundness. Based on this assessment,  management believes
that  the  Corporation  has  complied,  in all  significant  respects,  with the
designated  laws and  regulations  related to safety and  soundness for the year
ended December 31, 2006.
<TABLE>
<CAPTION>
<S>                                        <C>
/s/ Craig W. Yates                          /s/ Channing L. Smith

Craig W. Yates                              Channing L. Smith
President and Chief Executive Officer       Vice President and Chief Financial Officer
FMS Financial Corporation
Burlington, New Jersey
March 9, 2007
</TABLE>
                                      F-30
<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 March 12, 2007.

                             FMS FINANCIAL CORPORATION


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

     Pursuant to the  requirement of the Securities  Exchange Act of 1934,  this
report  has been  signed  below on March 12,  2007 by the  following  persons on
behalf of the registrant and in the capacities indicated.
<TABLE>
<CAPTION>

<S>                                                     <C>
/s/ Craig W. Yates                                      /s/ George J. Barber
-----------------------------------------------         -----------------------------------------------------
Craig W. Yates                                          George J. Barber
President, Chief Executive Officer and Director         Director
(Principal Executive Officer)


/s/ Channing L. Smith                                   /s/ Edward J. Staats, Jr.
-----------------------------------------------         -----------------------------------------------------
Channing L. Smith                                       Edward J. Staats, Jr.
Vice President and Chief Financial Officer              Director
(Principal Financial and Accounting Officer)


/s/ Dominic W. Flamini                                  /s/ Vincent R. Farias
-----------------------------------------------         -----------------------------------------------------
Dominic W. Flamini                                      Vincent R. Farias
Director                                                Director

/s/ Roy D. Yates                                        /s/ Mary Wells
-----------------------------------------------         -----------------------------------------------------
Roy D. Yates                                            Mary Wells
Chairman of the Board                                   Director


/s/ Joseph W. Clarke, Jr.
-----------------------------------------------
Joseph W. Clarke, Jr.
Director

</TABLE>
<PAGE>