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, 2004

                                       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 an  accelerated  filer
(as defined in Rule 12b-2 of the Exchange Act). YES      NO  X .
                                                    ---     ---

         As of  November  5, 2004 there were  issued and  outstanding  6,500,960
shares of the registrant's Common Stock, par value $.10 per share.

<PAGE>

                    FMS FINANCIAL CORPORATION AND SUBSIDIARY
                    ----------------------------------------

                          QUARTERLY REPORT ON FORM 10-Q
                          -----------------------------

                               September 30, 2004
                               ------------------

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

         Item 1 - Financial Statements

               Consolidated Statements of Financial Condition as of
                       September 30, 2004 (unaudited) and December 31, 2003................................1

               Consolidated Statements of Operations (unaudited)
                       for the three and nine months ended
                       September 30, 2004 and September 30, 2003...........................................2

               Consolidated Statements of Cash Flows (unaudited)
                       for the nine months ended September 30, 2004
                       and September 30, 2003..............................................................3

               Consolidated  Statements  of  Changes  in  Stockholders'   Equity
                       (unaudited)  for the nine months ended September 30, 2004
                       and September 30, 2003............................................................. 4

               Notes to Consolidated Financial Statements................................................5-6

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

         Item 3 - Disclosure about Market Risk............................................................19

         Item 4 - Controls and Procedures.................................................................19

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

         Item 1 - Legal Proceedings         ..............................................................20
         Item 2 - Unregistered Sale of Equity Securities
                       and Use of Proceeds  ..............................................................20
         Item 3 - Defaults Upon Senior Securities.........................................................20
         Item 4 - Submission of Matters to Vote Security of Holders.......................................20
         Item 5 - Other Information.......................................................................20
         Item 6 - Exhibits................................................................................20
         Signatures ..................................................................................... 21
</TABLE>

<PAGE>

FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                             September 30, 2004   December 31, 2003
-------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>                <C>
ASSETS

       Cash and amounts due from depository institutions                       $    47,888,451    $    41,022,232
       Interest-bearing deposits                                                        52,525            142,929
       Short term funds                                                             23,681,478         31,169,476
                                                                               ---------------    ---------------

              Total cash and cash equivalents                                       71,622,454         72,334,637
       Investment securities held to maturity                                      219,906,141        250,383,262
       Investment securities available for sale                                    174,558,268        149,230,862
       Loans, net                                                                  420,868,876        402,606,056
       Mortgage-backed securities held to maturity                                 289,031,700        294,915,606
       Accrued interest receivable                                                   6,441,292          5,203,748
       Federal Home Loan Bank stock                                                 10,250,120         11,809,620
       Real estate owned, net                                                                0             48,294
       Office properties and equipment, net                                         31,019,569         31,429,069
       Deferred income taxes                                                         2,115,489          2,043,909
       Core deposit intangible                                                       2,771,082          3,308,238
       Prepaid expenses and other assets                                             2,097,519          1,603,294
       FMS Statutory Trust 1 issue costs, net                                          581,772            640,154

                                                                               ---------------    ---------------
TOTAL ASSETS                                                                   $ 1,231,264,282    $ 1,225,556,749
                                                                               ===============    ===============

LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------

Liabilities:
       Deposits                                                                $   923,705,511    $   893,006,498
       Securities sold under agreements to repurchase                              195,000,000        225,000,000
       Advances from the Federal Home Loan Bank                                     10,000,000         11,191,047
       FMS Statutory Trust 1 debentures                                             25,774,000         25,774,000
       Advances by borrowers for taxes and insurance                                 2,238,939          2,142,499
       Accrued interest payable                                                      1,207,816          1,319,501
       Dividends payable                                                               195,029            194,576
       Other liabilities                                                             4,431,137          4,098,885
                                                                               ---------------    ---------------
       Total liabilities                                                         1,162,552,432      1,162,727,006
                                                                               ---------------    ---------------

Commitments and contingencies
Stockholders' Equity:
       Preferred stock - $.10 par value 5,000,000 shares  authorized;
                         none issued
       Common stock - $.10 par value 10,000,000 shares authorized;
                      shares issued 7,990,142 and 7,975,059 and shares
                      outstanding 6,500,960 and 6,485,877 as of
                      September 30, 2004 and December 31, 2003, respectively           799,014            797,506
       Paid-in capital in excess of par                                              8,544,121          8,507,333
       Accumulated other comprehensive income - net of deferred income taxes           572,045            802,239
       Retained earnings                                                            69,731,669         63,657,664
       Less:  Treasury stock (1,489,182 shares, at cost, as of
              September 30, 2004 and December 31, 2003)                            (10,934,999)       (10,934,999)
                                                                               ---------------    ---------------
Total stockholders' equity                                                          68,711,850         62,829,743
                                                                               ---------------    ---------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                     $ 1,231,264,282    $ 1,225,556,749
                                                                               ===============    ===============
</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,
                                                              ----------------------------    ----------------------------
                                                                   2004            2003            2004            2003
                                                              ------------    ------------    ------------    ------------
<S>                                                          <C>             <C>             <C>             <C>
INTEREST  INCOME:
Interest income on:
  Loans                                                       $  6,219,024    $  6,023,654    $ 18,329,907    $ 18,308,107
  Mortgage-backed securities                                     4,224,347       3,508,199      12,237,351      11,814,678
  Investments                                                    3,706,263       2,135,917      10,808,357       7,414,628
                                                              ------------    ------------    ------------    ------------
Total interest income                                           14,149,634      11,667,770      41,375,615      37,537,413
                                                              ------------    ------------    ------------    ------------
INTEREST EXPENSE:
Interest expense on:
  Deposits                                                       1,942,196       1,917,653       5,548,386       6,755,394
  Borrowings                                                     2,305,113       2,386,311       7,006,011       7,093,661
  Long term debt                                                   353,489         314,282         992,527         973,424
                                                              ------------    ------------    ------------    ------------
Total interest expense                                           4,600,798       4,618,246      13,546,924      14,822,479
                                                              ------------    ------------    ------------    ------------
NET INTEREST INCOME                                              9,548,836       7,049,524      27,828,691      22,714,934
PROVISION FOR LOAN LOSSES                                           90,000          75,000         240,000         195,000
                                                              ------------    ------------    ------------    ------------
NET INTEREST INCOME AFTER PROVISION
    FOR LOAN LOSSES                                              9,458,836       6,974,524      27,588,691      22,519,934
                                                              ------------    ------------    ------------    ------------
OTHER INCOME (EXPENSE):
  Loan service charges and other fees                               21,384          19,566          80,560          63,300
  Gain on sale of real estate held for development, net                  0               0               0         600,780
  Gain on sale of loans                                                228             232             229             283
  Gain on sale of investment securities                            433,518          63,103         533,574         285,846
  Gain on disposal of fixed assets                                       0               0          46,080        (141,151)
  Real estate owned operations, net                                    (39)         (4,265)         (4,586)         16,940
  Service charges on accounts                                    1,308,036       1,159,714       3,834,588       3,415,956
  Other income                                                      35,633          33,566          99,948         103,031
                                                              ------------    ------------    ------------    ------------
Total other income                                               1,798,760       1,271,916       4,590,393       4,344,985
                                                              ------------    ------------    ------------    ------------
OPERATING EXPENSES:
  Salaries and employee benefits                                 4,209,679       3,876,483      12,409,459      11,607,680
  Occupancy and equipment                                        1,361,072       1,384,007       4,043,164       4,072,723
  Purchased services                                               699,781         744,658       2,144,793       2,142,416
  Federal deposit insurance premiums                                32,412          32,466          97,959          96,048
  Professional fees                                                161,864         157,366         495,542         498,785
  Advertising                                                      106,565         112,879         322,591         345,735
  Amortization of core deposit intangible                          179,052          65,757         537,156         131,514
  Other                                                            319,439         384,516       1,020,789       1,309,431
                                                              ------------    ------------    ------------    ------------
Total operating expenses                                         7,069,864       6,758,132      21,071,453      20,204,332
                                                              ------------    ------------    ------------    ------------

INCOME BEFORE INCOME TAXES                                       4,187,732       1,488,308      11,107,631       6,660,587

INCOME TAXES                                                     1,679,599         587,873       4,448,954       2,620,257
                                                              ------------    ------------    ------------    ------------

NET INCOME                                                    $  2,508,133    $    900,435    $  6,658,677    $  4,040,330
                                                              ============    ============    ============    ============

 BASIC EARNINGS PER COMMON SHARE                              $       0.39    $       0.14    $       1.03    $       0.62
                                                              ============    ============    ============    ============

 DILUTED EARNINGS PER COMMON SHARE                            $       0.38    $       0.14    $       1.02    $       0.62
                                                              ============    ============    ============    ============

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


 Weighted average common shares outstanding                      6,500,960       6,484,466       6,493,267       6,473,959
 Potential dilutive effect of the exercise of stock options         36,763          36,009          38,020          36,420
                                                              ------------    ------------    ------------    ------------
 Adjusted weighted average common shares outstanding             6,537,723       6,520,475       6,531,287       6,510,379
                                                              ============    ============    ============    ============
</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,
                                                                                             -------------------------------
                                                                                                   2004             2003
<S>                                                                                        <C>              <C>
OPERATING ACTIVITIES:
Net income                                                                                   $   6,658,677    $   4,040,330
Adjustments to reconcile net income to net cash provided
   by operating activities:
         Provision for loan losses                                                                 240,000          195,000
         Depreciation and Amortization                                                           5,637,346        7,548,803
Realized (gains)
and losses on:
         Sale of loans                                                                                (229)            (283)
         Disposal and sale of fixed assets                                                         (46,080)         141,151
         Sale of investment securities                                                            (533,574)        (285,846)
         Sale of real estate owned                                                                    (654)         (33,432)

         Sale of real estate held for development, net                                                   0         (600,780)
(Increase) Decrease in accrued interest receivable                                              (1,237,544)         293,587
Increase in prepaid expenses and other assets                                                     (494,225)        (285,940)
Decrease in accrued interest payable                                                              (111,685)         (79,426)
Increase (Decrease) in other liabilities                                                           485,327         (557,840)
(Benefit) Provision for deferred income taxes                                                      (71,580)       1,068,497
                                                                                             -------------    -------------
                 Net cash provided by operating activities                                      10,525,779       11,443,821
                                                                                             -------------    -------------
INVESTING ACTIVITIES:
Proceeds from sale of:
         Education loans                                                                            60,279           98,685
         Real estate held for development                                                                0          688,706
         Real estate owned                                                                          48,948          332,877
         Property and equipment                                                                    238,871          148,619
         Investment securities available for sale                                               17,723,462        7,503,529
Principal collected and proceeds from maturities of investment securities held to maturity      88,067,249      178,121,234
Proceeds from maturities of investment securities available for sale                            39,787,375      100,982,096
Principal collected on mortgage-backed securities held to maturity                              82,180,283      168,304,986
Principal collected on loans, net                                                               83,858,710      107,109,449
Loans originated or acquired, net                                                             (102,474,901)    (141,250,672)
Purchase of investment securities and mortgage-backed securities held to maturity             (136,349,712)    (385,731,684)
Purchase of investment securities and mortgage-backed securities available for sale            (83,735,389)    (131,343,250)
Redemption of Federal Home Loan Bank stock                                                       1,559,500          227,100
Purchase of office property and equipment                                                       (1,261,120)      (3,615,921)
Net cash received from deposit purchase, net                                                             0       16,539,246
                                                                                             -------------    -------------
                 Net cash used by investing activities                                         (10,296,445)     (81,885,000)
                                                                                             -------------    -------------
FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts                                            43,869,502       57,996,689
Net decrease in time deposits                                                                  (13,170,489)      (8,224,918)
Net decrease in FHLB advances                                                                   (1,191,047)         (41,056)
Repayment of securities sold under agreement to repurchase                                     (30,000,000)               0
Increase in advances from borrowers for taxes and insurance                                         96,440          142,569
Purchase of treasury stock                                                                               0          (48,419)
Dividends paid on common stock                                                                    (584,219)        (582,353)
Net proceeds from issuance of common stock                                                          38,296          230,333
                                                                                             -------------    -------------
                 Net cash (used) provided by financing activities                                 (941,517)      49,472,845
                                                                                             -------------    -------------
DECREASE IN CASH AND CASH EQUIVALENTS                                                             (712,183)     (20,968,334)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                  72,334,637       88,410,346
                                                                                             -------------    -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                                     $  71,622,454    $  67,442,012
                                                                                             =============    =============
Supplemental Disclosures:
                 Cash paid for:
                        Interest on deposits, advances, and other borrowings                 $  13,658,609    $  14,901,905
                        Income taxes                                                             4,243,000        2,255,500
                 Non-cash investing and financing activities:
                        Dividends declared and not paid at year end                                195,029          194,578
                        Non-monetary transfers from loans to real estate owned
                         through foreclosure                                                             0          405,598
</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  income (loss)   earnings       stock       Equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>        <C>       <C>           <C>         <C>          <C>           <C>
Balances at December 31, 2002                6,463,811  $794,981  $8,279,525    $1,216,053  $58,233,840  $(10,886,580) $57,637,819
Net Income                                                                                    4,040,330                  4,040,330
Other comprehensive incomealized loss on securities available
      for sale, net of taxes of $341,738 and
      reclassification adjustment of $285,846                                     (513,890)                               (513,890)
                                                                                                                       -----------
Total comprehensive income                                                                                               3,526,440
                                                                                                                       -----------

Dividends declared ($.09)                                                                      (583,016)                  (583,016)
Exercise of stock options                       25,250    2,525      227,808                                               230,333
Purchase of common stock                        (3,184)                                                       (48,419)     (48,419)
------------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 2003               6,485,877 $797,506   $8,507,333    $  702,163  $61,691,154  $(10,934,999) $60,763,157
------------------------------------------------------------------------------------------------------------------------------------

Balances at December 31, 2003                6,485,877 $797,506   $8,507,333    $  802,239  $63,657,664  $(10,934,999) $62,829,743

Net Income                                                                                    6,658,677                  6,658,677
Other comprehensive income
  Unrealized gain on securities available
      for sale, net of taxes of ($153,075)                                        (230,194)                               (230,194)
                                                                                                                       -----------
Total comprehensive income                                                                                               6,428,483
                                                                                                                       -----------

Dividends declared ($.09)                                                                      (584,672)                  (584,672)
Exercise of stock options                       15,083    1,508       36,788                                                38,296
------------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 2004               6,500,960 $799,014   $8,544,121    $  572,045  $69,731,669  $(10,934,999) $68,711,850
------------------------------------------------------------------------------------------------------------------------------------
</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, 2004 (UNAUDITED).

1-GENERAL
In the opinion of management,  the accompanying unaudited consolidated financial
statements of FMS Financial  Corporation contain all adjustments,  consisting of
normal recurring  accruals,  necessary for a fair  presentation of 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, 2004 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 year ended  December 31, 2003. The 2003  Comparative  Statement of Financial
Condition was derived from the audited  financial  statements.  The consolidated
financial statements include the Corporation's wholly-owned subsidiary,  Farmers
& Mechanics Bank (the "Bank").


2-LONG-TERM DEBT
Long-Term  Debt at September  30, 2004 and December 31, 2003  consisted of $25.8
million of FMS  Statutory  Trust 1  debentures.  The interest  rate resets every
three months to LIBOR plus 360 basis points and will not exceed  11.00%  through
March  2007.  At  September  30, 2004 and 2003 the  interest  rate was 5.55% and
4.61%, respectively.


3-REGULATORY CAPITAL REQUIREMENTS
The Bank is considered  "well  capitalized"  by OTS regulations at September 30,
2004. The Bank's regulatory  tangible and tier 1 (core) capital ratios are $79.8
million or 6.50% of total bank assets and $84.0 million or 16.91% for risk-based
capital.


4-STOCK OPTIONS
The  Corporation  maintains an incentive stock option plan. As permitted by SFAS
No. 148 "Accounting for Stock-Based  Compensation-Transition and Disclosure" the
Corporation  will continue to use the intrinsic  value method of accounting  for
stock  options.  No  options  have been  granted  during the nine  months  ended
September 30, 2004 and 2003.

                                       5

<PAGE>

5-PENSION PLAN
The Corporation  maintains a defined benefit Pension Plan for active  employees.
The  Corporation  contributed  $953 thousand to its Pension Plan during the nine
months ended  September 30, 2004.  The components of the net pension cost are as
follows:


                                           Nine Months ended September 30,
      --------------------------------------------------------------------
                                                 2004               2003
      --------------------------------------------------------------------

      Service cost                          ($653,280)         ($537,459)
      Interest cost                          (423,276)          (364,791)
      Return on assets                        474,150            346,092
      Net amortization and deferral            (9,201)           (44,184)
      --------------------------------------------------------------------
      Net periodic pension cost             ($611,607)         ($600,342)
      --------------------------------------------------------------------


                                       6
<PAGE>

ITEM 2: MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF  OPERATIONS  FOR THE NINE MONTHS  ENDED  SEPTEMBER  30, 2004.  The  following
discussion and analysis should be read with our financial statements and related
notes included elsewhere in this report on Form 10-Q. FMS Financial  Corporation
(the "Corporation") may from time to time make written or oral  "forward-looking
statements,"  including statements  contained in the Corporation's  filings with
the Securities and Exchange Commission  (including this quarterly report on Form
10-Q and the  exhibits  thereto),  in its reports to  stockholders  and in other
communications  by  the  Corporation,  which  are  made  in  good  faith  by the
Corporation  pursuant to the "safe harbor"  provisions of the Private Securities
Litigation  Reform Act of 1995.  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.

                                       7

<PAGE>

FINANCIAL CONDITION

Total Assets - at September  30, 2004 were $1.23  billion as compared with total
assets at December 31, 2003 of $1.22 billion.

Short Term Funds - decreased $7.5 million to $23.7 million at September 30, 2004
from $31.2  million at  December  31,  2003 due to the  purchase  of  investment
securities.

Investment  Securities  Held to  Maturity -  decreased  $30.5  million to $219.9
million at September 30, 2004 from $250.4 million at December 31, 2003 primarily
due  to  a  reclassification   of  securities  from  pass-thru   investments  to
mortgage-backed  securities (MBS's) held to maturity of $64.9 million,  calls of
$45.3  million in U.S.  Agency  Notes,  principal  paydowns of $40.9  million in
collateralized  mortgage obligations (CMO's) and the maturity of $1.9 million in
municipal bonds,  partially offset by purchases of $104.4 million in U.S. Agency
Notes,  $16.0  million of CMO's and $2.4 million of  municipal  bonds during the
period.  Investment  securities held to maturity at September 30, 2004 consisted
of $219.9 million in fixed rate securities. A comparison of cost and approximate
market values of investment securities held to maturity as of September 30, 2004
and December 31, 2003 follows:

<TABLE>
<CAPTION>
                                            September 30, 2004                           December 31, 2003
                       ------------------------------------------------------------ -------------------------------
                                         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   $131,382,480     $508,897      $  (307,666)    $131,583,711   $ 72,256,272     $ 72,994,187
CMO's                    85,688,761      261,990         (965,950)      84,984,801    175,727,450      175,279,820
Municipal bonds           2,834,900        4,830                 0       2,839,730      2,399,540        2,404,563
----------------------------------------------------------------------------------- -------------------------------
Total                  $219,906,141     $775,717      $(1,273,616)    $219,408,242   $250,383,262     $250,678,570
=================================================================================== ===============================
</TABLE>

Investment  Securities  Available  for Sale - increased  $25.4 million to $174.6
million at September  30, 2004 from $149.2  million at December  31,  2003.  The
increase is the result of purchases of $49.5 million of U.S. Agency Notes, $24.0
million  of CMO's and  $10.0  million  of  mortgage-backed  securities  (MBS's),
partially  offset by  principal  paydowns  of $31.9  million of CMO's and MBS's,
sales of $17.7 million of CMO's and MBS's,  $8.1 million of calls of U.S. Agency
Notes and $383 thousand in market adjustments at September 30, 2004.  Investment
securities  available  for sale  consisted  of  $174.2  million  in  fixed  rate
securities  and $351  thousand in  adjustable  rate  securities at September 30,
2004.  A  comparison  of  cost  and  approximate  market  values  of  investment
securities  available  for sale as of  September  30, 2004 and December 31, 2003
follows:

<TABLE>
<CAPTION>
                                        September 30, 2004                           December 31, 2003
                       ------------------------------------------------------ --------------------------------
                                         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   $ 54,507,034     $  110,950     $(159,600)    $ 54,458,384   $ 13,100,525  $ 13,188,525
CMO's                    41,710,873        321,277      (280,604)      41,751,546     48,250,773    48,419,522
MBS's                    77,403,156      1,109,972      (164,790)      78,348,338     86,559,090    87,622,815
                     --------------------------------------------------------------- -------------------------
Total                  $173,621,063     $1,542,199     $(604,994)    $174,558,268   $147,910,388  $149,230,862
==================================================================================== =========================
</TABLE>

                                       8

<PAGE>

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 September 30, 2004:

<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. Agency Notes               $ 19,248,890    $  (159,599)                 -                 -       $  19,248,890  $  (159,599)
MBS's & CMO's                     11,809,012       (255,282)       $13,337,023       $  (190,113)         25,146,035     (445,395)
                                ---------------------------        -----------------------------       --------------------------
Total Available for Sale          31,057,902       (414,881)        13,337,023          (190,113)         44,394,925     (604,994)
                                ---------------------------        -----------------------------       --------------------------

Held to Maturity:
U.S. Agency Notes                 32,178,985       (307,666)                 -                 -          32,178,985     (307,666)
MBS's & CMO's                     79,719,263       (728,980)        56,365,327          (956,411)       136,084,590    (1,685,391)
                                ---------------------------        -----------------------------       --------------------------
Total Held to Maturity           111,898,248     (1,036,646)        56,365,327          (956,411)       168,263,575    (1,993,057)
                                ---------------------------        -----------------------------       ---------------------------
Total                           $142,956,150    $(1,451,527)       $69,702,350       $(1,146,524)      $212,658,500   $(2,598,051)
                                ===========================        =============================       ==========================
</TABLE>


U.S.  Agency Notes - The unrealized  losses on the  investments  in U.S.  Agency
Notes were a result of interest rate increases.  The contractual  terms of these
investments  do not  permit  the  issuer to  settle  the  securities  at a price
materially  less than the amortized cost of the  investment.  Since the Bank has
the ability and intent to hold these investments until a recovery of fair value,
which  may  be at  maturity,  it  does  not  consider  these  investments  to be
other-than-temporarily impaired at September 30, 2004.

Mortgage-Backed   Securities  and  Collateralized  Mortgage  Obligations  -  The
unrealized  losses on the investments in MBS's and CMO's were caused by interest
rate  increases.  The Bank  purchased  most of  these  investments  at  either a
discount or a premium  relative to their face amount,  and the contractual  cash
flows of each is  guaranteed  by the  issuer  organization.  Accordingly,  it is
expected that the  securities  would not be settled at a price  materially  less
than the amortized cost of the investment. Since the decline in the market value
is  attributable to changes in interest rates and not credit quality and because
the Bank has the  ability to hold  these  investments  until a recovery  of fair
value,  which may be at maturity,  it does not consider these  investments to be
other-than-temporarily impaired at September 30, 2004.

                                       9

<PAGE>

Loans,  net - increased  $18.3  million to $420.9  million at September 30, 2004
from $402.6 million at December 31, 2003. This increase was primarily the result
of $102.4 million of loans originated,  partially offset by approximately  $83.9
million of principal  collected on loans during the nine months ended  September
30, 2004. The following table shows loans  receivable by major categories at the
dates indicated.

                                        September 30,               December 31,
                                             2004                      2003
                                         ---------------------------------------

Mortgage Loans                           $279,872,160               $280,663,785
Construction Loans                            868,534                  1,324,699
Commercial Construction                    12,290,896                  5,993,838
Consumer Loans                              2,836,124                  3,186,549
Commercial Real Estate                    112,248,581                104,352,118
Commercial Business                        17,886,948                 12,180,496
                                         ---------------------------------------
Subtotal                                  426,003,243                407,701,485
                                         ---------------------------------------
Less:
    Deferred loan fees                        485,884                    687,877
    Allowance for
     loan losses                            4,648,483                  4,407,552
                                         ---------------------------------------
Total loans, net                         $420,868,876               $402,606,056
                                         =======================================


At September 30, 2004, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS Nos. 114 and 118 totaled $1.8 million of
which  $985  thousand  related  to loans  that were  individually  measured  for
impairment  with a valuation  allowance of $414  thousand  and $852  thousand of
loans that were collectively  measured for impairment with a valuation allowance
of $26 thousand.  The Bank had $4.6 million in total reserves for loan losses at
September 30, 2004,  representing  approximately  253% of non-accrual  loans and
1.1% of total loans.  For the nine months ended  September 30, 2004, the average
recorded  investment in impaired loans was approximately $1.9 million.  The Bank
recognized $93 thousand of interest income on impaired loans for the nine months
ended September 30, 2004, all of which was recognized on the cash basis.

As of September 30, 2004,  the Bank had  outstanding  loan  commitments of $14.4
million, of which $9.1 million represented  variable rate loans and $5.3 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.

                                       10

<PAGE>

Non-Performing  Assets - The following  table sets forth  information  regarding
non-accrual  loans,  troubled debt restructuring and real estate owned assets by
the Bank.

                                                  September 30,    December 31,
                                                  -------------    ------------

Loans accounted for on a non-accrual basis:
Mortgage loans:
    One-to-four family                            $  639,023        $  507,317
    Commercial real estate                         1,197,753         1,188,504
    Consumer and other                                     0                 0
                                                  ----------        ----------
       Total non-accrual loans                    $1,836,776        $1,695,821
                                                  ----------        ----------

    Troubled debt restructuring                   $  570,959        $1,027,054
    $eal estate owned, net                                 0            48,294
    other non-performing assets                            0                 0
                                                  ----------        ----------
    Total non-performing assets, net              $2,407,735        $2,771,169
                                                  ----------        ----------

    Total non-accrual loans to net loans                0.44%             0.42%
                                                  ==========        ==========
    Total non-accrual loans to total assets             0.15%             0.14%
                                                  ==========        ==========
    Total non-performing assets to total assets         0.20%             0.23%
                                                  ==========        ==========

Mortgage-Backed  Securities  Held to Maturity - decreased $5.9 million to $289.0
million at September  30, 2004 from $294.9  million at December  31,  2003.  The
decrease is the result of principal paydowns of $82.2 million,  partially offset
by a reclassification of $64.9 million of pass-thru  securities from investments
held to maturity, and purchases of $13.4 million.  Mortgage-backed securities at
September  30, 2004  consisted of $250.1  million in fixed rate  securities  and
$38.9 million in adjustable rate securities.  Mortgage-backed securities held to
maturity at September 30, 2004 and December 31, 2003 are summarized below:

<TABLE>
<CAPTION>
                                      September 30, 2004                                   December 31, 2003
--------------------------------------------------------------------------------   -----------------------------
                                         Gross         Gross
                        Amortized      Unrealized    Unrealized     Estimated         Amortized      Estimated
                           Cost          Gains         Losses      Market Value          Cost       Market Value
-------------------------------------------------------------------------------    -----------------------------
<S>                  <C>             <C>           <C>           <C>              <C>             <C>
GNMA                   $  8,859,870    $  482,754    $    (364)    $  9,342,260     $ 13,948,013    $ 14,684,540
FNMA                    147,462,586     3,054,943     (143,175)     150,374,354      194,437,708     197,881,404
FHLMC                    67,646,743       955,787     (309,450)      68,293,080       86,529,885      87,076,088
Pass-Thru                65,062,501       541,377     (266,452)      65,337,426                0               0
-------------------------------------------------------------------------------     ----------------------------
Total                  $289,031,700    $5,034,861    $(719,441)    $293,347,120     $294,915,606    $299,642,032
================= =============================================================     ============================
</TABLE>

                                       11

<PAGE>

Deposits - increased  $30.7 million to $923.7 million at September 30, 2004 from
$893.0  million at December 31, 2003.  Non-interest  bearing  checking  accounts
increased  $13.2 million,  interest-bearing  checking  accounts  increased $11.1
million,   savings  accounts  increased  $4.3  million,  money  market  accounts
increased $15.3 million and certificates of deposits decreased $13.2 million for
the nine months  ended  September  30,  2004.  Interest  credited to  depositors
accounts for the nine months ended  September 30, 2004 amounted to $5.5 million.
The following table sets forth certain  information  concerning  deposits at the
dates indicated.

<TABLE>
<CAPTION>
                              September 30, 2004                      December 31, 2003
---------------------------------------------------------------  --------------------------------------
                                           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      $170,826,123    18.49%       0.00%      $157,637,346     17.65%      0.00%
Checking accounts           197,673,173    21.41%       0.73%       186,572,464     20.89%      0.55%
Savings accounts            192,540,903    20.84%       0.55%       188,235,776     21.08%      0.69%
Money market accounts       148,002,904    16.02%       0.69%       132,728,015     14.87%      0.78%
Certificates                214,662,408    23.24%       1.82%       227,832,897     25.51%      2.40%
------------------------------------------------------------     -----------------------------------
   Total Deposits          $923,705,511    100.00%      0.80%      $893,006,498    100.00%      1.01%
============================================================     ===================================
</TABLE>


Borrowings  - at  September  30,  2004  amounted to $205.0  million.  Borrowings
consisted of $195.0 million in securities sold under the agreement to repurchase
with a weighted average interest rate of 4.49% and $10.0 million in Federal Home
Loan Bank Advances with a weighted  average  interest rate of 1.94%. At December
31,  2003  borrowings  consisted  of $225.0  million  in  securities  sold under
agreements to repurchase with a weighted average rate of 4.08% and $11.2 million
in Federal Home Loan Bank  Advances  with a weighted  average  interest  rate of
1.56%.

Long-term  debt - at September 30, 2004 and December 31, 2003 consisted of $25.8
million of FMS  Statutory  Trust 1  debentures.  The interest  rate resets every
three months to LIBOR plus 360 basis points and will not exceed  11.00%  through
March  2007.  At  September  30, 2004 and 2003 the  interest  rate was 5.55% and
4.61%, respectively.

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.

                                       12

<PAGE>

The  Corporation  recorded net income for the three months ended  September  30,
2004 of $2.5  million,  or $.38  diluted  earnings per share as compared to $900
thousand,  or $.14 diluted earnings per share for the comparable period in 2003.
The Corporation recorded net income for the nine months ended September 30, 2004
of $6.7  million,  or $1.02  diluted  earnings  per  share as  compared  to $4.0
million, or $.62 diluted earnings per share for the comparable period in 2003.

Interest Rate Spread

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

                                       13

<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 income or expense by the average balance of interest-earning  assets
or interest-bearing liabilities, respectively, for the periods presented:

<TABLE>
<CAPTION>

                                                       Three Months Ended September 30,
--------------------------------------------------------------------------------------------------------------
                                                 2004                                    2003
---------------------------------------------------------------------     ------------------------------------
                                  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             $   424,548     $ 6,219        5.86%     $  391,661     $ 6,024        6.15%
   Interest-bearing deposit          49,734         174        1.40%         44,450         115        1.03%
   Mortgage-backed securities       377,060       4,224        4.48%        391,044       3,508        3.59%
   Investment securities            293,920       3,533        4.81%        261,423       2,021        3.09%
                                -----------     -------     -------      ----------     -------     -------
Total interest-earning
      assets                      1,145,262      14,150        4.94%      1,088,578      11,668        4.29%
                                -----------     -------     -------      ----------     -------     -------

Interest-bearing liabilities:
   Checking deposits                369,586         444        0.48%        321,628         190        0.24%
   Savings deposits                 196,151         272        0.55%        183,699         268        0.58%
   Money Market deposits            143,936         270        0.75%        131,979         219        0.66%
   Time deposit                     214,861         956        1.78%        224,232       1,241        2.21%
   Borrowings                       211,989       2,305        4.35%        236,191       2,386        4.04%
   Long-Term Debt                    25,774         354        5.49%         25,774         314        4.87%
                                -----------     -------     -------      ----------     -------     -------
Total interest-bearing
      liabilities               $ 1,162,297       4,601        1.58%     $1,123,503       4,618        1.64%
                                ===========     -------     -------      ==========     -------     -------
Net interest income                             $ 9,549                                 $ 7,050
                                                =======                                 =======
Interest rate spread                                           3.36%                                   2.65%
                                                            =======                                 =======

Net yield on average
   interest-earning assets                                     3.34%                                   2.59%
                                                            =======                                 =======

Ratio of average interest-
   earning assets to average
   interest -bearing liabilities                              98.53%                                  96.89%
                                                            =======                                 =======
</TABLE>

<TABLE>
<CAPTION>

                                                       Nine Months Ended September 30,
--------------------------------------------------------------------------------------------------------------
                                                 2004                                    2003
---------------------------------------------------------------------     ------------------------------------
                                  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             $   416,519     $18,330        5.87%     $  383,148     $18,308        6.37%
   Interest-bearing deposit          25,644         438        2.28%         44,706         402        1.20%
   Mortgage-backed securities       412,464      12,237        3.95%        383,435      11,815        4.11%
   Investment securities            265,187      10,371        5.21%        256,162       7,012        3.65%
                                -----------     -------     -------      ----------     -------     -------
Total interest-earning
      assets                      1,119,814      41,376        4.93%      1,087,451      37,537        4.69%
                                -----------     -------     -------      ----------     -------     -------

Interest-bearing liabilities:
   Checking deposits                359,829       1,059        0.39%        305,735         709        0.31%
   Savings deposits                 194,071         803        0.55%        177,110         987        0.74%
   Money Market deposits            135,745         698        0.69%        129,721         799        0.82%
   Time deposit                     218,550       2,988        1.82%        224,896       4,260        2.52%
   Borrowings                       227,511       7,006        4.10%        236,202       7,094        4.00%
   Long-Term Debt                    25,774         993        5.14%         25,774         973        5.03%
                                -----------     -------     -------      ----------     -------     -------
Total interest-bearing
      liabilities               $ 1,161,480      13,547        1.55%     $1,099,438      14,822        1.80%
                                ===========     -------     -------      ==========     -------     -------
Net interest income                             $27,829                                 $22,715
                                                =======                                 =======
Interest rate spread                                           3.38%                                   2.89%
                                                            =======                                 =======
Net yield on average
   interest-earning assets                                     3.31%                                   2.84%
                                                            =======                                 =======
Ratio of average interest-
   earning assets to average
   interest -bearing liabilities                              96.41%                                  97.09%
                                                            =======                                 =======
</TABLE>

                                       16
<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 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,
                                                 2004 vs. 2003                2004 vs. 2003
                                             Increase (Decrease)            Increase (Decrease)
                                              Due to Change in               Due to Change in
                                      -----------------------------    -----------------------------
                                         Rate     Volume      Total       Rate     Volume     Total
                                              (In Thousands)                   (In Thousands)
                                      -----------------------------    -----------------------------
<S>                                 <C>        <C>        <C>        <C>        <C>             <C>
Interest income:
    Loans                             $  (311)   $   506    $   195    $(1,573)   $ 1,595         22
    Interest-bearing deposits              45         14         59        207       (171)        36
    Mortgage-backed securities            841       (125)       716       (472)       894        422
    Investment securities               1,261        251      1,512      3,112        247      3,359
                                      -----------------------------    -----------------------------
    Total change - interest income      1,836        646      2,482      1,274      2,565      3,839
                                      -----------------------------    -----------------------------
Interest expense:
    Checking deposits                     226         28        254        225        125        350
    Savings deposit                       (14)        18          4       (279)        95       (184)
    Money market deposit                   31         20         51       (138)        37       (101)
    Time deposit                         (233)       (52)      (285)    (1,152)      (120)    (1,272)
    Borrowings                            163       (244)       (81)       173       (261)       (88)
    Long-Term Debt                         40          -         40         20          -         20
                                      -----------------------------    -----------------------------
    Total change - interest expense       213       (230)       (17)    (1,151)      (124)    (1,275)
                                      -----------------------------    -----------------------------
Net change in net interest income     $ 1,623    $   876    $ 2,499    $ 2,425    $ 2,689    $ 5,114
                                      =============================    =============================
</TABLE>

                                       15

<PAGE>

Net Interest  Income - Net interest  income for the three months ended September
30, 2004 increased $2.5 million to $9.5 million compared to $7.0 million for the
same period in 2003 due primarily to increases in interest  income on investment
securities of $1.5 million,  mortgage-backed  securities of $716 thousand, loans
of $195  thousand  and  decreases in interest  expense on time  deposits of $285
thousand,  partially  offset by an  increase  in  interest  expense on  checking
accounts of $254 thousand.

The  increase  in  interest  income was  primarily  the result of an increase in
interest income on investment securities of $1.5 million to $3.5 million for the
three months ended  September  30, 2004 from $2.0 million for the same period in
2003. The average yield of the investment  portfolio  increased 172 basis points
to 4.81% for the quarter ended September 30, 2004 from 3.09% for the same period
in 2003,  which resulted in an interest  income  increase of $1.3 million due to
rate changes.  The average  balance of  investment  securities  increased  $32.5
million to $293.9  million for the three  months ended  September  30, 2004 from
$261.4 million for the same period in 2003,  which resulted in a volume increase
in interest income of $251 thousand.

Interest income on  mortgage-backed  securities  increased $716 thousand to $4.2
million for the three months ended  September 30, 2004 from $3.5 million for the
same period in 2003.  The average yield of the MBS portfolio  increased 89 basis
points to 4.48% for the quarter ended September 30, 2004 from 3.59% for the same
period in 2003,  which resulted in an interest  income increase of $841 thousand
due to rate changes.  The average  balance of MBS's  decreased  $13.9 million to
$377.1 million for the three months ended September 30, 2004 from $391.0 million
for the same  period  in 2003,  which  resulted  in an  interest  income  volume
decrease of $125 thousand.

Interest  income on loans  increased $195 thousand to $6.2 million for the three
months ended  September  30, 2004 from $6.0 million for the same period in 2003.
The average  balance of the loan  portfolio  increased  $32.8  million to $424.5
million for the three months ended  September  30, 2004 from $391.7  million for
the same period in 2003,  which resulted in a volume increase in interest income
of $506 thousand.  The average rate on loans  decreased 29 basis points to 5.86%
for the three months ended  September 30, 2004 from 6.15% for the same period in
2003,  which  resulted in a decrease in interest  income of $311 thousand due to
rate changes.

Interest  expense on time deposits  decreased $285 thousand to $956 thousand for
the three months ended  September 30, 2004 from $1.2 million for the same period
in 2003.  The average rate on time  deposits  decreased 43 basis points to 1.78%
for the quarter ended September 30, 2004 from 2.21% for the same period in 2003,
which resulted in a decrease in interest  expense of $233 thousand.  The average
balance of time deposits  decreased $9.3 million to $214.9 million for the three
months ended September 30, 2004 from $224.2 million for the same period in 2003,
which resulted in a volume decrease in interest expense of $52 thousand.

Interest expense on checking  deposits  increased $254 thousand to $444 thousand
for the three months ended  September  30, 2004 from $190  thousand for the same
period in 2003. The average rate on checking deposits  increased 24 basis points
to 0.48% for the quarter ended September 30, 2004 from 0.24% for the same period
in 2003, which resulted in an increase in interest expense of $226 thousand. The
average balance of checking  deposits  increased $48.0 million to $369.6 million
for the three months ended  September 30, 2004 from $321.6  million for the same
period in 2003,  which resulted in a volume increase in interest  expense of $28
thousand.

Interest  expense on  borrowings  decreased $81 thousand to $2.3 million for the
three months ended  September  30, 2004 from $2.4 million for the same period in
2003. The average balance borrowed decreased $24.2 million to $212.0 million for
the three  months  ended  September  30, 2004 from  $236.2  million for the same
period in 2003 which resulted in a volume  decrease in interest  expense of $244
thousand.  The average  rate on  borrowings  increased  31 basis points to 4.35%
increasing  interest  expense on borrowings  $163 thousand for the quarter ended
September 30, 2004.

                                       16

<PAGE>

Net interest  income for the nine months ended September 30, 2004 increased $5.1
million to $27.8  million  compared to $22.7 million for the same period in 2003
primarily due to an increase in interest income on investment securities of $3.4
million,  mortgage-backed  securities of $422 thousand and decreases in interest
expense on time deposits of $1.3 million,  savings deposits of $184 thousand and
money  market  accounts  of $101  thousand,  partially  offset by  increases  in
interest  expense on checking  deposits of $350 thousand as compared to the same
nine month period in 2003.

The increase in interest income on investment  securities was due to an increase
in the average  yield on the  investment  portfolio of 156 basis points to 5.21%
for the nine months ended  September  30, 2004 from 3.65% for the same period in
2003,  which  resulted in an increase in interest  income of $3.1 million due to
interest  rate changes.  The average  balance of the  portfolio  increased  $9.0
million to $265.2  million for the nine  months  ended  September  30, 2004 from
$256.2 million for the same period in 2003,  which resulted in a volume increase
in interest  income of $247  thousand.  The increase in the average  balance was
primarily  due to purchases of $294.7  million,  partially  offset by investment
calls and maturities of $85.0 million,  the sale of $17.0 million of investments
available for sale and principal paydowns of $104.0 million.

Interest income on  mortgage-backed  securities  increased $422 thousand for the
nine months ended September 30, 2004 to $12.2 million from $11.8 million for the
same period in 2003.  The increase in interest  income was due to an increase in
the average  balance of the portfolio of $29.1 million to $412.5 million for the
nine months  ended  September  30, 2004 from $383.4  million for the nine months
ended  September 30, 2003,  which resulted in a $894 thousand volume increase in
interest  income.  The  increase in the average  balance was due to purchases of
$20.1 million and a  reclassification  of $64.9 million of pass-thru  securities
from  investments  held to maturity  to  mortgage-backed  securities,  partially
offset by  principal  paydowns of $116.9  million  from  September  2003 through
September 2004. The average yield on the portfolio  decreased 16 basis points to
3.95% for the nine  months  ended  September  30,  2004 from  4.11% for the same
period in 2003, which resulted in a decrease in interest income of $472 thousand
due to interest rate changes.

Interest expense on time deposits decreased $1.3 million to $3.0 million for the
nine months  ended  September  30, 2004 from $4.3 million for the same period in
2003.  The average rate on time deposits  decreased 70 basis points to 1.82% for
the nine months ended September 30, 2004 from 2.52% for the same period in 2003,
which  resulted in a decrease in interest  expense of $1.2 million.  The average
balance of time deposits  decreased  $6.3 million to $218.6 million for the nine
months ended September 30, 2004 from $224.9 million for the same period in 2003,
which resulted in a volume decrease in interest expense of $120 thousand.

Interest  expense on savings  deposits  decreased $184 thousand to $803 thousand
for the nine months  ended  September  30, 2004 from $987  thousand for the same
period in 2003. The average rate on savings  deposits  decreased 19 basis points
to 0.55% for the nine months  ended  September  30, 2004 from 0.74% for the same
period in 2003,  which  resulted  in a  decrease  in  interest  expense  of $279
thousand.  The average  balance of savings  deposits  increased $17.0 million to
$194.1 million for the nine months ended  September 30, 2004 from $177.1 million
for the same period in 2003,  which  resulted  in a volume  increase in interest
expense of $95 thousand.

Interest  expense on money  market  deposits  decreased  $101  thousand  to $698
thousand for the nine months ended September 30, 2004 from $799 thousand for the
same period in 2003.  The average  rate on money  market  deposits  decreased 13
basis  points to 0.69% for the nine months ended  September  30, 2004 from 0.82%
for the same period in 2003, which resulted in a decrease in interest expense of
$138  thousand.  The average  balance of money market  deposits  increased  $6.0
million to $135.7  million for the nine  months  ended  September  30, 2004 from
$129.7 million for the same period in 2003,  which resulted in a volume increase
in interest expense of $37 thousand.

                                       17

<PAGE>

Interest  expense on checking  deposits  increased $350 thousand to $1.1 million
for the nine months  ended  September  30, 2004 from $709  thousand for the same
period in 2003. The average rate on checking  deposits  increased 8 basis points
to 0.39% for the nine months  ended  September  30, 2004 from 0.31% for the same
period in 2003,  which  resulted  in an  increase  in  interest  expense of $225
thousand due to rate changes. The average balance of checking deposits increased
$54.1  million to $359.8  million for the nine months ended  September  30, 2004
from $305.7 million for the nine months ended September 30, 2003, which resulted
in a $125 thousand volume increase in interest expense.

Critical Accounting  Estimate-Provision  for Loan Losses - A critical accounting
estimate is the provision  for loan losses which  increased $45 thousand to $240
thousand for the nine months ended September 30, 2004 from $195 thousand for the
same  period in 2003.  At  September  30,  2004 the  allowance  for loan  losses
amounted to $4.6 million  compared to $4.4  million at December  31,  2003.  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.

Other Income - for the three and nine month periods ended September 30, 2004 was
$1.8  million and $4.6  million,  respectively,  as compared to $1.3 million and
$4.3 million for the same periods in 2003.  The increase was  primarily due to a
$534  thousand gain on the sale of $17.7  million of  investments  available for
sale and a $419  thousand  increase in service  charges on accounts for the nine
months ended September 30, 2004.

Salaries  and  Employee  Benefits - for the three and nine month  periods  ended
September  30,  2004  were $4.2  million  and $12.4  million,  respectively,  as
compared  to $3.9  million and $11.6  million  for the same period in 2003.  The
increase  is due to annual  compensation  increases  for the nine  months  ended
September 30, 2004. Average full time equivalent employees at September 30, 2004
were 514 as compared to 507 at September 30, 2003.

Purchased  Services - for the three and nine month periods  ended  September 30,
2004 totaled $700  thousand and $2.1  million,  as compared to $745 thousand and
$2.1 million for the same periods in 2003.  Check processing costs increased $37
thousand  for the nine months  ended  September  30,  2004  compared to the same
period in 2003 due to higher transaction volume.

                                       18

<PAGE>

ITEM 3:  DISCLOSURE ABOUT MARKET RISK

There were no significant  changes for the nine months ended  September 30, 2004
from the  information  presented in the Annual  Report on Form 10-K for the year
ended December 31, 2003.

ITEM 4:  CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.  Based on their evaluation
    ------------------------------------------------
of the  Company's  disclosure  controls  and  procedures  (as  defined  in  Rule
13a-15(e) under the Securities  Exchange Act of 1934 (the "Exchange Act")),  the
Company's  principal  executive  officer and  principal  financial  officer have
concluded that as of the end of the period  covered by this Quarterly  Report of
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  control over  financial  reporting.  During the quarter
    -------------------------------------------------------
under  report,  there was no  change  in the  Company's  internal  control  over
financial  reporting that has materially  affected,  or is reasonably  likely to
materially affect, the Company's internal control over financial reporting.

                                       19

<PAGE>

PART II. OTHER INFORMATION
         -----------------


     Item 1:  Legal Proceedings
     -------  -----------------

              None


     Item 2:  Unregistered Sale of Equity Securities and Use of Proceeds
     -------  ----------------------------------------------------------

              None


     Item 3:  Defaults Upon Senior Securities
     -------  -------------------------------

              None


     Item 4:  Submission of Matters to Vote of Security of Holders
     -------  ----------------------------------------------------

              None

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

              None

     Item 6:  Exhibits
     -------  --------

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

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


                                       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 10, 2004                    /s/ Craig W. Yates
                                           -------------------------------------
                                           Craig W. Yates
                                           President and Chief Executive Officer
                                           (Principal Executive Officer)



Date: November 10, 2004                    /s/ Channing L. Smith
                                           -------------------------------------
                                           Channing L. Smith
                                           Vice President and
                                           Chief Financial Officer
                                           (Principal Financial Officer)

                                       21