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 March 31, 2007

                                       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 : May 4, 2007.


            Class                                           6,543,813
            -----                                           ---------
   $.10 par value common stock                          Outstanding Shares

<PAGE>

                    FMS FINANCIAL CORPORATION AND SUBSIDIARY
                         QUARTERLY REPORT ON FORM 10-Q
                                 MARCH 31, 2007


                               TABLE OF CONTENTS

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

Item 1 - Financial Statements
         Consolidated Statements of Financial Condition as of
              March 31, 2007 (unaudited) and December 31, 2006                 1

         Consolidated Statements of Operations (unaudited)
              for the three months ended March 31, 2007
              and March 31, 2006                                               2

         Consolidated Statements of Cash Flows (unaudited)
              for the three months ended March 31, 2007 and
              March 31, 2006                                                   3

         Consolidated Statements of Changes in Stockholders' Equity
              (unaudited) for the three months ended March 31, 2007
              and March 31, 2006                                               4

         Notes to Consolidated Financial Statements                        5 - 9

Item 2 - Management's Discussion and Analysis of
         Financial Condition and Results of Operations                    9 - 21

Item 3 - Quantitative and Qualitative Disclosures About Market Risk           22

Item 4 - Controls and Procedures                                              22

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

Item 1 - Legal Proceedings                                                    23

Item 1A- Risk Factors                                                         23

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds          23

Item 3 - Defaults Upon Senior Securities                                      23

Item 4 - Submission of Matters to a Vote of Security Holders                  23

Item 5 - Other Information                                                    23

Item 6 - Exhibits                                                             23

<PAGE>



FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
                                                                       MARCH 31, 2007         DECEMBER 31, 2006
                                                                         (UNAUDITED)
------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                     <C>
ASSETS
------------------------------------------------------------------------------------------------------------------
Cash and amounts due from depository institutions                      $   48,569,822          $   55,269,961
Interest-bearing deposits                                                      35,555               1,052,911
Short term funds                                                           62,608,361              53,438,325
                                                                       --------------          --------------
     Total cash and cash equivalents                                      111,213,738             109,761,197

Investment securities held to maturity                                    414,983,094             428,441,417
Investment securities available for sale                                  141,084,588             146,005,715
                                                                       --------------          --------------
     Total investment securities                                          556,067,682             574,447,132

Loans, net                                                                447,465,984             450,099,184
Accrued interest receivable                                                 6,974,194               6,372,354
Federal Home Loan Bank stock                                                6,088,520               6,313,520
Office properties and equipment, net                                       33,455,509              33,738,928
Deferred income taxes                                                       4,169,868               4,094,838
Core deposit intangible                                                       980,561               1,159,614
Prepaid expenses and other assets                                           2,898,022               2,125,656
                                                                       --------------          --------------
TOTAL ASSETS                                                           $1,169,314,078          $1,188,112,423
                                                                       ==============          ==============

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------------------
Liabilities:

Interest-bearing deposits                                              $  751,629,412          $  738,896,140
Non-interest-bearing deposits                                             191,168,110             194,206,626
                                                                       --------------          --------------
   Total deposits                                                         942,797,522             933,102,766

Securities sold under agreements to repurchase                            110,000,000             115,000,000
FMS Statutory Trust I and II debentures                                    25,774,000              51,548,000
Advances by borrowers for taxes and insurance                               2,253,407               2,086,128
Accrued interest payable                                                    1,614,014               1,467,745
Dividends payable                                                             196,269                 195,849
Other liabilities                                                           7,221,301               6,351,377
                                                                       --------------          --------------
Total liabilities                                                       1,089,856,513           1,109,751,865
                                                                       --------------          --------------

Commitments and contingencies
Stockholders' Equity:
Preferred stock - $.10 par value 5,000,000 shares authorized;
   none issued Common stock - $.10 par value 10,000,000 shares
   authorized; shares issued 8,035,892 and 8,022,892 and shares
   outstanding 6,542,313 and 6,529,313 as of March 31, 2007 and
   December 31, 2006, respectively                                            803,589                 802,289
Additional paid-in capital                                                  9,059,431               8,930,731
Accumulated other comprehensive loss- net of deferred income taxes         (2,208,198)             (2,485,410)
Retained earnings                                                          82,810,186              82,120,391
Less:  Treasury stock (1,493,579 shares, at cost, as of
   March 31, 2007 and December 31, 2006)                                  (11,007,443)            (11,007,443)
                                                                       --------------          --------------
Total stockholders' equity                                                 79,457,565              78,360,558
                                                                       --------------          --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                             $1,169,314,078          $1,188,112,423
                                                                       ==============          ==============
</TABLE>

See notes to consolidated financial statements.

                                       1
<PAGE>

FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
                                                                   THREE MONTHS ENDED
                                                                       MARCH 31,
-----------------------------------------------------------------------------------------------
                                                                2007                2006
-----------------------------------------------------------------------------------------------
                                                                      (UNAUDITED)
<S>                                                            <C>                <C>
INTEREST  INCOME:
Interest income on:
  Loans                                                        $ 6,914,683        $  6,804,861
  Mortgage-backed securities                                     2,846,611           3,472,078
  Investments
     Taxable                                                     5,126,297           4,814,620
     Tax exempt                                                     24,134              85,016
                                                               -----------        ------------
Total interest income                                           14,911,725          15,176,575
                                                               -----------        ------------

INTEREST EXPENSE:
Interest expense on:
  Deposits                                                       4,737,159           3,654,097
  Borrowings                                                     1,462,923           2,123,725
  Long-term debt                                                 1,048,606             566,910
                                                               -----------        ------------
Total interest expense                                           7,248,688           6,344,732
                                                               -----------        ------------


NET INTEREST INCOME                                              7,663,037           8,831,843
PROVISION FOR LOAN LOSSES                                           15,000              90,000
                                                               -----------        ------------
NET INTEREST INCOME AFTER PROVISION
    FOR LOAN LOSSES                                              7,648,037           8,741,843
                                                               -----------        ------------

NON-INTEREST INCOME:
  Service charges on accounts                                    1,367,441           1,358,662
  Other income                                                      23,093              39,453
                                                               -----------        ------------
Total non-interest income                                        1,390,534           1,398,115
                                                               -----------        ------------

NON-INTEREST EXPENSE:
  Salaries and employee benefits                                 4,465,869           4,821,585
  Occupancy and equipment                                        1,582,528           1,466,688
  Purchased services                                               715,411             717,024
  Professional fees                                                117,871             196,847
  Amortization of core deposit intangible                          179,052             179,052
  Office supplies                                                   98,554             164,404
  Other expenses                                                   126,212             150,560
  Telecommunications                                               137,372             138,969
  Advertising                                                      117,477             108,918
                                                               -----------        ------------
Total non-interest expense                                       7,540,346           7,944,047
                                                               -----------        ------------


INCOME BEFORE INCOME TAXES                                       1,498,225           2,195,911

INCOME TAXES                                                       612,161             861,825
                                                               -----------        ------------
NET INCOME                                                     $   886,064        $  1,334,086
                                                               ===========        ============

BASIC EARNINGS PER COMMON SHARE                                      $0.14               $0.20
                                                               ===========        ============

DILUTED EARNINGS PER COMMON SHARE                                    $0.14               $0.20
                                                               ===========        ============

DIVIDENDS DECLARED PER COMMON SHARE                                  $0.03               $0.03
                                                               ===========        ============
</TABLE>

See notes to consolidated financial statements.

                                       2
<PAGE>


FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                               THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------------------------------------------------------
                                                                                 2007              2006
---------------------------------------------------------------------------------------------------------------------
                                                                                      (UNAUDITED)
<S>                                                                         <C>                 <C>
OPERATING ACTIVITIES:
Net income                                                                  $    886,064        $  1,334,086
Adjustments to reconcile net income to net cash by provided
 operating activities:
  Provision for loan losses                                                       15,000              90,000
  Amortization and accretion of premiums and discounts on investments, net        62,920             156,331
  Amortization and accretion of other fees and costs                             180,424             234,169
  Depreciation                                                                   491,868             496,495
Realized losses on disposal of fixed assets                                        6,856               3,084
Changes in assets and liabilities:
Increase in accrued interest receivable                                         (601,840)         (1,074,183)
Increase in prepaid expenses and other assets                                   (772,366)         (1,592,820)
Increase in accrued interest payable                                             146,269              34,656
Increase  in other liabilities                                                   678,475              53,319
Benefit for deferred income taxes                                                (75,030)            (56,002)
                                                                            ------------        ------------
  Net cash provided (used) by operating activities                             1,018,640            (320,865)
                                                                            ------------        ------------

INVESTING ACTIVITIES:
Principal collected and proceeds from maturities of investment
  securities held to maturity                                                 13,420,665          17,763,385
Principal collected and proceeds from maturities of investment
  securities available for sale                                                5,364,526           3,703,113
Principal collected on loans, net                                             17,751,800          25,749,636
Loans originated or acquired                                                 (15,134,971)        (33,930,926)
Purchase of investment securities and mortgage-backed securities
  held to maturity                                                                     -          (9,843,737)
Purchase of investment securities and mortgage-backed securities
  available for sale                                                                   -          (5,000,000)
Redemption of Federal Home Loan Bank stock                                       225,000             900,000
Purchase of office property and equipment                                       (215,305)           (535,781)
                                                                            ------------        ------------
  Net cash provided (used) by investing activities                            21,411,715          (1,194,310)
                                                                            ------------        ------------

FINANCING ACTIVITIES:
Net (decrease) increase in demand deposits and savings accounts              (15,252,020)          4,512,894
Net increase in time deposits                                                 24,946,776             994,178
Repayment of securities sold under agreement to repurchase, net               (5,000,000)        (10,000,000)
Redemption of trust capital securities                                       (25,774,000)                  -
Increase in advances from borrowers for taxes and insurance                      167,279             154,313
Dividends paid on common stock                                                  (195,849)           (195,466)
Net proceeds from issuance of common stock                                       130,000                   -
                                                                            ------------        ------------

  Net cash used by financing activities                                      (20,977,814)         (4,534,081)
                                                                            ------------        ------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                               1,452,541          (6,049,256)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                               109,761,197          93,840,949
                                                                            ------------        ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                    $111,213,738        $ 87,791,693
                                                                            ============        ============
Supplemental Disclosures:
  Cash paid for:
   Interest on deposits, advances, and other borrowings                        7,102,419           6,310,076
   Income taxes                                                                        -             275,000
  Non-cash investing and financing activities:
   Dividends declared and not paid at period end                                 196,269           195,486
</TABLE>

See notes to consolidated financial statements.

                                       3
<PAGE>

FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
                                                                       ACCUMULATED                                    TOTAL
                                 COMMON SHARES  COMMON     PAID-IN    COMPREHENSIVE     RETAINED      TREASURY    STOCKHOLDERS'
                                  OUTSTANDING    STOCK     CAPITAL    (LOSS) INCOME     EARNINGS       STOCK         EQUITY
-------------------------------------------------------------------------------------------------------------------------------
<S>                                 <C>         <C>       <C>         <C>              <C>         <C>              <C>
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                                                                               1,334,086                    1,334,086
Other comprehensive income:
  Unrealized loss on securities
    available for sale, net of
    taxes of $776,568                                                    (1,124,457)                                 (1,124,457)
                                                                                                                   ------------
Total comprehensive income                                                                                              209,629
                                                                                                                   ------------

Dividends declared ($.03)                                                                 (195,466)                    (195,466)
-------------------------------------------------------------------------------------------------------------------------------
BALANCES AT MARCH 31, 2006          6,515,110   $800,639  $8,767,381  $  (2,224,087)   $78,722,303 $(10,969,797)    $75,096,439
-------------------------------------------------------------------------------------------------------------------------------

Balances at December 31, 2006       6,529,313   $802,289  $8,930,731  $  (2,485,410)   $82,120,391 $(11,007,443)    $78,360,558

Net Income                                                                                 886,064                      886,064
Other comprehensive income:
  Unrealized gain on securities
    available for sale, net of
    taxes of $191,451                                                       277,212                                     277,212
                                                                                                                   ------------
Total comprehensive income                                                                                            1,163,276
                                                                                                                   ------------
Dividends declared ($.03)                                                                 (196,269)                    (196,269)
Exercise of stock options              13,000      1,300     128,700                                                    130,000
-------------------------------------------------------------------------------------------------------------------------------
BALANCES AT MARCH 31, 2007          6,542,313   $803,589  $9,059,431  $  (2,208,198)   $82,810,186 $(11,007,443)    $79,457,565
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See notes to consolidated financial statements.

                                       4
<PAGE>

FMS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007  (UNAUDITED).

1-BASIS OF PRESENTATION
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  months  ended March 31, 2007 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  Form 10-K for the fiscal year
ended  December 31, 2006.  The  consolidated  financial  statements  include the
Corporation's principal subsidiary, Farmers & Mechanics Bank (the "Bank").


2-STATUTORY  TRUST DEBENTURES
In March 2007, the Corporation redeemed $25.8 million of subordinated debentures
held by FMS Statutory Trust I. FMS Statutory Trust I subsequently redeemed $25.0
million  of  floating  rate  capital  securities  and $774  thousand  of  common
securities.  These  debentures  were  redeemed at par and required the mandatory
redemption of the Trust's capital and common securities. Long-Term Debt at March
31, 2007 consisted of $25.8 million of FMS Statutory  Trust II  debentures.  The
interest  rate resets every three months to LIBOR plus 158 basis  points.  As of
March 31, 2007 the interest rate was 6.93%.  These  debentures are redeemable at
the  Corporation's   option  anytime  after  June  2011.


3-REGULATORY CAPITAL REQUIREMENTS
The Bank is considered "well  capitalized" by OTS regulations at March 31, 2007.
The  Bank's  regulatory  tangible  and tier 1 (core)  capital  ratios  are $95.2
million,  or 8.14% of total  bank  assets,  and  $100.2  million  or 19.47%  for
risk-based capital.  FMS's consolidated  capital ratio at March 31, 2007 totaled
6.80%.

4-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 three months ended March
31, 2007 or March 31, 2006, or for the year ended December 31, 2006.


                                       5
<PAGE>


5-EARNINGS PER SHARE
The following table sets forth the calculation of basic and diluted earnings per
share for the three months March 31, 2007 and 2006.
<TABLE>
<CAPTION>
                                                         THREE MONTHS ENDED
                                                               MARCH 31,
                                                     ---------------------------
                                                           2007         2006
--------------------------------------------------------------------------------
<S>                                                      <C>         <C>
BASIC EARNINGS PER SHARE:
------------------------
Net income available to common shareholders              $886,064    $1,334,086

Average common shares outstanding                       6,536,480     6,515,110

Net income per common share                                 $0.14         $0.20

DILUTED EARNINGS PER SHARE:
--------------------------
Net income available to common shareholders
  on a diluted basis                                     $886,064    $1,334,086

Average common shares outstanding                       6,536,480     6,515,110
Additional shares considered in diluted
  computation assuming exercise of stock options            3,087        15,249
                                                     ---------------------------
Adjusted weighted average common shares outstanding     6,539,567     6,530,359

NET INCOME PER COMMON SHARE                                 $0.14         $0.20
</TABLE>

6-RETIREMENT  PLANS

The Bank  maintains a defined  benefit  pension plan for active  employees.  The
Corporation  expects to  contribute  approximately  $950 thousand to our pension
plan in 2007. The components of the net pension cost are as follows:

                                        THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------------------
                                            2007             2006
--------------------------------------------------------------------------------
Service cost                            $ 272,666         $ 256,462
Interest cost                             215,310           205,876
Return on assets                         (240,987)         (219,864)
Net amortization and deferral              24,607             5,008
--------------------------------------------------------------------------------
Net periodic pension cost               $ 271,596         $ 247,482
--------------------------------------------------------------------------------


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  post-retirement   benefits  for  2007  is  estimated  to  be
approximately  $34  thousand.  The  components  of net  periodic  postretirement
benefit cost are as follows:

                                      THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------------------
                                          2007             2006
----------------------------------------------------------------------
Interest cost                             $     8,384     $     6,463
Amortization of prior service cost                  -          (1,766)
Amortization of (gain) loss                         -            (965)
----------------------------------------------------------------------
Net periodic postretirement benefit
  costs                                   $     8,384     $     3,732
----------------------------------------------------------------------


                                       6
<PAGE>

7-RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2007, the Financial  Accounting  Standards  Board (FASB) issued SFAS
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities -
Including an amendment of FASB Statement No. 115." SFAS 159 permits  entities to
choose to measure many  financial  instruments  and certain  other items at fair
value. SFAS 159 provides entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions.  The statement also
establishes  presentation and disclosure  requirements.  The entity shall report
the effect of the first  re-measurement to fair value as a  cumulative-effective
adjustment  to the opening  balance of  retained  earnings.  At each  subsequent
reporting  date,  unrealized  gains and losses on items for which the fair value
option has been elected will be reported in earnings.  The fair value option may
be applied instrument by instrument,  with a few exceptions,  is irrevocable and
is applied only to entire instruments.  Most of the provisions of SFAS 159 apply
only to entities  that elect the fair value  option.  However,  the amendment to
SFAS 115,  "Accounting for Certain  Investments in Debt and Equity  Securities,"
applies to all entities with  available-for-sale and trading securities.  If the
fair value  option is elected  for any  available-for-sale  or  held-to-maturity
securities at the effective date, the cumulative  unrealized gains and losses at
that date shall be included  in the  cumulative-effect  adjustment.  SFAS 159 is
effective as of the beginning of an entity's first fiscal year that begins after
November 15, 2007.  Early  adoption is permitted as of the beginning of a fiscal
year that begins on or before  November 15, 2007,  provided that the entity also
elects to apply the  provisions  of SFAS 157,  "Fair  Value  Measurements."  The
Corporation  is in the process of  assessing  the impact of the adoption of this
statement on the Corporation's consolidated financial statements.

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

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

                                       7
<PAGE>

In  September  2006,  FASB  issued  Statement  No. 157 (SFAS  157),  "Fair Value
Measurements".  SFAS 157 defines  fair value and  establishes  a  framework  for
measuring fair value in generally accepted accounting principles. This Statement
does not require any new fair value measurements; however, it may change current
practices  related to the definition of fair value,  the methods used to measure
fair  value  and  expanded  disclosures  about  fair  value  measurements.  This
Statement  is  effective  for  financial  statements  issued  for  fiscal  years
beginning after November 15, 2007, and interim periods within those fiscal years
and is not expected to have a material impact on the Corporation'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. The adoption of FIN 48
did not have a  material  impact  on the  Corporation's  consolidated  financial
statements.

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

8-PENDING  MERGER

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

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

ITEM 2: MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF  OPERATIONS  FOR THE  THREE  MONTHS  ENDED  MARCH  31,  2007.

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

                                       8
<PAGE>

Corporation's  filings with the  Securities and Exchange  Commission  (including
this quarterly report on Form 10-Q and the exhibits thereto),  in its reports to
stockholders and in other  communications by the Corporation,  which are made in
good faith by the  Corporation  pursuant to the "safe harbor"  provisions of the
Private Securities Litigation Reform Act of 1995. 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.

FINANCIAL  CONDITION

TOTAL  ASSETS - at March 31,  2007 were  $1.17  billion as  compared  with total
assets at December 31, 2006 of $1.19 billion.

                                       9
<PAGE>


INVESTMENT  SECURITIES  HELD TO  MATURITY -  decreased  $13.4  million to $415.0
million at March 31, 2007 from $428.4 million at December 31, 2006 primarily due
to $8.8 million of principal paydowns and $4.6 million in investment  maturities
during this  period.  Investment  securities  held to maturity at March 31, 2007
consisted  of $395.4  million  in fixed  rate  securities  and $19.6  million in
adjustable rate securities.  A comparison of cost and approximate  market values
of investment  securities held to maturity as of March 31, 2007 and December 31,
2006 follows:
<TABLE>
<CAPTION>
                                                MARCH 31, 2007                                December 31, 2006
-------------------------------------------------------------------------------------------------------------------------
                                             GROSS         GROSS        ESTIMATED                         Estimated
                             AMORTIZED     UNREALIZED    UNREALIZED       MARKET         Amortized          Market
                               COST          GAINS         LOSSES         VALUE             Cost            Value
------------------------------------------------------------------------------------------------------------------------
<S>                         <C>             <C>        <C>           <C>              <C>              <C>
U. S. Gov't agencies        $ 197,330,038   $     18   $ (1,739,060) $ 195,590,996    $ 197,325,677    $ 194,547,672
Agency MBS's                  113,825,751    624,703     (1,326,251)   113,124,203      118,913,950      117,979,665
CMO's                          54,611,737          -     (1,407,670)    53,204,067       60,057,762       58,154,542
Pass through certificates      47,223,012     12,344       (866,923)    46,368,433       45,553,222       44,353,512
Municipal bonds                 1,992,556        957              -      1,993,513        6,590,806        6,591,942
------------------------------------------------------------------------------------------------------------------------
Total                       $ 414,983,094   $638,022   $ (5,339,904) $ 410,281,212    $ 428,441,417    $ 421,627,333
========================================================================================================================
</TABLE>

INVESTMENT  SECURITIES  AVAILABLE  FOR SALE - decreased  $4.9  million to $141.1
million at March 31, 2007 from $146.0 million at December 31, 2006. The decrease
is  primarily  the result of principal  paydowns of $2.7 million and  investment
calls of $2.6 million.  Investment  securities  available for sale  consisted of
$137.8  million in fixed rate  securities  and $3.3 million in  adjustable  rate
securities at March 31, 2007. A comparison of cost and approximate market values
of  investment  securities  available for sale as of March 31, 2007 and December
31, 2006 follows:
<TABLE>
<CAPTION>
                                                MARCH 31, 2007                                December 31, 2006
-------------------------------------------------------------------------------------------------------------------------
                                             GROSS         GROSS        ESTIMATED                         Estimated
                             AMORTIZED     UNREALIZED    UNREALIZED       MARKET         Amortized          Market
                               COST          GAINS         LOSSES         VALUE             Cost            Value
------------------------------------------------------------------------------------------------------------------------
<S>                         <C>             <C>        <C>           <C>              <C>              <C>
U. S. Gov't agencies         $ 62,785,903   $     -   $  (615,031)   $  62,170,872   $   65,398,776   $   64,481,337
Agency MBS's                   42,386,071    62,568      (446,101)      42,002,538       44,251,261       43,805,809
Pass through certificates      18,931,068         -      (293,668)      18,637,400       19,586,361       19,298,124
CMO's                          18,602,647         -      (328,869)      18,273,778       18,859,081       18,420,445
------------------------------------------------------------------------------------------------------------------------
Total                       $ 142,705,689 $  62,568   $(1,683,669)   $ 141,084,588   $  148,095,479   $  146,005,715
========================================================================================================================
</TABLE>

The  following  table  shows the gross  unrealized  losses and fair value of the
Bank's   investments   with  unrealized   losses  that  are  not  deemed  to  be
other-than-temporarily impaired, aggregated by investment category and length of
time that individual securities have been in continuous unrealized loss position
at March 31,  2007.  The  unrealized  losses are due to changes in market  value
stemming from changes in the general level of interest  rates and are considered
to be temporary and do not have a material impact on the Corporation.

                                       10
<PAGE>
<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                        $0              $0     $62,785,903      ($615,031)      $62,785,903     ($615,031)

Agency MBS's                                -              -       36,082,640       (446,101)       36,082,640      (446,101)

Pass through certificates                   -              -       18,931,068       (293,668)       18,931,068      (293,668)

CMO's                                       -              -       18,602,648       (328,869)       18,602,648      (328,869)
                              -------------------------------- ------------------------------- -------------------------------
TOTAL INVESTMENT SECURITIES
  AVAILABLE FOR SALE                       $0              $0    $136,402,259    ($1,683,669)     $136,402,259   ($1,683,669)
                              -------------------------------- ------------------------------- -------------------------------

Held to Maturity:
-----------------
U.S. Gov't agencies                        $0              $0    $192,345,656    ($1,739,060)     $192,345,656   ($1,739,060)

Agency MBS's                                -               -      77,202,602     (1,326,251)       77,202,602    (1,326,251)

Pass through certificates                   -               -      45,565,851       (866,923)       45,565,851      (866,923)

CMO's                               1,161,783            (17)      53,449,954     (1,407,653)       54,611,737    (1,407,670)
                              -------------------------------- ------------------------------- -------------------------------
TOTAL INVESTMENT SECURITIES
  HELD TO MATURITY                 $1,161,783           ($17)    $368,564,063    ($5,339,887)     $369,725,846   ($5,339,904)
                              -------------------------------- ------------------------------- -------------------------------

TOTAL                              $1,161,783           ($17)    $504,966,322    ($7,023,556)     $506,128,105   ($7,023,573)
                              ================================ =============================== ===============================
</TABLE>

LOANS,  NET - decreased  $2.6  million to $447.5  million at March 31, 2007 from
$450.1  million at December 31, 2006.  This decrease was primarily the result of
$17.7 million of principal collected on loans, partially offset by $15.1 million
of loans originated  during the three months ended March 31, 2007. The following
table shows loans receivable by major categories at the dates indicated.
<TABLE>
<CAPTION>
                               MARCH 31, 2007        DECEMBER 31, 2006
--------------------------------------------------------------------------
<S>                                 <C>                      <C>
Mortgage Loans                      $286,162,565             $288,052,449
Construction Loans                     3,024,604                3,759,783
Commercial Construction                2,515,310                2,955,926
Consumer Loans                         2,156,430                2,250,836
Commercial Real Estate               134,483,519              132,217,307
Commercial Business                   24,543,222               26,276,040
--------------------------------------------------------------------------
Subtotal                             452,885,650              455,512,341
Less:
    Deferred loan fees                    13,595                   22,587
    Allowance for
     loan losses                       5,406,071                5,390,570
--------------------------------------------------------------------------
Total loans, net                    $447,465,984             $450,099,184
--------------------------------------------------------------------------
</TABLE>

                                       11
<PAGE>

At March 31, 2007,  the recorded  investment in loans for which  impairment  has
been recognized in accordance with SFAS Nos. 114 and 118 totaled $3.9 million of
which  $985  thousand  related  to loans  that were  individually  measured  for
impairment  with a valuation  allowance  of $414  thousand,  and $2.9 million of
loans that were collectively  measured for impairment with a valuation allowance
of $227 thousand. The Bank had $5.4 million in total reserves for loan losses at
March 31, 2007,  representing  approximately  138% of non-performing  assets and
1.2% of total loans.  For the three  months  ended March 31,  2007,  the average
recorded  investment in impaired loans was approximately $3.9 million.  Interest
income on impaired loans that would have been recognized during the three months
ended March 31, 2007 under the original  terms totaled $207  thousand.  The Bank
recognized  $150  thousand  of interest  income on impaired  loans for the three
months ended March 31, 2007, all of which was  recognized on the cash basis.

As of March 31, 2007 the Bank had outstanding  loan commitments of $7.0 million,
of  which  $3.3  million  represented  variable  rate  loans  and  $3.7  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>
                                             MARCH 31, 2007   DECEMBER 31, 2006
                                             --------------   -----------------

<S>                                             <C>               <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
    One-to-four family                          $  677,556        $1,055,828
    Commercial real estate                       3,212,620         1,799,770
    Consumer and other                                   0                 0
                                             --------------  ----------------
    Total non-accrual loans                     $3,890,176        $2,855,598
                                             --------------  ----------------

    Troubled debt restructuring                     32,524            32,987
    Real estate owned, net                               0                 0
                                             --------------  ----------------
    Total non-performing assets, net            $3,922,700        $2,888,585
                                             --------------  ----------------

    Total non-accrual loans to net loans             0.87%             0.63%
                                             ==============  ================
    Total non-accrual loans to total assets          0.33%             0.24%
                                             ==============  ================
    Total non-performing assets to total
    assets                                           0.34%             0.24%
                                             ==============  ================
</TABLE>

                                       12
<PAGE>

DEPOSITS  -  increased  $9.7  million to $942.8  million at March 31,  2007 from
$933.1 million at December 31, 2006. Increases in time deposits of $24.9 million
and savings  accounts of $1.2  million,  were  partially  offset by decreases in
checking  accounts of $10.3 million,  money market  accounts of $3.1 million and
non-interest  checking accounts of $3.0 million for the three months ended March
31, 2007.  Interest  credited to depositors  accounts for the three months ended
March 31, 2007 amounted to $2.5 million.  The following table sets forth certain
information concerning deposits at the dates indicated.

<TABLE>
<CAPTION>
                                         MARCH 31, 2007                            December 31, 2006
-------------------------------------------------------------------------------------------------------------------
                                               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            $191,168,111   20.27%      0.00%           $194,206,626   20.81%        0.00%
Checking accounts                 207,088,975   21.97%      0.47%            217,387,796   23.30%        2.93%
Savings accounts                  176,284,057   18.70%      0.69%            175,056,992   18.76%        0.61%
Money market accounts             111,516,715   11.83%      1.34%            114,658,464   12.29%        1.22%
Time deposits                     256,739,664   27.23%      4.06%            231,792,888   24.84%        3.31%
-------------------------------------------------------------------------------------------------------------------
   Total Deposits                $942,797,522  100.00%      2.09%           $933,102,766  100.00%        1.73%
===================================================================================================================
</TABLE>

BORROWINGS - at March 31, 2007  amounted to $110.0  million in  securities  sold
under the  agreement to  repurchase  with a weighted  average  interest  rate of
5.31%.  At  December  31,  2006,  borrowings  consisted  of  $115.0  million  in
securities sold under  agreements to repurchase with a weighted  average rate of
5.24%.

LONG-TERM  DEBT - In March  2007,  the  Corporation  redeemed  $25.8  million of
subordinated  debentures  held by FMS Statutory  Trust I. FMS Statutory  Trust I
subsequently redeemed $25.0 million of floating rate capital securities and $774
thousand  of  common  securities.   These  debentures  were  redeemable  at  the
Corporation's  option any time on or after March 2007.  Long-Term  Debt at March
31, 2007 consisted of $25.8 million of FMS Statutory  Trust II  debentures.  The
interest  rate resets every three months to LIBOR plus 158 basis  points.  As of
March 31, 2007 the interest rate was 6.93%.  These  debentures are redeemable at
the  Corporation's  option  anytime  after  June  2011.

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 March 31, 2007 of
$886 thousand,  or $0.14 diluted earnings per share as compared to $1.3 million,
or $0.20 diluted earnings per share for the comparable period in 2006.

                                       13
<PAGE>

INTEREST RATE SPREAD

The Bank's  interest  income is affected by the  difference  or  "interest  rate
spread" between yields received by the Bank on its  interest-earning  assets and
the  interest  rates  paid  by  the  Bank  on its  interest-bearing  liabilities
including non-interest checking accounts. Net interest income is affected by (i)
the spread between the yield earned on interest-earning  assets and the interest
rates paid on interest-bearing  savings deposits including non-interest checking
accounts  and  borrowings   (liabilities)  and  (ii)  the  relative  amounts  of
interest-earning assets versus interest-bearing liabilities. The Bank's interest
rate spread varies over time because money fund accounts and other flexible rate
accounts  have  become  significant  sources of savings  deposits.  Income  from
investment  securities and  mortgage-backed  securities  depends upon the amount
invested during the period and the yields earned on such  securities.  The yield
on loans 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.

                                       14
<PAGE>

The following table sets forth certain information relating to the Corporation's
average balance sheet and reflects the average yield on assets and average rates
paid on liabilities for the periods indicated. Such yields and rates are derived
by  dividing  interest  income or expense,  on a  tax-equivalent  basis,  by the
average balance of interest-earning assets or liabilities,  respectively for the
periods presented.
<TABLE>
<CAPTION>
                                                                 THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------------------------------------------------------------------
                                                      2007                                          2006
------------------------------------------------------------------------------------------------------------------------------
                                       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                       $453,991      $6,915           6.09%         $454,145      $6,805            5.99%
    Interest-bearing deposits                54,750         704           5.14%           24,108         260            4.31%
    Mortgage-backed securities              225,270       2,847           5.06%          274,898       3,472            5.05%
    Investment securities                   349,203       4,459           5.11%          375,518       4,684            4.99%
                                  --------------------------------------------------------------------------------------------
Total interest-earning
        assets                            1,083,214      14,925           5.51%        1,128,669      15,221            5.39%
                                  --------------------------------------------------------------------------------------------

Interest-bearing liabilities:
    Checking deposits                       392,654       1,634           1.66%          401,228       1,469            1.46%
    Savings deposits                        172,968         302           0.70%          189,662         279            0.59%
    Money market deposits                   111,630         369           1.32%          130,297         344            1.06%
    Time deposits                           243,209       2,433           4.00%          212,554       1,562            2.94%
    Borrowings                              110,376       1,463           5.30%          171,614       2,124            4.95%
    Long-Term Debt                           49,890       1,048           8.40%           25,774         567            8.80%
                                  --------------------------------------------------------------------------------------------
Total interest-bearing
        liabilities                      $1,080,727       7,249           2.68%       $1,131,129       6,345            2.24%
                                  =================-----------------------------=================-----------------------------

Net interest income                                      $7,676                                       $8,876
                                                         =======                                      =======
Interest rate spread                                                      2.83%                                         3.15%
                                                                         =====                                         =====

Net yield on average interest-earning assets                              2.83%                                         3.15%
                                                                         =====                                         =====

Ratio of average interest-earning assets
    to average interest-bearing liabilities                             100.23%                                        99.78%
                                                                        ======                                         ======
</TABLE>

                                       15
<PAGE>
RATE/VOLUME ANALYSIS

The following  table describes the extent to which changes in interest rates and
changes in volume of interest-earning  assets and  interest-bearing  liabilities
have  affected  the  Bank's  interest  income  and  interest  expense,  on a tax
equivalent  basis,   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 MARCH 31,
                                                             2007 VS. 2006
                                                 INCREASE (DECREASE) DUE TO CHANGE IN:
                                           ------------------------------------------------
                                                             RATE VOLUME TOTAL
                                                              (IN THOUSANDS)
                                           ------------------------------------------------
<S>                                                   <C>             <C>             <C>
Interest income:
    Loans receivable                                  $112            ($2)            $110
    Interest-bearing deposits                          114            330              444
    Mortgage-backed securities                           2           (627)            (625)
    Investment securities                              103           (328)            (225)
                                           ------------------------------------------------

    Total change - interest income                     331           (627)            (296)
                                           ------------------------------------------------
Interest expense:
    Checking deposits                                  196            (31)             165
    Savings deposits                                    48            (25)              23
    Money market deposits                               74            (49)              25
    Time deposits                                      646            225              871
    Borrowings                                          97           (758)            (661)
    Long-Term Debt                                     (50)           531              481
                                           ------------------------------------------------

    Total change - interest expense                  1,011           (107)             904
                                           ------------------------------------------------

Net change in net interest income                    ($680)         ($520)         ($1,200)
                                           ================================================
</TABLE>

NET INCOME
The Corporation and its subsidiary  recorded net income of $886 thousand for the
quarter ended March 31, 2007, or $0.14 diluted  earnings per share,  as compared
to net  income of $1.3  million,  or $0.20  diluted  earnings  per share for the
quarter ended March 31, 2006. Net interest income on a tax equivalent  basis was
$7.7 million for the three months ended March 31, 2006  compared to $8.9 million
for the same period in 2006.  Provisions  for loan losses were $15  thousand and
$90  thousand  for the  quarters  ended March 31,  2007 and 2006,  respectively.
Non-interest  income was $1.4  million for the three months ended March 31, 2007
and 2006.  Total  noninterest  expense for the quarter  ended March 31, 2007 was
$7.5 million compared to $7.9 million for the same quarter in 2006.

INTEREST INCOME
Total interest income on a tax equivalent basis decreased $296 thousand to $14.9
million  for the quarter  ended  March 31, 2007 from $15.2  million for the same
period in 2006. The decrease is  attributable to decreases in interest income on
mortgage-backed securities (MBS's) of $625 thousand and investment securities of
$225   thousand,   partially   offset  by  increases   in  interest   income  on
interest-bearing  deposits  of  $444  thousand  and  loans  receivable  of  $110
thousand.

                                       16
<PAGE>

Interest income on mortgage-backed securities decreased by $625 thousand to $2.8
million for the three months ended March 31, 2007 from $3.5 million for the same
period in 2006. The average  balance of MBS's  decreased $49.6 million to $225.3
million for the three  months  ended March 31, 2007 from $274.9  million for the
same period in 2006,  which  resulted in an interest  income volume  decrease of
$627 thousand. The decrease in the average balance during this period was due to
principal  paydowns of $29.2 million and calls and  maturities of $12.0 million,
partially offset by purchases of MBS's of $3.1 million from the first quarter of
2006.  The average yield of the MBS  portfolio  increased 1 basis point to 5.06%
for the  quarter  ended  March 31,  2007 from 5.05% for the same period in 2006,
which resulted in an interest  income  increase of $2 thousand due to changes in
rates.

Interest income on investment securities decreased $225 thousand to $4.5 million
for the three  months ended March 31, 2007 from $4.7 million for the same period
in 2006. The average balance of investment securities decreased $26.3 million to
$349.2 million for the three months ended March 31, 2007 from $375.5 million for
the same period in 2006,  which resulted in a volume decrease in interest income
of $328  thousand.  The decrease in the average volume during this period is due
to investment  principal  paydowns of $23.8 million and calls and  maturities of
$22.5 million,  partially  offset by investment  purchases of $8.1 million since
the first quarter 2006. The average yield of the investment  portfolio increased
12 basis points to 5.11% for the quarter ended March 31, 2007 from 4.99% for the
same  period in 2006,  which  resulted in an  interest  income  increase of $103
thousand  due to rate  changes.

Interest income on interest-bearing  deposit investments increased $444 thousand
to $704  thousand for the three  months ended March 31, 2007 from $260  thousand
for the same period in 2006.  The average  balance of  interest-bearing  deposit
investments increased $30.7 million to $54.8 million for the quarter ended March
31, 2007 from $24.1  million for the same  period in 2006,  which  resulted in a
volume  increase  in interest  income of $330  thousand.  The  average  yield of
interest-bearing  deposit investments increased 83 basis points to 5.14% for the
three months ended March 31, 2007 from 4.31% for the same period in 2006,  which
resulted in an increase in interest income of $114 thousand due to rate changes.

Interest  income on loans  increased $110 thousand to $6.9 million for the three
months ended March 31, 2007 from $6.8  million for the same period in 2006.  The
average  rate on loans  increased  10 basis points to 6.09% for the three months
ended March 31, 2007 from 5.99% for the same period in 2006,  which  resulted in
an increase in interest income of $112 thousand due to rate changes. The average
balance of the loan portfolio  decreased $154 thousand to $454.0 million for the
three  months  ended March 31,  2007 from $454.1  million for the same period in
2006, which resulted in a volume decrease in interest income of $2 thousand. The
decrease in the average balance is primarily due to principal collected on loans
of $89.0 million,  partially  offset by $86.3 of loan originated since the first
quarter of 2006.

INTEREST EXPENSE
Total  interest  expense  increased  $904 thousand to $7.2 million for the three
months ended March 31, 2007 from $6.3  million for the same period in 2006.  The
increases  in  interest  expense  on time  deposits,  long-term  debt,  checking
deposits,  money market deposits and savings deposits were partially offset by a
decrease in interest expense on borrowings.

Interest  expense on time deposits  increased  $871 thousand to $2.4 million for
the three  months  ended March 31, 2007 from $1.6 million for the same period in
2006. The average rate on time

                                       17
<PAGE>

deposits  increased  106 basis  points to 4.00% for the quarter  ended March 31,
2007 from 2.94% for the same period in 2006,  which  resulted in a rate increase
in  interest  expense of $646  thousand.  The average  balance of time  deposits
increased  $30.6 million to $243.2  million for the quarter ended March 31, 2007
from $212.6  million for the same period in 2006,  which resulted in an increase
in interest  expense of $225  thousand.  The increase in the average  balance of
time deposits is the result of a promotional 5 month and 13 month certificate of
deposit program that began in September 2006.

Interest  expense on long-term  debt increased $481 thousand to $1.0 million for
the three months ended March 31, 2007 from $567  thousand for the same period in
2006. The average balance of debentures increased $24.1 million to $49.9 million
for the quarter  ended March 31, 2007 from $25.8  million for the same period in
2006, which resulted in an increase in interest  expense of $531 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 decreased 40 basis points to 8.40%
for the three  months  ended  March 31,  2007 from 8.80% for the same  period in
2006, which decreased interest expense on long-term debt $50 thousand.

Interest  expense on checking  deposits  increased $165 thousand to $1.6 million
for the three months ended March 31, 2007 from $1.5 thousand for the same period
in 2006.  The average  rate on checking  deposits  increased  20 basis points to
1.66% for the  quarter  ended  March 31,  2007 from 1.46% for the same period in
2006, which resulted in an increase in interest  expense of $196 thousand.  This
increase was  primarily due to an increase in the average rate paid on municipal
government  checking accounts to 5.25% for the three months ended March 31, 2007
from 4.67% for the same period in 2006. The average balance of checking deposits
decreased  $8.5  million to $392.7  million for the three months ended March 31,
2007 from $401.2 million for the same period in 2006, which resulted in a volume
decrease in interest  expense of $31 thousand.

Interest  expense  on money  market  deposits  increased  $25  thousand  to $369
thousand for the three  months  ended March 31, 2007 from $344  thousand for the
same period in 2006.  The average  rate on money  market  deposits  increased 26
basis  points to 1.32% for the  quarter  ended March 31, 2007 from 1.06% for the
same period in 2006,  which  resulted in an increase in interest  expense of $74
thousand.  The average balance of money market deposits  decreased $18.7 million
to $111.6  million for the three months ended March 31, 2007 from $130.3 million
for the same period in 2006,  which  resulted  in a volume  decrease in interest
expense of $49 thousand.

Interest expense on savings deposits increased $23 thousand to $302 thousand for
the three months ended March 31, 2007 from $279  thousand for the same period in
2006. The average rate on savings deposits increased 11 basis point to 0.70% for
the quarter  ended March 31, 2007 from 0.59% for the same period in 2006,  which
resulted in an increase in interest expense of $48 thousand. The average balance
of savings  deposits  decreased  $16.7  million to $173.0  million for the three
months  ended March 31,  2007 from  $189.7  million for the same period in 2006,
which resulted in a volume decrease in interest expense of $25 thousand.

Interest  expense on borrowings  decreased $661 thousand to $1.5 million for the
three months ended March 31, 2007 from $2.1 million for the same period in 2006.
The average  balance of borrowings  decreased $61.2 million to $110.4 million at
March 31, 2007 from $171.6  million for the same period in 2006,  which resulted
in a volume decrease in interest expense of $758 thousand. The average rate paid
on borrowings increased 35 basis points to 5.30% for the quarter ended March 31,
2007 from 4.95% for the same  period in 2006,  which  resulted in an increase in
interest expense of $97 thousand due to rate changes.

                                       18
<PAGE>

CRITICAL ACCOUNTING ESTIMATES

PROVISION FOR LOAN LOSSES - A critical  accounting estimate is the provision for
loan losses. The provision  decreased to $15 thousand for the three months ended
March 31,  2007  compared  to $90  thousand  for the same  period  in 2006.  The
allowance  for loan  losses  amounted  to $5.4  million  at March  31,  2007 and
December 31, 2006. 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.

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

NON-INTEREST  INCOME - remained  constant at $1.4  million  for the  three-month
period ended March 31, 2007 and 2006.

NON-INTEREST  EXPENSE - decreased  $400  thousand to $7.5  million for the three
month  period ended March 31, 2007 from $7.9 million for the same period in 2006
primarily due to a decrease in salaries and employee benefits expense, partially
offset by an increase in occupancy and equipment expense.

SALARIES AND EMPLOYEE BENEFITS - decreased $356 thousand to $4.5 million for the
three month  period  ended March 31, 2007  compared to $4.8 million for the same
period in 2006.  The  decrease  was due to a reduction  in  overtime  pay of $69
thousand as well as a current  moratorium  on hiring is in effect.  Average full
time equivalent employees were 477 at March 31, 2007 as compared to 547 at March
31, 2006.

OCCUPANCY AND  EQUIPMENT-  increased $116 thousand to $1.6 million for the three
month period  ended March 31, 2007  compared to $1.5 million for the same period
in 2006 due  primarily  to  increases in  maintenance  expense of $77  thousand,
equipment expense of $18 thousand and property taxes of $12 thousand.

                                       19
<PAGE>

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


ITEM 3: QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET
RISK

     There were no significant changes for the three months ended March 31, 2007
     from the  information  presented in the annual  report on Form 10-K for the
     year ended December 31, 2006.

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.

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
               Form 10-K for the year ended  December 31, 2006.  There have been
               no material  changes  from the risk  factors as disclosed in that
               report.

                                       20
<PAGE>

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

     (a)     Not applicable

     (b)     Not applicable

     (c)     Issuer Purchase of Equity Securities - None


     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.


                                       21
<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: May 15, 2007                        /s/ Craig W. Yates
                                          --------------------------------------
                                          Craig W. Yates
                                          President and Chief Executive Officer
                                          (Principal and Executive Officer)


Date: May 15, 2007                        /s/ Channing L. Smith
                                          --------------------------------------
                                          Channing L. Smith
                                          Vice President and
                                          Chief Financial Officer
                                          (Principal Financial Officer)


                                       22