UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                             ______________________

                                    FORM 10-Q

(Mark One)
[X]  Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
     Act of 1934

     For the quarterly period ended September 30, 2006

                                       OR

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

                         Commission file number 0-17353

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

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

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

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

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

     Indicate by check mark whether the registrant is 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.

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 Exchange Act)  Yes     NO X
                                               ---    ---

     Indicate the number of shares  outstanding to each of the issuer's  classes
of common stock as of the latest practicable date : November 3, 2006.


            Class                                           6,523,313
            -----                                           ---------
   $.10 par value common stock                          Outstanding Shares

<PAGE>

                    FMS FINANCIAL CORPORATION AND SUBSIDIARY
                         QUARTERLY REPORT ON FORM 10-Q
                               SEPTEMBER 30, 2006


                               TABLE OF CONTENTS

                                                                            Page
                                                                            ----
PART I - Financial Information
------------------------------

Item 1 - Financial Statements
         Consolidated Statements of Financial Condition as of
              September 30, 2006 (unaudited) and December 31, 2005             1

         Consolidated Statements of Operations (unaudited)
              for the three and nine months ended September 30, 2006
              and September 30, 2005                                           2

         Consolidated Statements of Cash Flows (unaudited)
              for the nine months ended September 30, 2006 and
              September 30, 2005                                               3

         Consolidated Statements of Changes in Stockholders' Equity
              (unaudited) for the nine months ended September 30, 2006
              and September 30, 2005                                           4

         Notes to Consolidated Financial Statements                        5 - 7

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

Item 3 - Quantitative and Qualitative Disclosures About Market Risk           19

Item 4 - Controls and Procedures                                              19

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

Item 1 - Legal Proceedings                                                    20

Item 1A- Risk Factors                                                         20

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds          20

Item 3 - Defaults Upon Senior Securities                                      20

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

Item 5 - Other Information                                                    20

Item 6 - Exhibits                                                             20

<PAGE>

FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
                                                                                SEPTEMBER 30, 2006    DECEMBER 31, 2005
                                                                                       (UNAUDITED)
------------------------------------------------------------------------------------------------------------------------
ASSETS
------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                 <C>
     Cash and amounts due from depository institutions                          $     47,754,701    $         54,479,491
     Interest-bearing deposits                                                           202,724                  93,076
     Short term funds                                                                 68,301,888              39,268,382
                                                                                ----------------    --------------------
        Total cash and cash equivalents                                              116,259,313              93,840,949

     Investment securities held to maturity                                          441,059,945             483,536,309
     Investment securities available for sale                                        148,744,743             155,632,095
                                                                                ----------------    --------------------
        Total investment securities                                                  589,804,688             639,168,404

     Loans, net                                                                      450,977,975             442,571,357
     Accrued interest receivable                                                       7,250,176               6,224,371
     Federal Home Loan Bank stock                                                      6,313,520               8,248,420
     Office properties and equipment, net                                             34,326,043              34,801,087
     Deferred income taxes                                                             2,840,687               2,607,641
     Core deposit intangible, net                                                      1,338,666               1,875,822
     Prepaid expenses and other assets                                                 3,872,067               1,925,324
                                                                                ----------------    --------------------
TOTAL ASSETS                                                                    $  1,212,983,135    $      1,231,263,375
                                                                                ================    ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------------------------

Liabilities:
     Interest-bearing deposits                                                  $    743,163,181    $        759,991,442
     Noninterest-bearing deposits                                                    186,235,630             187,075,982
                                                                                ----------------    --------------------
        Total deposits                                                               929,398,811             947,067,424
     Securities sold under agreements to repurchase                                  145,000,000             175,000,000
     FMS Statutory Trust I and II debentures                                          51,548,000              25,774,000
     Advances by borrowers for taxes and insurance                                     2,077,836               2,132,320
     Accrued interest payable                                                          1,390,307               1,378,353
     Dividends payable                                                                   195,474                 195,486
     Other liabilities                                                                 5,053,306               4,633,516
                                                                                ----------------    --------------------
     Total liabilities                                                             1,134,663,734           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 8,009,392 and 8,006,392 shares outstanding 6,515,813
        and 6,515,110 as of September 30, 2006 and December 31, 2005, respectively       800,939                 800,639
     Additional paid-in capital                                                        8,797,081               8,767,381
     Accumulated other comprehensive loss - net of income taxes                       (1,359,692)             (1,099,630)
     Retained earnings                                                                81,088,517              77,583,683
     Less:  Treasury stock (1,493,579 and 1,491,282 shares, at cost,
        as of September 30, 2006 and December 31, 2005, respectively)                (11,007,444)            (10,969,797)
                                                                                ----------------    --------------------
Total stockholders' equity                                                            78,319,401              75,082,276
                                                                                ----------------    --------------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                      $  1,212,983,135    $      1,231,263,375
                                                                                ================    ====================
</TABLE>

See notes to consolidated financial statements.

                                       1
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                              THREE MONTHS ENDED              NINE MONTHS ENDED
                                                                SEPTEMBER 30,                  SEPTEMBER 30,
                                                        ----------------------------   ------------------------------
                                                             2006            2005          2006             2005
---------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>            <C>            <C>             <C>
INTEREST  INCOME:
Interest income on:
    Loans                                                $  7,062,340   $  6,563,963   $ 20,795,572    $  19,164,617
    Mortgage-backed securities                              2,998,347      3,683,402      9,664,035       11,061,882
    Investments:
        Taxable                                             5,266,527      4,297,392     15,161,173       12,596,923
        Tax exempt                                            109,336         53,437        286,339          118,542
                                                         ------------   ------------   ------------    -------------
Total interest income                                      15,436,550     14,598,194     45,907,119       42,941,964
                                                         ------------   ------------   ------------    -------------
INTEREST EXPENSE:
Interest expense on:
    Deposits                                                4,109,213      2,951,433     11,665,092        8,037,622
    Borrowings                                              1,877,536      1,998,801      6,078,057        6,162,057
    Debentures                                              1,142,587        469,752      2,441,229        1,321,428
                                                         ------------   ------------   ------------    -------------
Total interest expense                                      7,129,336      5,419,986     20,184,378       15,521,107
                                                         ------------   ------------   ------------    -------------

NET INTEREST INCOME                                         8,307,214      9,178,208     25,722,741       27,420,857
PROVISION FOR LOAN LOSSES                                      90,000         90,000        270,000          270,000
                                                         ------------   ------------   ------------    -------------
NET INTEREST INCOME AFTER PROVISION
    FOR LOAN LOSSES                                         8,217,214      9,088,208     25,452,741       27,150,857
                                                         ------------   ------------   ------------    -------------
NON-INTEREST INCOME:
    Service charges on accounts                             1,462,290      1,331,764      4,332,289        3,981,310
    Gain on sale of fixed assets                              302,877              0        299,793                0
    Other income                                               27,661         41,290        116,821          116,107
    Gain on sale of investment securities                           0              0        364,621                0
                                                         ------------   ------------   ------------    -------------
Total non-interest income                                   1,792,828      1,373,054      5,113,524        4,097,417
                                                         ------------   ------------   ------------    -------------
NON-INTEREST EXPENSE:
    Salaries and employee benefits                          4,786,209      4,534,246     14,400,984       13,369,108
    Occupancy and equipment                                 1,595,231      1,405,837      4,566,868        4,227,445
    Purchased services                                        735,726        685,900      2,152,447        2,084,823
    Professional fees                                         190,041        193,792        580,765          565,800
    Amortization of core deposit intangible                   179,052        179,052        537,156          537,156
    Other expenses                                            155,938        137,275        464,435          444,474
    Telecommunications                                        136,455        168,901        415,626          326,373
    Office supplies                                           131,241        169,900        459,043          483,573
    Advertising                                               117,208        109,814        338,900          323,057
                                                         ------------   ------------   ------------    -------------
Total non-interest expenses                                 8,027,101      7,584,717     23,916,224       22,361,809
                                                         ------------   ------------   ------------    -------------

INCOME BEFORE INCOME TAXES                                  1,982,941      2,876,545      6,650,041        8,886,465

INCOME TAXES                                                  735,886      1,170,210      2,558,726        3,636,604
                                                         ------------   ------------   ------------    -------------
NET INCOME                                               $  1,247,055   $  1,706,335   $  4,091,315    $   5,249,861
                                                         ============   ============   ============    =============

BASIC EARNINGS PER COMMON SHARE                          $       0.19   $       0.26   $       0.63    $        0.81
                                                         ============   ============   ============    =============

DILUTED EARNINGS PER COMMON SHARE                        $       0.19   $       0.26   $       0.63    $        0.80
                                                         ============   ============   ============    =============

Dividends declared per common share                      $       0.03   $       0.03   $       0.09    $        0.09
                                                         ============   ============   ============    =============

</TABLE>
  See notes to consolidated financial statements.

                                       2
<PAGE>

FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
                                                                                   NINE MONTHS ENDED SEPTEMBER 30,
                                                                                        2006             2005
------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>              <C>
OPERATING ACTIVITIES:
Net income                                                                           $  4,091,315    $   5,249,861
Adjustments to reconcile net income to net cash provided by operating activities:
    Provision for loan losses                                                             270,000          270,000
    Amortization and accretion of premiums and discounts on investments, net              210,178        1,476,011
    Amortization and accretion of other fees and costs                                    810,746          613,170
    Depreciation                                                                        1,506,066        1,520,704
Realized (gains) and losses on:
    (Sale) Disposal of fixed assets                                                      (299,793)             115
    Net gains on sale of investment securities                                           (364,621)               0
Increase in accrued interest receivable                                                (1,025,805)         (43,835)
(Increase) Decrease in prepaid expenses and other assets                               (2,234,755)         272,934
Increase (Decrease) in accrued interest payable                                            11,954          (94,568)
Increase in other liabilities                                                             599,394          396,539
Benefit for deferred income taxes                                                        (233,046)        (265,727)
                                                                                     -----------------------------
    Net cash provided by operating activities                                           3,341,633        9,395,204
                                                                                     -----------------------------

INVESTING ACTIVITIES:
Proceeds from sale of:
    Office property and equipment                                                         727,769                0
    Investment securities                                                              12,206,808                0
Principal collected and proceeds from maturities of investment securities
  held to maturity                                                                     45,883,954      296,445,554
Principal collected and proceeds from maturities of investment securities
  available for sale                                                                   16,329,274       99,587,558
Principal collected and proceeds from maturities of mortgage-backed securities                  0                0
Principal collected on loans, net                                                      77,407,865       67,473,299
Loans originated or acquired                                                          (86,070,093)     (86,468,022)
Purchase of investment securities and mortgage-backed securities held to maturity     (15,341,543)    (234,489,547)
Purchase of investment securities and mortgage-backed securities available
  for sale                                                                            (10,000,000)    (120,528,427)
Redemption of Federal Home Loan Bank stock                                              1,934,900        2,500,100
Purchase of office property and equipment                                              (1,458,997)      (2,064,894)
                                                                                     -----------------------------
    Net cash provided by investing activities                                          41,619,937       22,455,621
                                                                                     -----------------------------

FINANCING ACTIVITIES:
Net (decrease) increase in demand deposits and savings accounts                       (18,410,247)      12,153,538
Net increase (decrease) in time deposits                                                  741,634       (2,304,155)
Net proceeds from issuance of trust capital debentures                                 25,774,000                0
Net decrease in FHLB advances                                                         (30,000,000)     (10,000,000)
Repayment from securities sold under agreement to repurchase                                    0      (40,000,000)
Decrease in advances from borrowers for taxes and insurance                               (54,484)         (21,178)
Purchase of treasury stock                                                                (37,647)               0
Dividends paid on common stock                                                           (586,462)        (585,209)
Net proceeds from issuance of common stock                                                 30,000          132,715
                                                                                     -----------------------------
    Net cash used by financing activities                                             (22,543,206)     (40,624,289)
                                                                                     -----------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                       22,418,364       (8,773,464)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                         93,840,949      110,577,356
                                                                                     -----------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                             $116,259,313    $ 101,803,892
                                                                                     =============================

Supplemental Disclosures:
    Cash paid for:
       Interest on deposits, advances, and other borrowings                          $ 20,172,424    $  15,615,675
       Income taxes                                                                     2,188,800        4,417,629
    Non-cash investing and financing activities:
       Dividends declared and not paid at period end                                      195,474          195,077
</TABLE>

See notes to consolidated financial statements.

                                       3
<PAGE>

FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                              ADDITIONAL   ACCUMULATED                                TOTAL
                                      COMMON SHARES  COMMON    PAID-IN    COMPREHENSIVE    RETAINED    TREASURY    STOCKHOLDERS'
                                       OUTSTANDING   STOCK     CAPITAL    INCOME (LOSS)    EARNINGS      STOCK        EQUITY
----------------------------------------------------------------------------------------------------------------------------------

<S>                                      <C>        <C>       <C>           <C>          <C>          <C>           <C>
Balances at December 31, 2004            6,502,110  $799,129  $8,555,506      $270,784   $71,646,199  ($10,934,999) $70,336,619
Net Income                                                                                 5,249,861                  5,249,861
Other comprehensive loss
  Unrealized loss on securities available
      for sale, net of taxes of $589,408                                      (853,453)                                (853,453)
                                                                                                                    -----------
Total comprehensive income                                                                                            4,396,408
                                                                                                                    -----------

Dividends declared ($.09)                                                                   (585,267)                  (585,267)
Exercise of stock options                      850         85    132,630                                                132,715
-------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 2005           6,502,960  $799,214  $8,688,136     ($582,669)  $76,310,793  ($10,934,999) $74,280,475
===============================================================================================================================

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                                                                                 4,091,315                  4,091,315
Other comprehensive loss
  Unrealized loss on securities available
      for sale, net of taxes of $179,604                                      (260,062)                                (260,062)
                                                                                                                    -----------
Total comprehensive income                                                                                            3,831,253
                                                                                                                    -----------

Dividends declared ($.09)                                                                   (586,481)                  (586,481)
Exercise of stock options                    3,000        300     29,700                                                 30,000
Purchase of common stock                    (2,297)                                                        (37,647)     (37,647)
-------------------------------------------------------------------------------------------------------------------------------
BALANCES AT SEPTEMBER 30, 2006           6,515,813  $800,939  $8,797,081   ($1,359,692)  $81,088,517  ($11,007,444)  78,319,401
===============================================================================================================================
</TABLE>


See notes to consolidated financial statements.

                                       4
<PAGE>

FMS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2006 (UNAUDITED).

1-GENERAL
In the opinion of management,  the accompanying unaudited consolidated financial
statements  of  FMS  Financial  Corporation  (the  "Corporation")   contain  all
adjustments,  consisting  of normal  recurring  accruals,  necessary  for a fair
presentation of its financial condition,  results of operations,  cash flows and
changes in stockholders' equity for the periods and dates indicated. The results
of  operations  for the three and nine months ended  September  30, 2006 are not
necessarily  indicative of the operating results for the full fiscal year or any
other  interim  period.

The accompanying  unaudited consolidated financial statements have been prepared
in accordance with the instructions for Form 10-Q, and therefore, do not include
all  information  and  notes  necessary  for a fair  presentation  of  financial
condition, results of operations and statements of cash flows in conformity with
generally  accepted  accounting  principles.  These statements should be read in
conjunction  with the  consolidated  statements  and  related  notes,  which are
incorporated  by reference to the  Corporation's  Annual Report on Form 10-K for
the fiscal year ended  December  31,  2005.  The 2005  comparative  Statement of
Financial  Condition  was derived  from the audited  financial  statements.  The
consolidated   financial   statements   include  the   Corporation's   principal
subsidiary, Farmers & Mechanics Bank (the "Bank").

2-DEBENTURES
In June 2006, the Corporation  formed a wholly owned  subsidiary,  FMS Statutory
Trust II (Trust II). On June 15, 2006, Trust II issued $25.0 million of floating
rate capital  securities with an interest rate that resets every three months to
LIBOR plus 158 basis points. At September 30, 2006 debentures consisted of $25.8
million of FMS Statutory  Trust II debentures with an interest rate of 6.88% and
$25.8 million of Statutory Trust I debentures with an interest rate of 8.56%. At
December 31, 2005 debentures consisted of $25.8 million of FMS Statutory Trust 1
debentures with an interest rate of 6.69%.

3-REGULATORY  CAPITAL  REQUIREMENTS
The Bank is considered  "well  capitalized"  by OTS regulations at September 30,
2006. The Bank's regulatory  tangible and tier 1 (core) capital ratios are $92.9
million,  or 7.67% of total  bank  assets,  and  $97.8  million  or  18.68%  for
risk-based  capital.  FMS's  consolidated  capital  ratio at September  30, 2006
totaled 6.46%.

4-EARNINGS PER SHARE
The following table set forth the calculation of basic and diluted  earnings per
share for the three months and nine months periods ended  September 30, 2006 and
2005.
<TABLE>
<CAPTION>
                                                                Three Months Ended                    Nine Months Ended
                                                                  September 30,                         September 30,
                                                            ----------------------------       -------------------------------
                                                              2006               2005             2006               2005
------------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>                <C>              <C>                <C>
BASIC EARNINGS PER SHARE:
------------------------
Net income available to common shareholders                  $1,247,055         $1,706,335       $4,091,315         $5,249,861

Average common shares outstanding                             6,516,920          6,502,849        6,516,127          6,502,516

Net income per common share                                       $0.19              $0.26            $0.63              $0.81

DILUTED EARNINGS PER SHARE:
--------------------------
Net income available to common shareholders
on a diluted basis                                           $1,247,055         $1,706,335       $4,091,315         $5,249,861

Average common shares outstanding                             6,516,920          6,502,849        6,516,127          6,502,516
Additional shares considered in diluted
computation assuming exercise of stock options                   13,628             33,173           13,767             35,397
                                                             ----------         ----------       ----------         ----------
Adjusted weighted average common shares outstanding           6,530,548          6,536,022        6,529,894          6,537,913

Net income per common share                                       $0.19              $0.26            $0.63              $0.81
</TABLE>

                                       5
<PAGE>

5-STOCK OPTIONS
The  Corporation  maintains  an  incentive  stock  option  plan.  The  Financial
Accounting  Standards Board ("FASB") issued Statement of Financial Standards No.
123R in  December  2004,  (SFAS  No.  123R),  which  establishes  standards  for
share-based  payments.  This  statement  has  no  effect  on  the  Corporation's
Consolidated  Statements of Financial  Condition or  Consolidated  Statements of
Operations  as no  options  have  been  granted  during  the nine  months  ended
September 30, 2006 or the years ending December 31, 2005, 2004 or 2003.

6-RETIREMENT  PLANS
The Bank  maintains a defined  benefit  pension plan for active  employees.  The
Corporation expects to contribute approximately $1.0 million to the pension plan
in 2006. The components of the net pension cost are as follows:
<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED              NINE MONTHS ENDED
                                                       SEPTEMBER 30,                  SEPTEMBER 30,
                                                --------------------------       ------------------------
                                                  2006              2005            2006           2005
---------------------------------------------------------------------------------------------------------
<S>                                             <C>               <C>            <C>             <C>
Service cost                                    $256,462          $230,355       $769,386        $691,065
Interest cost                                    205,876           170,627        617,628         511,881
Return on assets                                (219,864)         (203,406)      (659,592)       (610,218)
Net amortization and deferral                      5,008             1,027         15,024           3,081
---------------------------------------------------------------------------------------------------------
Net periodic pension cost                       $247,482          $198,603       $742,446        $595,809
=========================================================================================================
</TABLE>

In addition to providing  retirement  plan benefits,  the Bank provides  certain
health  care and life  insurance  benefits  to certain  retired  employees.  The
expected  cost  of   postretirement   benefits  for  2006  is  estimated  to  be
approximately  $43  thousand.  The  components  of net  periodic  postretirement
benefit cost are as follows:
<TABLE>
<CAPTION>
                                                 Three Months Ended               Nine Months Ended
                                                   September 30,                    September 30,
                                             -------------------------         -----------------------
                                               2006              2005            2006            2005
------------------------------------------------------------------------------------------------------
<S>                                          <C>               <C>             <C>             <C>
Interest cost                                $ 6,463           $ 6,291         $19,389         $18,873
Amortization of prior service cost            (1,766)           (2,835)         (5,298)         (8,505)
Amortization of (gain) loss                     (965)            4,879          (2,895)         14,637

------------------------------------------------------------------------------------------------------
Net periodic postretirement
benefit costs                                $ 3,732           $ 8,335         $11,196         $25,005
======================================================================================================
</TABLE>

7-RECENTLY ISSUED ACCOUNTING STANDARDS
In March 2006, the Financial  Accounting Standards Board (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 is not  expected  to  have a  material  impact  on the
Company's consolidated financial statements.

In July  2006,  FASB  issued  FASB  Interpretation  (FIN)  48,  "Accounting  for
Uncertainty  in Income  Taxes:  an  interpretation  of FASB  Statement  No. 109,
"Accounting  for Income Taxes".  FIN 48 clarifies the accounting for uncertainty
in income taxes  recognized  in an entity's  financial  statements in accordance
with  Statement of SFAS No. 109. FIN 48 prescribes a  recognition  threshold and
measurement attribute for the financial statement recognition and measurement of
a tax  position  taken or  expected  to be taken  in a tax  return.  FIN 48 also
provides  guidance on  derecognition,  classification,  interest and  penalties,
accounting in interim  periods,  disclosure and transition.  FIN 48 is effective
for fiscal  years  beginning  after  December  15, 2006 and is  currently  under
evaluation by the Company to determine the impact on the Company's  consolidated
financial statements.

In  September  2006,  FASB  Issued  Statement  No. 157 (SFAS  157),  "Fair Value
Measurements"  which is effective for fiscal years  beginning after November 15,
2007 and for interim  periods within those years.  This

                                       6
<PAGE>

statement  defines fair value,  establishes a framework for measuring fair value
and expands  the  related  disclosure  requirements.  The  Company is  currently
evaluating the impact the adoption of SFAS No. 157 will have on its 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 is
currently  evaluating  the impact the  adoption of SFAS No. 158 will have on its
consolidated financial statements.

In  September  2006,  the SEC staff  issued  Staff  Accounting  Bulletin  No.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.
The Company is currently  evaluating the impact the adoption of SAB No. 108 will
have on its consolidated financial statements.  Because the Company is not aware
of any material  misstatement,  it does not believe that the adoption of SAB 108
will have a material effect on the financial statements.

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

ITEM 2: MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006.

The  following  discussion  and  analysis  should  be read  with  our  financial
statements and related notes included elsewhere in this report on Form 10-Q. The
Corporation  may  from  time  to time  make  written  or  oral  "forward-looking
statements,"  including statements  contained in the Corporation's  filings with
the Securities and Exchange Commission  (including this quarterly report on Form
10-Q and the  exhibits  thereto),  in its reports to

                                       7
<PAGE>

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. The discussion and analysis in
this  report may  contain  "forward-looking  statements"  within the  meaning of
Section 21A of the  Securities  and Exchange Act of  1934.

These  forward-looking  statements  involve  risk  and  uncertainties,  such  as
statements of the Corporation's plans, objectives,  expectations,  estimates and
intentions,  that are subject to change based on various important factors (some
of which are beyond the Corporation's  control).  The cautionary statements made
in this  report  should  be  read as  applying  to all  related  forward-looking
statements  wherever they appear in this report.  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.  Such risks and  uncertainties  could  cause  actual
results to differ  materially  from any  future  performance  suggested  in this
report. The Corporation cautions that the foregoing list of important factors is
not exclusive.  The Corporation undertakes no obligation to release publicly the
results of any revisions to these  forward-looking  statements to reflect events
or  circumstances  arising  after the date of this report.  This caution is made
under the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995.

CRITICAL ACCOUNTING  ESTIMATE-Provision  for Loan Losses - A critical accounting
estimate is the provision for loan losses. The Corporation  recorded a provision
of $90 thousand and $270 thousand for the three and nine months ended  September
30, 2006 and 2005. At September 30, 2006 the allowance for loan losses  amounted
to $5.3 million compared to $5.1 million at December 31, 2005. The determination
of the allowance level for loan losses is based on management's  analysis of the
risk  characteristics  of various types of loans,  levels of  classified  loans,
previous loan loss experience, the estimated fair market value of the underlying
collateral and current  economic  conditions.  Additionally,  the mix within the
Bank's  portfolio  continues  to change as the Bank  offers a wider  variety  of
products.  Within the loan  portfolio,  a change is also occurring as a shift is
made from  lower  yielding  loans  (i.e.,  one-to-four  family  loans) to higher
yielding loans (i.e., commercial real estate mortgages, commercial construction,
consumer and commercial  business loans).  These types of loans contain a higher
degree of risk.  The Bank will continue to monitor its allowance for loan losses
and make future  adjustments  to the  allowance  through the  provision for loan
losses as changing conditions dictate. Although the Bank maintains its allowance
for loan losses at a level that it  considers  to be adequate to provide for the
inherent  risk of loss in its loan  portfolio,  there can be no  assurance  that
future losses will not exceed  estimated  amounts or that additional  provisions
for loan losses will not be required in future  periods due to the higher degree
of  credit  risk  which  might  result  from the  change  in the mix of the loan
portfolio or changes in economic conditions. Most of the Bank's lending activity
is with customers located within southern New Jersey.  Generally,  the loans are
secured by real estate consisting of single-family residential properties. While
this represents a  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.

                                       8
<PAGE>

FINANCIAL  CONDITION

TOTAL ASSETS - were $1.2 billion at September 30, 2006 and December 31, 2005.

INVESTMENT  SECURITIES  HELD TO  MATURITY -  decreased  $42.4  million to $441.1
million at September  30, 2006 from $483.5  million at December  31,  2005.  The
decrease  is the  result  of  principal  paydowns  of $20.7  million  in  Agency
Mortgage-Backed  Securities  (MBS's),  $9.1 million in  Collateralized  Mortgage
Obligations (CMO's), $4.3 million in Pass through certificates,  the maturity of
$11.6 million of municipal  bonds and the sale of $12.0 million in Agency MBS's,
partially offset by purchases of $5.0 million in U.S.  Government Agencies (U.S.
Gov't  agencies)  Notes and $10.3 million of municipal  bonds during the period.
Investment securities held to maturity at September 30, 2006 consisted of $420.1
million  in  fixed  rate   securities  and  $21.0  million  in  adjustable  rate
securities.  A comparison  of cost and  approximate  market values of investment
securities  held to maturity as of  September  30,  2006 and  December  31, 2005
follows:
<TABLE>
<CAPTION>
                                              SEPTEMBER 30, 2006                                December 31, 2005
--------------------------------------------------------------------------------------      -----------------------------
                                              GROSS         GROSS
                             AMORTIZED     UNREALIZED     UNREALIZED        FAIR            Amortized          Fair
                               COST           GAINS         LOSSES          VALUE             Cost            Value
--------------------------------------------------------------------------------------      -----------------------------
<S>                          <C>               <C>        <C>             <C>               <C>              <C>
Agency MBS's                 $124,357,816      $508,112   ($1,772,911)    $123,093,017      $157,095,589     $156,615,675
U. S. Gov't agencies          197,320,231           591    (2,288,656)     195,032,166       192,328,423      190,184,454
CMO's                          62,475,375           387    (1,981,787)      60,493,975        71,621,287       69,647,298
Pass through certificates      46,778,117         4,122    (1,162,612)      45,619,627        51,100,285       49,859,482
Municipal bonds                10,128,406         1,381              0      10,129,787        11,390,725       11,393,027
--------------------------------------------------------------------------------------      -----------------------------
Total                        $441,059,945      $514,593   ($7,205,966)    $434,368,572      $483,536,309     $477,699,936
======================================================================================      =============================
</TABLE>


INVESTMENT  SECURITIES  AVAILABLE  FOR SALE - decreased  $6.9  million to $148.7
million at September  30, 2006 from $155.6  million at December  31,  2005.  The
decrease  is the  result of  principal  paydowns  of $11.3  million of CMO's and
MBS's,  $5.0 million in maturities of U.S.  Gov't  agencies and $400 thousand in
market adjustments, partially offset by purchases of $10.0 million of U.S. Gov't
agencies during the nine months ended September 30, 2006.  Investment securities
available for sale consisted of $145.2 million in fixed rate securities and $3.5
million in  adjustable  rate  securities  at September 30, 2006. A comparison of
cost and fair values of investment securities available for sale as of September
30, 2006 and December 31, 2005 follows:
<TABLE>
<CAPTION>
                                              SEPTEMBER 30, 2006                                December 31, 2005
--------------------------------------------------------------------------------------      -----------------------------
                                              GROSS         GROSS
                             AMORTIZED     UNREALIZED     UNREALIZED        FAIR            Amortized          Fair
                               COST           GAINS         LOSSES          VALUE             Cost            Value
--------------------------------------------------------------------------------------      -----------------------------
<S>                           <C>                    <C>    <C>            <C>              <C>               <C>
U. S. Gov't agencies          $65,396,626            $0     ($887,262)     $64,509,364      $ 60,411,063      $59,581,396
CMO's                          19,258,923             0      (448,484)      18,810,439        22,350,620       21,990,367
Agency MBS's                   46,010,353        42,092      (623,505)      45,428,940        52,082,272       51,642,686
Pass through certificates      20,377,561             0      (381,561)      19,996,000        22,647,193       22,417,646
--------------------------------------------------------------------------------------      -----------------------------
Total                        $151,043,463       $42,092   ($2,340,812)    $148,744,743      $157,491,148     $155,632,095
======================================================================================      =============================
</TABLE>

                                       9
<PAGE>

The  following  table  shows the gross  unrealized  losses and fair value of the
Bank's  investments  with  unrealized  losses that are deemed to be  temporarily
impaired,  aggregated by investment  category and length of time that individual
securities  have been in  continuous  unrealized  loss position at September 30,
2006.  The  Bank  has  the  intent  and  ability  to hold  temporarily  impaired
securities  either  until  maturity or until  interest  rates reach a level that
would eliminate a loss on sale.
<TABLE>
<CAPTION>

                                           LESS THAN 12 MONTHS          12 MONTHS OR GREATER                  TOTAL
                                       ----------------------------------------------------------------------------------------
                                                       UNREALIZED                    UNREALIZED                      UNREALIZED
DESCRIPTION OF SECURITY                 FAIR VALUE       LOSSES       FAIR VALUE       LOSSES        FAIR VALUE       LOSSES
-------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>           <C>           <C>              <C>            <C>             <C>
Available for Sale:
------------------
U.S. Gov't agencies                    $  8,120,704    ($59,296)     $56,388,661      ($827,967)     $64,509,365     ($887,263)

Agency MBS's                             17,333,130     (93,942)      21,326,717       (529,563)      38,659,847      (623,505)

Pass through certificates                 6,721,034     (99,172)      13,274,966       (282,389)      19,996,000      (381,561)

CMO's                                     5,506,171     (48,865)      13,304,268       (399,618)      18,810,439      (448,483)
                                       ------------------------     ---------------------------     --------------------------
Total Available for Sale Securities    $ 37,681,039   ($301,275)    $104,294,612    ($2,039,537)    $141,975,651   ($2,340,812)
                                       ------------------------     ---------------------------     --------------------------

Held to Maturity:
----------------
U.S. Gov't agencies                    $ 84,792,516   ($475,605)    $105,255,251    ($1,813,050)    $190,047,767   ($2,288,655)

Agency MBS's                             15,511,458     (86,775)      66,589,597     (1,686,137)      82,101,055    (1,772,912)

Pass through certificates                 6,582,919     (42,317)      38,406,325     (1,120,295)      44,989,244    (1,162,612)

CMOs                                        472,965      (6,132)      58,766,172     (1,975,655)      59,239,137    (1,981,787)
                                       ------------------------     ---------------------------     --------------------------
Total Held to Maturity Securities      $107,359,858   ($610,829)    $269,017,345    ($6,595,137)    $376,377,203   ($7,205,966)
                                       ------------------------     ---------------------------     --------------------------
Total                                  $145,040,897   ($912,104)    $373,311,957    ($8,634,674)    $518,352,854   ($9,546,778)
                                       ------------   ---------     ------------    -----------     ------------   -----------
</TABLE>


LOANS, NET - increased $8.4 million to $451.0 million at September 30, 2006 from
$442.6  million at December 31, 2005.  This increase was primarily the result of
$86.1  million  of  loans  originated,  partially  offset  by $77.4  million  of
principal  collected on loans during the nine months ended  September  30, 2006.
The  following  table shows loans  receivable  by major  categories at the dates
indicated.

                                    SEPTEMBER 30,          December 31,
                                        2006                   2005
-----------------------------------------------------------------------

Mortgage Loans                      $287,894,643           $286,476,251
Construction Loans                     5,541,285              1,774,630
Commercial Construction                2,885,716              6,942,091
Consumer Loans                         2,435,864              2,355,697
Commercial Real Estate               132,892,776            127,704,281
Commercial Business                   24,686,144             22,550,190
-----------------------------------------------------------------------
Subtotal                             456,336,428            447,803,140
Less:
     Deferred loan fees                   28,182                168,998
     Allowance for
      loan losses                      5,330,271              5,062,785
-----------------------------------------------------------------------
Total loans, net                    $450,977,975           $442,571,357
=======================================================================

                                       10
<PAGE>

At September 30, 2006, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS Nos. 114 and 118 totaled $2.0 million of
which  $985  thousand  related  to loans  that were  individually  measured  for
impairment  with a valuation  allowance of $414  thousand  and $981  thousand of
loans that were collectively  measured for impairment with a valuation allowance
of $20 thousand.  The Bank had $5.3 million in total reserves for loan losses at
September 30, 2006, representing approximately 271% of non-performing assets and
1.2% of total loans.  For the nine months ended  September 30, 2006, the average
recorded  investment in impaired loans was approximately $1.8 million.  The Bank
recognized $85 thousand of interest income on impaired loans for the nine months
ended  September 30, 2006, all of which was recognized on the cash basis.

As of  September  30, 2006 the Bank had  outstanding  loan  commitments  of $7.5
million, of which $3.4 million represented variable rate loans and $4.1 million,
represented fixed rate loans. The Bank intends to fund these commitments through
scheduled  amortization  of loans  and  mortgage-backed  securities,  additional
borrowings,  and if necessary,  the sale of investment  securities available for
sale.

NON-PERFORMING  ASSETS - The following  table sets forth  information  regarding
non-accrual  loans,  troubled debt  restructured and real estate owned assets by
the Bank.
<TABLE>
<CAPTION>
                                                           SEPTEMBER 30,         December 31,
                                                                2006                 2005
                                                            ----------           ----------
<S>                                                         <C>                  <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
     One-to-four family                                     $  763,330           $  794,154
     Commercial real estate                                  1,059,770              984,924
     Consumer and other                                              0                    0
                                                            ----------           ----------
     Total non-accrual loans                                $1,823,100           $1,779,078
                                                            ----------           ----------
     Troubled debt restructuring                               177,136              175,802
     Real estate owned, net                                    158,216                    0
                                                            ----------           ----------
     Total non-performing assets, net                       $2,158,452           $1,954,880
                                                            ----------           ----------


     Total non-accrual loans to net loans                        0.40%                0.40%
                                                            ==========           ==========
     Total non-accrual loans to total assets                     0.15%                0.14%
                                                            ==========           ==========
     Total non-performing assets to total assets                 0.18%                0.16%
                                                            ==========           ==========
</TABLE>


DEPOSITS - decreased  $17.7 million to $929.4 million at September 30, 2006 from
$947.1  million at December 31,  2005.  A decrease in checking  accounts of $8.5
million, savings accounts of $5.2 million, money market accounts of $3.9 million
and non-interest checking accounts of $840 thousand, were partially offset by an
increase in time  deposit  accounts of $741  thousand  for the nine months ended
September 30, 2006. Interest credited to depositors accounts for the nine months
ended  September  30, 2006 amounted to $2.2  million.  The following  table sets
forth certain information concerning deposits at the dates indicated.
<TABLE>
<CAPTION>
                                           SEPTEMBER 30, 2006                            December 31, 2005
-------------------------------------------------------------------------------------------------------------------
                                                   PERCENT      WEIGHTED                        Percent      Weighted
                                                   OF TOTAL     AVERAGE                         of Total     Average
                                    AMOUNT         DEPOSITS       RATE           Amount         Deposits       Rate
-------------------------------------------------------------------------------------------------------------------
<S>                                 <C>             <C>          <C>             <C>             <C>          <C>
Non-interest checking               $186,235,630    20.04%       0.00%           $187,075,982    19.75%       0.00%
Checking accounts                    217,782,577    23.43%       2.86%            226,271,954    23.89%       1.88%
Savings accounts                     183,651,701    19.76%       0.59%            188,866,936    19.94%       0.59%
Money market accounts                129,095,498    13.89%       1.18%            132,960,782    14.04%       0.89%
Time deposits                        212,633,405    22.88%       3.18%            211,891,770    22.38%       2.34%
-------------------------------------------------------------------------------------------------------------------
   Total Deposits                   $929,398,811   100.00%       1.67%           $947,067,424   100.00%       1.21%
===================================================================================================================
</TABLE>

                                       11
<PAGE>

BORROWINGS - at September 30, 2006 amounted to $145.0 million in securities sold
under the  agreement to  repurchase  with a weighted  average  interest  rate of
4.96%.  At  December  31,  2005,  borrowings  consisted  of  $175.0  million  in
securities sold under  agreements to repurchase with a weighted  average rate of
4.93%.


DEBENTURES - In June 2006, the Corporation formed a wholly owned subsidiary, FMS
Statutory  Trust II (Trust II). On June 15, 2006, the trust issued $25.0 million
of floating  rate  capital  securities  with an interest  rate that resets every
three months to LIBOR plus 158 basis points.  At September  30, 2006  debentures
consisted of $25.8 million of FMS Statutory Trust II debentures with an interest
rate of 6.88% and $25.8 million of Statutory Trust I debentures with an interest
rate of 8.56%. At December 31, 2005 debentures consisted of $25.8 million of FMS
Statutory Trust I debentures with an interest rate of 6.69%.

RESULTS OF OPERATIONS

GENERAL
The earnings of the Corporation  depend primarily upon the level of net interest
income,  which is the difference between interest earned on its interest-earning
assets such as loans and investments,  and the interest paid on interest-bearing
liabilities,   such  as  deposits  including   non-interest  checking  accounts,
long-term  debts  and  borrowings.  Net  interest  income is a  function  of the
interest rate spread, which is the difference between the weighted average yield
earned  on  interest-earning  assets  and  the  weighted  average  rate  paid on
interest-bearing liabilities, as well as the average balance of interest-earning
assets as compared to interest-bearing  liabilities. Net income is also affected
by  non-interest  income,  such as  gains  (losses)  on the  sale of  loans  and
investments,  provision for loan losses and real estate owned,  service  charges
and other fees, and operating  expenses,  such as: salaries,  employee benefits,
deposit insurance  premiums,  depreciation,  occupancy and equipment expense and
purchased  services  expense.

The  Corporation  recorded net income for the three months ended  September  30,
2006 of $1.2  million,  or $.19  diluted  earnings per share as compared to $1.7
million,  or $.26  diluted  earnings  per share for the  comparable  three month
period in 2005.  The  Corporation  recorded net income for the nine months ended
September  30,  2006 of $4.1  million,  or $.63  diluted  earnings  per share as
compared to $5.2 million,  or $.80 diluted earnings per share for the comparable
period in 2005.


INTEREST RATE SPREAD

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


                                       12
<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.

AVERAGE BALANCES, INTEREST AND YIELDS/RATES
<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------------------------
                                            2006                                     2005
------------------------------------------------------------------     ----------------------------------
                                AVERAGE                  AVERAGE       AVERAGE                  AVERAGE
                                BALANCE     INTEREST    YIELD/RATE     BALANCE      INTEREST   YIELD/RATE
                                -------     --------    ----------     -------      --------   ----------
                                                       (DOLLARS IN THOUSANDS)
<S>                            <C>            <C>          <C>        <C>             <C>          <C>
Interest-earning assets:
   Loans receivable            $  457,218     $ 7,061      6.18%      $   440,621     $ 6,564      5.96%
   Interest-bearing deposit        54,992         686      4.99%           31,739         253      3.19%
   Mortgage-backed securities     240,961       2,998      4.98%          301,510       3,683      4.89%
   Investment securities          368,856       4,748      5.15%          342,736       4,126      4.82%
                               ----------     -------      ----       -----------     -------      ----
Total interest-earning
      assets                    1,122,027      15,493      5.52%        1,116,606      14,626      5.24%
                               ----------     -------      ----       -----------     -------      ----

Interest-bearing liabilities:
   Checking deposits              397,518       1,614      1.62%          398,902       1,071      1.07%
   Savings deposits               187,244         287      0.61%          196,328         289      0.59%
   Money Market deposits          128,440         412      1.28%          143,077         317      0.89%
   Time deposit                   212,073       1,796      3.39%          207,825       1,275      2.45%
   Borrowings                     147,796       1,877      5.08%          155,000       1,995      5.15%
   Long-Term Debt                  51,548       1,143      8.87%           25,774         473      7.34%
                               ----------     -------      ----       -----------     -------      ----
Total interest-bearing
      liabilities              $1,124,619       7,129      2.54%      $ 1,126,906       5,420      1.92%
                               ==========     -------      ----       ===========     -------      ----
Net interest income                           $ 8,364                                 $ 9,206
                                              =======                                 =======
Interest rate spread                                       2.98%                                   3.32%
                                                          =====                                   =====
Net yield on average interest-earning assets               2.98%                                   3.30%
                                                          =====                                   =====

Ratio of average interest-
   earning assets to average interest-bearing
   liabilities                                            99.77%                                  99.09%
                                                          =====                                   =====
</TABLE>
<TABLE>
<CAPTION>
                                                  NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------------------------
                                            2006                                     2005
------------------------------------------------------------------     ----------------------------------
                                AVERAGE                  AVERAGE       AVERAGE                  AVERAGE
                                BALANCE     INTEREST    YIELD/RATE     BALANCE      INTEREST   YIELD/RATE
                                -------     --------    ----------     -------      --------   ----------
                                                       (DOLLARS IN THOUSANDS)
<S>                            <C>            <C>          <C>        <C>             <C>          <C>
Interest-earning assets:
   Loans receivable            $  456,230     $20,796      6.08%       $  433,503     $19,165      5.89%
   Interest-bearing deposit        38,107       1,492      5.22%           44,657         844      2.52%
   Mortgage-backed securities     257,270       9,664      5.01%          315,842      11,062      4.67%
   Investment securities          369,053      14,103      5.09%          339,783      11,932      4.68%
                               ----------     -------      ----        ----------     -------      ----
Total interest-earning
      assets                    1,120,660      46,055      5.48%        1,133,785      43,003      5.06%
                               ----------     -------      ----        ----------     -------      ----

Interest-bearing liabilities:
   Checking deposits              400,835       4,616      1.54%          398,619       2,804      0.94%
   Savings deposits               190,378         857      0.60%          197,913         868      0.58%
   Money Market deposits          129,753       1,140      1.17%          144,060         907      0.84%
   Time deposit                   212,556       5,052      3.17%          208,438       3,459      2.21%
   Borrowings                     161,470       6,077      5.02%          167,202       6,162      4.91%
   Long-Term Debt                  35,797       2,442      9.09%           25,774       1,321      6.83%
                               ----------     -------      ----        ----------     -------      ----
Total interest-bearing
      liabilities              $1,130,789      20,184      2.38%       $1,142,006      15,521      1.81%
                               ==========     -------      ----        ==========     -------      ----

Net interest income                           $25,871                                 $27,482
                                              =======                                 =======
Interest rate spread                                       3.10%                                   3.24%
                                                          =====                                   =====
Net yield on average interest-earning assets               3.08%                                   3.23%
                                                          =====                                   =====

Ratio of average interest-
   earning assets to average interest-bearing
   liabilities                                            99.10%                                  99.28%
                                                          =====                                   =====
</TABLE>


                                       13
<PAGE>

RATE/VOLUME  ANALYSIS
The following  table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities on
a  tax-equivalent  basis have affected the Bank's  interest  income and interest
expense  during the periods  indicated.  For each  category of  interest-earning
assets and  interest-bearing  liabilities,  information  is  provided on changes
attributable  to (i)  changes in rate,  (ii)  changes in volume and (iii)  total
changes in rate and volume  (the  combined  effect of changes in both volume and
rate, not separately identified,  has been allocated to rate). A higher level of
non-performing loans affects the changes in both volume and rate.
<TABLE>
<CAPTION>
                                             THREE MONTHS ENDED SEPTEMBER 30,          NINE MONTHS ENDED SEPTEMBER 30,
                                                    2006 VS. 2005                             2006 VS. 2005
                                            INCREASE (DECREASE) DUE TO CHANGE IN:    INCREASE (DECREASE) DUE TO CHANGE IN:
                                           -------------------------------------    --------------------------------------
                                            RATE       VOLUME        TOTAL            RATE          VOLUME       TOTAL
                                                    (IN THOUSANDS)                              (IN THOUSANDS)
                                           ------------------------------------     --------------------------------------
<S>                                        <C>         <C>         <C>                <C>          <C>         <C>
Interest income:
     Loans                                 $   250     $     247   $    497           $    626     $  1,005    $    1,631
     Interest-bearing deposits                 248           185        433                772         (124)          648
     Mortgage-backed securities                 55          (740)      (685)               653       (2,051)       (1,398)
     Investment securities                     308           314        622              1,143        1,028         2,171
                                           --------------------------------           -----------------------------------

     Total change - interest income            861             6        867              3,194         (142)        3,052
                                           --------------------------------           -----------------------------------

Interest expense:
     Checking deposits                         547            (4)       543              1,796           16         1,812
     Savings deposit                            11           (13)        (2)                22          (33)          (11)
     Money market deposit                      127           (32)        95                323          (90)          233
     Time deposit                              495            26        521              1,525           68         1,593
     Borrowings                                (23)          (95)      (118)               126         (211)          (85)
     Long-Term Debt                            197           473        670                607          514         1,121
                                           --------------------------------           -----------------------------------

     Total change - interest expense         1,354           355      1,709              4,400          263         4,663
                                           --------------------------------           -----------------------------------
Net change in net interest income          $  (493)    $    (349)  $   (842)          $ (1,206)    $   (405)   $   (1,611)
                                           ================================           ===================================
</TABLE>

NET INCOME- QUARTER END
The Corporation  and its subsidiary  recorded net income of $1.2 million for the
quarter  ended  September  30, 2006,  or $0.19  diluted  earnings per share,  as
compared to net income of $1.7 million,  or $0.26 diluted earnings per share for
the quarter ended  September 30, 2005. Net interest  income was $8.3 million for
the three months ended  September 30, 2006 compared to $9.2 million for the same
period in 2005.  Provisions  for loan losses were $90  thousand for the quarters
ended September 30, 2006 and 2005.  Non-interest income was $1.8 million for the
three  months  ended  September  30, 2006  compared to $1.4 million for the same
period in 2005. Total  non-interest  expense for the quarter ended September 30,
2006 was $8.0 million compared to $7.6 million for the same quarter in 2005.

INTEREST INCOME- QUARTER END
Total interest income on a tax-equivalent basis increased $867 thousand to $15.5
million for the quarter ended September 30, 2006 from $14.6 million for the same
period in 2005. The increase is  attributable to increases in interest income on
investment   securities   of  $622   thousand,   loans  of  $497   thousand  and
interest-bearing  deposits of $433 thousand,  partially  offset by a decrease in
interest income on mortgage-backed securities of $685 thousand.

Interest income on investment securities increased $622 thousand to $4.7 million
for the three  months  ended  September  30, 2006 from $4.1 million for the same
period in 2005. The average  balance of investment  securities  increased  $26.2
million to $368.9  million for the quarter ended  September 30, 2006 from $342.7

                                       14
<PAGE>
million for the same  period in 2005,  which  resulted  in a volume  increase in
interest income of $314 thousand.

The average yield of the investment portfolio increased 33 basis points to 5.15%
for the three months ended  September 30, 2006 from 4.82% for the same period in
2005, which resulted in an interest income increase of $308 thousand due to rate
changes.

Interest  income on loans  increased $498 thousand to $7.1 million for the three
months ended  September  30, 2006 from $6.6 million for the same period in 2005.
The  average  rate on loans  increased  22 basis  points  to 6.18% for the three
months ended  September  30, 2006 from 5.96% for the same period in 2005,  which
resulted in an increase in interest income of $251 thousand due to rate changes.
The average  balance of the loan  portfolio  increased  $16.6  million to $457.2
million for the three months ended  September  30, 2006 from $440.6  million for
the same period in 2005,  which resulted in a volume increase in interest income
of $247 thousand.

Interest income on interest-bearing  deposit investments increased $433 thousand
to $686  thousand  for the  three  months  ended  September  30,  2006 from $253
thousand  for the same  period in 2005.  The average  yield of  interest-bearing
deposit  investments  increased  180 basis  points to 4.99% for the three months
ended September 30, 2006 from 3.19% for the same period in 2005,  which resulted
in an increase in interest  income of $248  thousand  due to rate  changes.  The
average balance of interest-bearing  deposit investments increased $23.3 million
to $55.0 million for the quarter ended September 30, 2006 from $31.7 million for
the same period in 2005,  which resulted in a volume increase in interest income
of $185 thousand.

Interest income on mortgage-backed securities decreased by $685 thousand to $3.0
million for the three months ended  September 30, 2006 from $3.7 million for the
same period in 2005.  The average  balance of MBS's  decreased  $60.5 million to
$241.0 million for the three months ended September 30, 2006 from $301.5 million
for the same  period  in 2005,  which  resulted  in an  interest  income  volume
decrease of $740  thousand.  The average yield of the MBS portfolio  increased 9
basis points to 4.98% for the quarter  ended  September  30, 2006 from 4.89% for
the same period in 2005,  which resulted in an interest  income  increase of $55
thousand due to changes in rates.

INTEREST EXPENSE- QUARTER END
Total  interest  expense  increased  $1.7  million to $7.1 million for the three
months ended  September  30, 2006 from $5.4 million for the same period in 2005.
The increases in interest  expense on long-term debt of $670 thousand,  checking
deposits of $543  thousand,  time  deposits of $521  thousand  and money  market
deposits  of $95  thousand,  were  partially  offset by a decrease  in  interest
expense on borrowings of $118 thousand and savings deposits of $2 thousand.

Interest  expense on debentures  increased $670 thousand to $1.1 million for the
three months ended  September 30, 2006 from $473 thousand for the same period in
2005. The average balance of debentures increased $25.7 million to $51.5 million
for the quarter ended  September 30, 2006 from $25.8 million for the same period
in 2005,  which  resulted in an increase in interest  expense of $473  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 153 basis points
to 8.87% for the three months ended  September  30, 2006 from 7.34% for the same
period in 2005,  which  resulted in a rate increase in interest  expense of $197
thousand.

Interest  expense on checking  deposits  increased $543 thousand to $1.6 million
for the three  months  ended  September  30, 2006 from $1.1 million for the same
period in 2005. The average rate on checking deposits  increased 55 basis points
to 1.62% for the quarter ended September 30, 2006 from 1.07% for the same period
in 2005, which resulted in an increase in interest expense of $547 thousand. The
average  balance of checking  deposits  decreased $1.4 million to $397.5 million
for the three months ended  September 30, 2006 from $398.9  million for the same
period in 2005,  which resulted in a volume  decrease in interest  expense of $4
thousand.

Interest  expense on time deposits  increased  $521 thousand to $1.8 million for
the three months ended


                                       15
<PAGE>
September  30, 2006 from $1.3  million for the same period in 2005.  The average
rate on time  deposits  increased 94 basis points to 3.39% for the quarter ended
September 30, 2006 from 2.45% for the same period in 2005,  which  resulted in a
rate increase in interest expense of $495 thousand.  The average balance of time
deposits  increased  $4.3  million  to  $212.1  million  for the  quarter  ended
September  30,  2006 from  $207.8  million  for the same  period in 2005,  which
resulted in an increase in interest expense of $26 thousand.

Interest  expense  on money  market  deposits  increased  $95  thousand  to $412
thousand for the three months ended  September  30, 2006 from $317  thousand for
the same period in 2005. The average rate on money market deposits  increased 39
basis points to 1.28% for the quarter  ended  September  30, 2006 from 0.89% for
the same period in 2005,  which  resulted in an increase in interest  expense of
$127 thousand.  The average  balance of money market  deposits  decreased  $14.7
million to $128.4  million for the three  months ended  September  30, 2006 from
$143.1 million for the same period in 2005,  which resulted in a volume decrease
in interest expense of $32 thousand.

Interest  expense on borrowings  decreased $118 thousand to $1.9 million for the
three months ended  September  30, 2006 from $2.0 million for the same period in
2005. The average balance of borrowings decreased $7.2 million to $147.8 million
at  September  30, 2006 from $155.0  million for the same period in 2005,  which
resulted in a volume decrease in interest  expense of $95 thousand.  The average
rate paid on borrowings  decreased 7 basis points to 5.08% for the quarter ended
September  30,  2006 from 5.15% the same  period in 2005,  which  resulted  in a
decrease in interest expense of $23 thousand.

Interest expense on savings deposits  decreased $2 thousand to $287 thousand for
the three months ended September 30, 2006 from $289 thousand for the same period
in 2005.  The average  balance of savings  deposits  decreased  $9.1  million to
$187.2 million for the three months ended September 30, 2006 from $196.3 million
for the same period in 2005,  which  resulted  in a volume  decrease in interest
expense of $13 thousand.  The average rate on savings deposits increased 2 basis
points to 0.61% for the quarter ended September 30, 2006 from 0.59% for the same
period in 2005,  which  resulted  in an  increase  in  interest  expense  of $11
thousand.

NET INCOME- YEAR TO DATE
The  Corporation  and it subsidiary  recorded net income of $4.1 million for the
nine months ended  September 30, 2006, or $0.63 diluted  earnings per share,  as
compared to net income of $5.2 million,  or $0.80 diluted earnings per share for
the nine months ended  September 30, 2006. Net interest income was $25.7 million
for the nine months ended  September  30, 2006 compared to $27.4 million for the
same period in 2005.  Provisions for loan losses were $270 thousand for the nine
months ended September 30, 2006 and 2005.  Non-interest  income was $5.1 million
for the nine months ended  September  30, 2006  compared to $4.1 million for the
same  period in 2005.  Total  non-interest  expense  for the nine  months  ended
September  30, 2006 was $23.9  million  compared  to $22.4  million for the same
period in 2005.

INTEREST INCOME- YEAR TO DATE
Total interest income on a tax-equivalent  basis increased $3.1 million to $46.1
million for the nine months ended  September 30, 2006 from $43.0 million for the
same period in 2005.  The  increase is  primarily  due to  increases in interest
income on  investment  securities  of $2.2  million,  loans of $1.6  million and
interest-bearing  deposits of $648 thousand,  partially  offset by a decrease in
interest income on mortgage-backed securities of $1.4 million.

Interest income on investment securities increased $2.2 million to $14.1 million
for the nine months  ended  September  30, 2006 from $11.9  million for the same
period in 2005. The average yield of the investment portfolio increased 41 basis
points to 5.09% for the nine months ended  September 30, 2006 from 4.68% for the
same  period in 2005,  which  resulted in an  interest  income  increase of $1.1
million. The average balance of investment securities increased $29.3 million to
$369.1 million for the nine months ended  September 30, 2006 from $339.8 million
for the same nine month period in 2005,  which resulted in a volume  increase in
interest

                                       16
<PAGE>
income of $1.0 million.  The increase in the average volume since September 2005
is due to investment purchases of $73.2 million,  partially offset by investment
calls and maturities of $20.9 million and principal paydowns of $35.4 million.

Interest  income on loans  increased  $1.6 million to $20.8 million for the nine
months ended  September 30, 2006 from $19.2 million for the same period in 2005.
The average  balance of the loan  portfolio  increased  $22.7  million to $456.2
million for the nine months ended September 30, 2006 from $433.5 million for the
same period in 2005,  which resulted in a volume  increase in interest income of
$1.0 million.  The increase in the average  balance is  principally  due to loan
originations of $116.4 million, partially offset by principal collected on loans
of $102.6 million since  September  2005. The average rate on loans increased 19
basis  points to 6.08% for the nine months ended  September  30, 2006 from 5.89%
for the same period in 2005, which resulted in an increase in interest income of
$626 thousand due to rate changes.

Interest  income on  interest-bearing  deposits  increased $648 thousand to $1.5
million for the nine months ended  September 30, 2006 from $844 thousand for the
same period in 2005. The average yield on  interest-bearing  deposits  increased
270 basis  points to 5.22% for the nine  months  ended  September  30, 2006 from
2.52% for the same  period in 2005,  which  resulted  in an increase in interest
income  of  $772  thousand  due  to  rate  changes.   The  average   balance  of
interest-bearing  deposits  decreased $6.6 million to $38.1 million for the nine
months ended  September 30, 2006 from $44.7 million for the same period in 2005,
which resulted in a volume decrease in interest income of $124 thousand.

Interest income on mortgage-backed  securities decreased by $1.4 million to $9.7
million for the nine months ended  September 30, 2006 from $11.1 million for the
same period in 2005.  The average  balance of MBS's  decreased  $58.5 million to
$257.3 million for the nine months ended  September 30, 2006 from $315.8 million
for the same  period  in 2005,  which  resulted  in an  interest  income  volume
decrease of $2.1 million. The decrease in the average balance during this period
was due to  principal  paydowns  of $38.3  million  and sales of $12.0  million,
partially offset by purchases of MBS's of $3.0 million since September 2005. The
average  yield of the MBS  portfolio  increased 34 basis points to 5.01% for the
nine  months  ended  September  30, 2006 from 4.67% for the same period in 2005,
which resulted in an interest income increase of $653 thousand due to changes in
rate.

INTEREST EXPENSE- YEAR TO DATE
Total  interest  expense  increased  $4.7 million to $20.2  million for the nine
months ended  September 30, 2006 from $15.5 million for the same period in 2005.
The increases in interest  expense on checking  deposits of $1.8  million,  time
deposits  of $1.6  million,  long-term  debt of $1.1  million  and money  market
deposits  of $233  thousand,  were  partially  offset by a decrease  in interest
expense on borrowings of $85 thousand and savings deposits of $11 thousand.

Interest expense on checking deposits increased $1.8 million to $4.6 million for
the nine months ended  September  30, 2006 from $2.8 million for the same period
in 2005.  The average  rate on checking  deposits  increased  60 basis points to
1.54% for the nine  months  ended  September  30,  2006 from  0.94% for the same
period in 2005,  which  resulted  in an  increase  in  interest  expense of $1.8
million.  This  increase  was due to an  increase  in the  average  rate paid on
municipal  government  checking  accounts  to 4.96%  for the nine  months  ended
September 30, 2006 from 3.22% for the same period in 2005.  The average  balance
of  checking  deposits  increased  $2.2  million to $400.8  million for the nine
months ended September 30, 2006 from $398.6 million for the same period in 2005,
which resulted in a volume increase in interest expense of $16 thousand.

Interest expense on time deposits increased $1.6 million to $5.1 million for the
nine months  ended  September  30, 2006 from $3.5 million for the same period in
2005.  The average rate on time deposits  increased 96 basis points to 3.17% for
the nine months ended September 30, 2006 from 2.21% for the same period in 2005,
which

                                       17
<PAGE>

resulted in a rate  increase in interest  expense of $1.5  million.  The average
balance of time deposits  increased  $4.2 million to $212.6 million for the nine
months ended September 30, 2006 from $208.4 million for the same period in 2005,
which resulted in an increase in interest expense of $68 thousand.

Interest  expense on debentures  increased  $1.1 million to $2.4 million for the
nine months  ended  September  30, 2006 from $1.3 million for the same period in
2005.  The average rate  increased 226 basis points to 9.09% for the nine months
ended September 30, 2006 from 6.83% for the same period in 2005, which increased
interest expense on debentures $607 thousand.  The average balance on debentures
increased $10.0 million to $35.8 million for the nine months ended September 30,
2006 from  $25.8  million  for the same  period in 2005,  which  resulted  in an
increase in interest expense of $514 thousand. This increase is primarily due to
the Trust II issuance in June 2006 of $25.0 million of floating rate debentures.

Interest  expense on money  market  deposits  increased  $233  thousand  to $1.1
million for the nine months ended  September 30, 2006 from $907 thousand for the
same period in 2005.  The average  rate on money  market  deposits  increased 33
basis  points to 1.17% for the nine months ended  September  30, 2006 from 0.84%
for the same period in 2005,  which resulted in an increase in interest  expense
of $323 thousand.  The average balance of money market deposits  decreased $14.3
million to $129.8  million for the nine  months  ended  September  30, 2006 from
$144.1 million for the same period in 2005,  which resulted in a volume decrease
in interest expense of $90 thousand.

Interest  expense on  borrowings  decreased $85 thousand to $6.1 million for the
nine months  ended  September  30, 2006 from $6.2 million for the same period in
2005. The average balance of borrowings decreased $5.7 million to $161.5 for the
nine months ended  September 30, 2006 from $167.2 million for the same period in
2005,  which resulted in a decrease in interest  expense of $211  thousand.  The
average rate paid on borrowings  increased 11 basis points to 5.02% for the nine
months ended  September  30, 2006 from 4.91% for the same period in 2005,  which
resulted  in an  increase  in  interest  expense  of $126  thousand  due to rate
changes.

Interest expense on savings deposits decreased $11 thousand to $857 thousand for
the nine months ended  September 30, 2006 from $868 thousand for the same period
in 2005.  The average  balance on savings  deposits  decreased  $7.5  million to
$190.4 million for the nine months ended  September 30, 2006 from $197.9 million
for the same period in 2005,  which  resulted  in a volume  decrease in interest
expense of $33 thousand.  The average rate on savings deposits increased 2 basis
point to 0.60% for the nine months ended  September  30, 2006 from 0.58% for the
same period in 2005,  which  resulted in an increase in interest  expense of $22
thousand.

NON-INTEREST  INCOME - for the three and nine month periods ended  September 30,
2006 was $1.8  million  and $5.1  million,  respectively,  as  compared  to $1.4
million and $4.1 million for the same period in 2005.  The  increase  during the
quarter  ended  September 30, 2006 compared to the same period in 2005 is due to
the gain on the sale of two properties  sold during the quarter,  which resulted
in a $303 thousand gain. The increase during the nine months ended September 30,
2006 was primarily  due to an increase in service  charges on accounts from 2005
due to a new fee structure for retail  banking fees,  which took effect March 1,
2006.

NON-INTEREST  EXPENSE - for the three and nine month periods ended September 30,
2006 totaled $8.0 million and $23.9  million  compared to $7.6 million and $22.4
million for the same period in 2005. The increase in non-interest expense during
both the three and nine  month  periods  was  primarily  due to an  increase  in
salaries  and  employee   benefits,   occupancy   and   equipment   expense  and
telecommunications expense.

SALARIES  AND  EMPLOYEE  BENEFITS - for the three and nine month  periods  ended
September  30,  2006  were $4.8  million  and $14.4  million,  respectively,  as
compared  to $4.5  million and $13.4  million  for the same period in 2005.  The
increases  were  primarily  due  to  annual  compensation  increases  and a $551
thousand  increase in health  insurance cost for the nine months ended September
30,  2006  compared  to the same period in 2005.

                                       18
<PAGE>

Average  full  time  equivalent  employees  were 500 at  September  30,  2006 as
compared to 525 at September 30, 2005.

OCCUPANCY AND  EQUIPMENT-  for the three and nine month periods ended  September
30, 2006 totaled $1.6 million and $4.6 million, respectively as compared to $1.4
million and $4.2 million for the same periods in 2005.  The  increases  were due
primarily to increases in maintenance  expense of $180 thousand,  property taxes
of $86 thousand and rent expense of $63 thousand for the nine month period ended
September 30, 2006 compared to the same period in 2005.

TELECOMMUNICATIONS-  for the three and nine month  periods  ended  September 30,
2006 were $136  thousand and $416  thousand,  respectively,  as compared to $169
thousand  and $326  thousand  for the same  periods in 2005.  Enhanced  computer
network  communications  services and a faster reconfigured ATM network were the
principal  reasons  for the higher  telecommunication  expenses  during the nine
months ended September 30, 2006 compared to the same period in 2005.

ITEM 3:  DISCLOSURE  ABOUT  MARKET  RISK

There were no significant  changes for the nine months ended  September 30, 2006
from the  information  presented in the annual  report on Form 10-K for the year
ended December 31, 2005.

ITEM 4:   CONTROLS AND PROCEDURES

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

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

                                       19
<PAGE>

PART II.          OTHER INFORMATION

        ITEM 1:  LEGAL PROCEEDINGS

                 Not Applicable

        ITEM 1A: RISK FACTORS

                 Information  regarding risk factors  appears in Part 1, Item 1A
                 of our annual  report on Form 10-K for the year ended  December
                 31,  2005.  There have been no material  changes  from the risk
                 factors as disclosed in that report.

        ITEM 2:  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


                 (a) Not applicable

                 (b) Not applicable

                 (c) Issuer Purchase of Equity Securities
<TABLE>
<CAPTION>

                                                                        (C) TOTAL NUMBER           (D) MAXIMUM NUMBER
                                                                      OF SHARES (OR UNITS)       (OR APPROXIMATE DOLLAR
                             (A) TOTAL                 (B)              PURCHASED AS PART         VALUE) OF SHARES (OR
                              NUMBER              AVERAGE PRICE            OF PUBLICLY           UNITS) THAT MAY YET BE
                           OF SHARES (OR         PAID PER SHARE          ANNOUNCED PLANS          PURCHASED UNDER THE
PERIOD                   UNITS) PURCHASED           (OR UNIT)             OR PROGRAMS*             PLANS OR PROGRAMS
---------------          ----------------        --------------      --------------------        ----------------------
<S>                             <C>                  <C>                      <C>                       <C>
August 7, 2006                  100                  $16.50                   2,497                     197,503

August 24, 2006                 900                  $16.50                   3,397                     196,603

August 25, 2006                 900                  $16.50                   4,297                     195,703

Total                          1,900                 $16.50                   4,297                     195,703
</TABLE>

*On September 28, 2005, the Registrant authorized the repurchase in the open
market of up to 200,000 shares of the Company's outstanding common stock.



         ITEM 3: DEFAULTS UPON SENIOR SECURITIES

                 Not Applicable

        ITEM 4:  SUBMISSION  OF MATTERS TO VOTE OF SECURITY OF HOLDERS

                 None

        ITEM 5:  OTHER INFORMATION

                 Not Applicable

        ITEM 6:  EXHIBITS

                (a)  31   Certifications   pursuant   to  Section   302  of  the
                          Sarbanes-Oxley Act of 2002.

                (b)  32   Certification   pursuant   to   Section   906  of  the
                          Sarbanes-Oxley Act of 2002.

                                       20
<PAGE>



                                S I G N A T U R E

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


FMS FINANCIAL CORPORATION


Date: November 13, 2006                   /s/ Craig W. Yates
                                          --------------------------------------
                                          Craig W. Yates
                                          President and Chief Executive Officer
                                          (Principal and Executive Officer)


Date: November 13, 2006                   /s/ Channing L. Smith
                                          --------------------------------------
                                          Channing L. Smith
                                          Vice President and
                                          Chief Financial Officer
                                          (Principal Financial Officer)

                                       21