Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations

     This section presents management's discussion and analysis of the
consolidated results of operations and financial condition of Interchange
Financial Services Corporation (the "Company"). The discussion and analysis
should be read in conjunction with the Company's consolidated financial
statements and notes thereto on pages 29 through 47 and the summary consolidated
data included elsewhere in this report.

     On May 31, 1998, the Company acquired The Jersey Bank for Savings ("Jersey
Bank"), which maintained two banking offices, both located within the Company's
delineated market area. At that date, Jersey Bank had total assets of $78.6
million and total deposits of $69.8 million. The transaction was accounted for
as a pooling-of-interests. Each outstanding share of Jersey Bank's common stock,
including shares of common stock that had been converted from outstanding shares
of preferred stock, was converted into 1.5 shares of the Company's common stock.
Total consideration tendered in the transaction amounted to 780,198 shares of
the Company's common stock.

Earnings Summary

     Diluted earnings per of common share for the year ended December 31, 2000
increased $0.05, or 3.7%, to $1.41 when compared to 1999. Basic earnings per of
common share for the year ended December 31, 2000 amounted to $1.42, an increase
of $0.05, or 3.6%, when compared to 1999. Net income for the year 2000 declined
$379 thousand, or 3.9%, to $9.3 million when compared to 1999. The decline was
due to the Company benefiting from non-recurring items in 1999 and incurring
costs associated with expansion programs in 2000. These items are described in
detail in the sections titled "non-interest income" and "non-interest expenses".
Adjusting for the major non-recurring items in each of the periods, net income
increased $465 thousand or 5.6% and diluted earnings per of common share
increased $0.16 or 13.6% in 2000 as compared to the 1999 period.

     These results produced a return on average assets of 1.24% and a return on
average equity of 16.18%. Furthermore, the favorable earnings growth resulted in
an increase in the quarterly dividend paid on common stock to an annualized rate
of $0.50 in 2000 as compared to $0.48 in 1999. The Company's operating
performance for 2000 reflects favorable loan and deposit growth, healthy asset
quality and a disciplined approach in managing non-interest expenses while
expanding operations and the Company's investment in technology.

     Net income for the year ended December 31, 1999 was $9.6 million as
compared with $8.6 million in 1998, an increase of 11.9%. For the same period,
diluted earnings per share rose 14.3% to $1.36 in 1999 from $1.19 in 1998. Basic
earnings per share in 1999 were $1.37 as compared to $1.20 in 1998. Excluding
the 1998 merger related charge of $898 thousand, net of tax, net income for 1999
would have increased $128 thousand or 1.3% as compared to 1998. Diluted earnings
per share would have increased 3.8% to $1.36 in 1999 as compared to $1.31 in
1998. Basic earnings per share would have increased 3.8% to $1.37 as compared to
$1.32 in 1998. The Company's returns on average equity and average assets were
15.52% and 1.39%, respectively, in 1999 as compared to 14.53% and 1.31%,
respectively, in 1998.

<TABLE>
<CAPTION>

Table 1
-------------------------------------------------------------------------------------------------------
Summary of Operating Results
-------------------------------------------------------------------------------------------------------
                                                          2000            1999             1998
                                                      -------------    -----------      -----------
<S>                                                   <C>              <C>              <C>

Net income (in thousands)                                   $9,256      $  9,635           $8,609
Basic earnings per common share                               1.42          1.37             1.20
Diluted earnings per common share                             1.41          1.36             1.19
Return on average total assets                                1.24  %       1.39  %          1.31 %
Return on average total equity                               16.18         15.52            14.53
Dividend payout ratio*                                       35.24         35.04            32.81
Average total stockholders' equity to
    average total assets                                      7.64          8.99             9.00

* Cash dividends declared on common shares to net income.
</TABLE>



Results of Operations

Net Interest Income

     Net interest income is the difference between the interest the company
earns on its assets, principally loans and investment securities, and interest
it pays on its deposits and borrowings. When expressed as a percentage of
average interest-earning assets, it is referred to as net interest margin. Table
2 sets forth a summary of average interest-earning assets and interest-bearing
liabilities for the years ended December 31, 2000, 1999 and 1998, together with
the interest earned and paid on each major type of asset and liability account
during such periods. The average rates on the earning assets and the average
cost of interest-bearing liabilities during such periods are also summarized.
Table 3, which presents changes in interest income and interest expense by each
major asset and liability category for 2000 and 1999, illustrates the impact of
average volume growth (estimated according to prior year rates) and rate changes
(estimated on the basis of prior year volumes). Changes not due solely to
changes in either volume or rates have been allocated based on the relationship
of changes in volume and changes in rates.

     Figures are adjusted to a taxable equivalent basis to recognize the income
from tax-exempt assets as if the interest was taxable, thereby allowing a
uniform comparison to be made between yields on assets.

                                       13
<PAGE>

<TABLE>
<CAPTION>

Table 2
------------------------------------------------------------------------------------------------------------------------------------
Analysis of Net Interest Income
------------------------------------------------------------------------------------------------------------------------------------
for the years ended December 31,
(dollars in thousands)
                                                             2000                        1999                        1998
                                                 --------------------------- ---------------------------  --------------------------
                                                  Average           Average   Average           Average   Average           Average
                                                  Balance  Interest  Rate     Balance  Interest  Rate     Balance  Interest  Rate
                                                 --------------------------- ---------------------------  --------------------------
<S>                                              <C>       <C>       <C>      <C>      <C>      <C>       <C>      <C>      <C>
Assets
  Interest earning assets
      Loans (1)                                  $536,971  $44,499   8.29 %  $494,022  $39,521   8.00 %  $462,296  $38,904   8.42 %
      Taxable securities (4)                      154,947   10,054   6.49     142,786    8,692   6.09     132,433    8,206   6.20
      Tax-exempt securities (2)(4)                 12,251      696   5.68      11,578      650   5.61       4,428      234   5.28
      Federal funds sold                           10,944      700   6.40      12,142      596   4.91      27,318    1,474   5.40
      Interest-bearing demand deposits                  -        -      -           -        -      -       1,024       55   5.37
                                                 --------  --------          --------  -------            -------   -------
      Total interest-earning assets               715,113   55,949   7.82     660,528   49,459   7.49     627,499   48,873   7.79
                                                            -------                     ------                      -------

  Non-interest earning assets
      Cash and due from banks                      19,403                      18,386                      17,618
      Allowance for loan and lease losses          (5,953)                     (5,638)                     (5,437)
      Other assets                                 19,829                      17,682                      18,336
                                                 --------                    --------                     -------
      Total assets                               $748,392                    $690,958                    $658,016
                                                 ========                    ========                    ========

Liabilities and stockholders' equity
  Interest-bearing liabilities
      Demand deposits                            $231,480    7,754   3.35    $201,150    6,055   3.01    $171,546    5,573   3.25
      Savings deposits                            117,037    3,624   3.10     128,700    2,992   2.33     132,735    3,790   2.86
      Time deposits                               190,890   10,682   5.60     172,005    8,653   5.03     171,462    9,104   5.31
      Short-term borrowings                        24,565    1,417   5.77      18,501    1,000   5.41      14,723      807   5.48
      Long-term borrowings                         11,707      750   6.41       1,302       83   6.37       9,828      590   6.00
                                                 --------  --------          --------    -----            -------   ------
      Total interest-bearing liabilities          575,679   24,227   4.21     521,658   18,783   3.60     500,294   19,864   3.97
                                                           --------                      -----                      ------

  Non-interest bearing liabilities
      Demand deposits                             109,039                     102,194                      94,568
      Other liabilities                             6,470                       5,012                       3,903
                                                 --------                    --------                     -------
      Total liabilities (3)                       691,188                     628,864                     598,765
      Stockholders' equity                         57,204                      62,094                      59,251
                                                 --------                    --------                     -------
      Total liabilities and stockholders' equity $748,392                    $690,958                    $658,016
                                                 ========                    ========                    ========

Net interest income (tax-equivalent basis)                  31,722   3.61               30,676   3.89               29,009   3.82
Tax-equivalent basis adjustment                               (158)                       (158)                       (53)
                                                              -----                       -----                       ----
Net interest income                                        $31,564                     $30,518                     $28,956
                                                           ========                    ========                    =======

Net interest income as a percent of
  interest-earning assets (tax-equivalent basis)                     4.44 %                      4.64 %                      4.62 %

------------------------------------------------------------------------------------------------------------------------------------
<FN>

(1)  Nonaccrual loans and any related interest recorded have been included in
     computing the average rate earned on the loan portfolio.
(2)  Computed on a fully taxable equivalent basis using the corporate federal
     tax rate of 34%.
(3)  All deposits are in domestic bank offices.
(4)  The average balances are based on historical cost and do not reflect
     unrealized gains or losses.
</FN>
</TABLE>

                                       14

<PAGE>
<TABLE>
<CAPTION>

  Table 3
------------------------------------------------------------------------------------------------------------------------------
  Effect of Volume and Rate Changes on Net Interest Income
------------------------------------------------------------------------------------------------------------------------------
  (in thousands)
                                                      Year ended December 31,                   Year ended December 31,
                                                     2000 compared with 1999                     1999 compared with 1998
                                                        increase (decrease)                       increase (decrease)
                                                         due to change in:                         due to change in:
                                            --------------------------------------------- ------------------------------------
                                                                               Net                                   Net
                                              Average         Average       Increase       Average     Average     Increase
                                               Volume         Rate         (Decrease)      Volume       Rate      (Decrease)
                                            ------------- -------------- ---------------- ---------- ----------- -------------
<S>                                         <C>           <C>            <C>              <C>        <C>          <C>
  Interest income
   Loans                                          $3,522         $1,456          $ 4,978     $2,671     $(2,054)         $617
   Taxable securities                                769            593            1,362        641        (155)          486
   Tax-exempt securities                              38              8               46        401          15           416
   Federal funds sold                                (77)           181              104       (755)       (123)         (878)
   Interest-bearing demand deposits                    -              -                -        (55)          -           (55)
                                            ------------- -------------- ---------------- ---------- ----------- -------------
    Total interest income                          4,252          2,238            6,490      2,903      (2,317)          586
                                            ------------- -------------- ----------------  --------- ----------- -------------

  Interest expense
   Demand deposits                                   972            727            1,699        962        (480)          482
   Savings deposits                                 (354)           986              632       (112)       (686)         (798)
   Time deposits                                   1,003          1,026            2,029         29        (480)         (451)
   Short-term borrowings                             346             71              417        207         (14)          193
   Long-term borrowings                              667              -              667       (546)         39          (507)
                                            ------------- -------------- ---------------- ---------- ----------- -------------
    Total interest expense                         2,634          2,810            5,444        540      (1,621)       (1,081)
                                            ------------- -------------- ---------------- ---------- ----------- -------------

 Change in net interest income                   $ 1,618         $ (572)         $ 1,046     $2,363       $ (696)      $ 1,667
                                            ============= ============== ================ ========== =========== =============

  ---------------------------------------------------------------------------------------------------------------------------
  Non-performing loans are included in interest-earning assets.

</TABLE>

         Net interest income, on a taxable equivalent basis, amounted to $31.7
million in 2000, an increase of $1.0 million, or 3.4%, from $30.7 million in
1999. The increase in net interest income was primarily due to growth in average
interest-earning assets of $54.6 million, which was largely funded by a $44.4
million growth in average deposits. The growth in average deposits occurred
mostly in interest-bearing demand and time deposits. The growth in
interest-bearing liabilities along with an increase in the Company's cost of
funds partly offset some of the growth in interest income. The net interest
margin decreased 20 basis points to 4.44% for 2000 as compared to 4.64% for
1999, due largely to an increase in the Company's funding cost resulting from an
increase in short-term market interest rates and a change in the composition
("mix") of retail deposits.

         Interest income, on a taxable equivalent basis, totaled $55.9 million
in 2000, an increase of $6.5 million or 13.1% from $49.5 million in 1999. The
increase was largely driven by the growth in average interest-earning assets.
Contributing to the growth in interest income was an increase of 33 basis points
in the average yield on interest-earning assets to 7.82% in 2000 as compared to
1999. The increase in average interest-earning assets was principally due to
growth in loans. The average balance of commercial and commercial mortgage loans
increased by $27.0 million or 12.1% to $250.1 million in 2000, as compared to
$223.1 million in 1999. In addition, equipment-financing leases generated by the
Bank's leasing subsidiary, Interchange Capital Company L.L.C. ("ICC") grew $11.2
million, on average, for 2000 at an average lease yield of 12.36%. The average
balance of consumer loans (comprised mostly of home equity loans) totaled $275.6
million in 2000, compared to $270.1 million in 1999, an increase of $5.5 million
or 2.1%. The increase in average loans outstanding and an increase in average
loan yields of 29 basis points had the most significant impact on interest
income growth for 2000 as compared to 1999. Also, contributing to the growth in
interest income was a $1.4 million or 15.1% increase in interest income from
investment securities, which benefited from an average growth of $12.9 million
and a 38 basis points increase in average yield for 2000 as compared to 1999.

         Interest expense totaled $24.2 million in 2000, an increase of $5.4
million or 29.0% as compared to 1999. Of the total growth in interest expense,
$2.8 million was predominantly due to a 61 basis point increase in the average
rates paid on interest-bearing liabilities, which increased to 4.21% in 2000 as
compared to 3.60% in 1999. This increase in average rates was largely due to
increases in short-term market interest rates and a growth in time deposits. In
addition, growth in average interest-bearing liabilities of $54.0 million
contributed to the increase in interest expense for 2000. Average
interest-bearing demand deposits grew $30.3 million or 15.1% in 2000, which is
largely attributable to the Company's efforts in marketing and sales.
Contributing to the growth in average interest-bearing liabilities was an
increase in average time deposits and borrowings of $18.9 million or 11.0% and
$16.5 million or 83.2%, respectively in 2000 as compared to 1999. The growth in
average interest- bearing liabilities was tempered by a decline in average
savings deposits of $11.7 million or 9.1%.

     Net  interest  income,  on a taxable  equivalent  basis,  amounted to $30.7
million in 1999,  an increase of $1.7  million,  or 5.7%,  from $29.0 million in
1998. The increase in net interest  income was  principally due to the growth in
interest  earning  assets of $33.0  million  that was funded  largely by a $33.7
million growth in deposits. The growth in deposits, which occurred predominantly
in interest and  non-interest-bearing  demand deposits, had a positive effect on
the mix of retail  deposits.  Net interest  income was  favorably  affected by a
change in the  retail  deposit  mix,  which  served to reduce the yield on total
deposits. The net interest

                                       15
<PAGE>


margin increased 2 basis points to 4.64% for 1999 as compared to 4.62% for 1998,
due largely to the positive effects on the Company's funding cost resulting from
the decline in market interest rates.

         Interest income, on a taxable equivalent basis, totaled $49.5 million
in 1999, an increase of $586 thousand or 1.2% from $48.9 million in 1998. The
increase was principally driven by the growth in average interest-earning
assets. Average yields on interest-earning assets decreased 30 basis points to
7.49% in 1999 as compared to 1998. The increase in average interest-earning
assets was principally due to growth in loan originations. The average balance
of commercial and commercial mortgage loans increased by $23.1 million or 11.6%
to $223.1 million in 1999, as compared to $200.0 million in 1998. The average
balance of consumer loans totaled $270.2 million in 1999, compared to $256.9
million in 1998, an increase of $13.3 million or 5.2%. The increase in average
loans outstanding more than offset the effects of the decline in yield on
interest earning assets resulting from a decrease in market interest rates.
Interest income also benefited from a $17.5 million growth in the securities
portfolio. The growth was partly offset by a decline in the average yield of the
securities portfolio. The decline in average yield was largely due to the
decline in market interest rates during 1999. A decline in average federal funds
sold of $15.2 million also negatively impacted interest income.

         Interest expense totaled $18.8 million in 1999, a decrease of $1.1
million or 5.4% as compared to 1998. The decrease was principally due to a
decline of 37 basis points in the average rates paid on interest-bearing
liabilities to 3.60% in 1999 as compared to 3.97% in 1998. This decline in
average rates was largely due to a decrease in market interest rates and a more
favorable retail deposit mix. The positive effects of the decline in interest
rates were partly offset by a $21.4 million growth in average interest-bearing
liabilities, specifically interest-bearing demand deposits. The average balance
of interest-bearing demand deposits grew $29.6 million or 17.3% to $201.2
million in 1999 as compared to 1998. Total average interest and
non-interest-bearing demand deposits grew $37.2 million or 14.0%, in 1999, which
is largely attributable to the Company's continued efforts in marketing and
sales. In addition, commercial loans resulting from these selling efforts
generally carry compensating deposit balances in the form of demand deposits and
further contributed to the growth.

Non-interest income

         Non-interest income consists of all income other than interest and
dividend income and is principally derived from: service charges on deposits;
loan fees; commissions on sales of annuities and mutual funds; rental of safe
deposit space; income from the collection of principal on acquired loans in
excess of their carrying value and net gains on sales of assets, which includes
lease syndication fee income. The Company recognizes the importance of
supplementing net interest income with other sources of income and maintains a
management committee that explores new opportunities to generate non-interest
income.

         In 2000, non-interest income decreased $1.1 million to $4.2 million
from 1999. The change was largely attributable to non-recurring items during
1999. These non-recurring items included gains from the sales of securities,
collections of principal on acquired loans in excess of their carrying value,
and sale of the Company's VISA(TM) and merchant credit card portfolio. Adjusted
for non-recurring items, non-interest income for 2000 increased $287 thousand or
8.5% as compared to 1999. The increase for 2000 was comprised of increases in
lease syndication fee income, service charges on deposits and other non-interest
income in the amount of $136 thousand, $86 thousand and $65 thousand,
respectively. Other non-interest income includes, but is not limited to, income
from servicing fees, commissions on sales of annuities and mutual funds, loan
fees and safe deposit rental fees.

         In 2000, the net gain from the sale of securities amounted to $312
thousand, a decrease of $547 thousand or 63.7% from $859 thousand in 1999.
Included in the net gain is $311 thousand from the sale of available for sale
securities and $1 thousand from the sale of a held to maturity security
(scheduled to mature within 3 months). In 1999, the net gain included $856
thousand from the sale of available for sale securities and $3 thousand from the
sale of a held to maturity security (scheduled to mature within 3 months). In
2000, the collection of principal on acquired loans in excess of their carrying
value decreased $453 thousand as compared to 1999. Gains recorded on the sales
of the Company's VISA(TM) and merchant credit card portfolio of $86 thousand and
$329 thousand, respectively, occurred in 1999.

         In 1999, non-interest income totaled $5.3 million, an increase of $411
thousand or 8.3% over 1998. The growth in non-interest income was largely due to
an increase in the collection of principal on acquired loans in excess of their
carrying value and gains from the sale of the Company's VISA(TM) and merchant
credit card portfolios. In 1999, the net gain from the sale of securities
amounted to $859 thousand, a decrease of $162 thousand or 15.9% from $1.0
million in 1998. Included in the net gain is $856 thousand from the sale of
available for sale securities and $3 thousand from the sale of a held to
maturity security (scheduled to mature within 3 months). In 1998, the net gain
included $876 thousand from the sale of available for sale securities and $145
thousand from the call of a security before its maturity.

         The gain from the VISA(TM) portfolio sale is included in net gain on
sale of loans and the gain from the sale of the merchant credit card portfolio
is included in other income. The VISA(TM) and merchant credit card portfolios
were sold following an evaluation of the risk/reward profiles of the portfolios,
which determined that the risk associated with the portfolios exceeded the
levels deemed acceptable by the Company. During 1998, there were no gains from
the sale of VISA(TM) and merchant credit card portfolios.

            In 1999, the collection of principal on acquired loans in excess of
their carrying value increased $508 thousand as compared to 1998. The increase
in non-interest income for 1999 was negatively impacted by a decrease in service
charges on deposits and other non-interest income in the amount of $251 thousand
and $99 thousand, respectively. Included in other income for 1998 was $53
thousand from the sale of the reverse mortgage-servicing portfolio.


<TABLE>
<CAPTION>

 Table 4
-----------------------------------------------------------------------------------------------------------
 Non-interest Income
-----------------------------------------------------------------------------------------------------------
for the years ended December 31,
 (in thousands)

                                                                                 2000       1999      1998
                                                                                ------    ------    -------
<S>                                                                             <C>       <C>       <C>

 Service fees on deposit accounts                                               $2,386    $2,300    $2,551
 Net gain on sale of securities                                                    312       859     1,021
 Net gain on sale of loans                                                         136        86         -
 Net gains on sale of merchant credit card portfolio                                 -       329         -
 Collection of principal on acquired loans in excess of their carrying value       229       682       174
 All other                                                                       1,148     1,083     1,182
                                                                                ------    ------    -------
                                                                                $4,211    $5,339    $4,928
                                                                                ======    ======    =======


</TABLE>

                                       16



<PAGE>


Non-interest Expenses

         Non-interest expenses increased by $1.1 million, or 5.6%, to $21.2
million in 2000 as compared to 1999. This increase was due mostly to the Bank's
expansion of its operations, which included, but was not limited to ICC, the
Bank-Line center and two new branches, Waldwick and Ramsey, New Jersey.

         Salaries and benefits, the largest component of non-interest expenses,
increased $769 thousand or 7.5% during 2000. The Bank's expansion programs
described above, which resulted in approximately $824 thousand of growth in
salaries and benefits, comprised most of the increase. Staffing vacancies and
consolidations offset some of the growth in salaries and benefits. The same
expansion also was the principal cause for the increase in occupancy and
furniture and equipment expense of $252 thousand, of which $231 thousand was due
to the expansion. The increase in non-interest expenses was also impacted by
increases in Federal Deposit Insurance Corporation premiums and data processing
fees of $50 thousand and $58 thousand, respectively.

         During 2000, two non-recurring items occurred which affect the earning
comparison with 1999: the Company paid $118 thousand for a legal settlement
relating to the interpretation of past rental adjustments on a branch office and
offsetting this expense was a credit of $165 thousand arising from an adjustment
to an actuarial assumption related to the outside directors retirement plan.

         Non-interest expenses totaled $20.1 million for 1999; an increase of
$647 thousand or 3.3% from $19.4 million as compared to 1998. Excluding the
one-time charges that occurred in 1998 associated with the acquisition of Jersey
Bank and the 1998 recognition of $474 thousand in cash surrender value of
certain directors' life insurance policies, non-interest expenses for 1999
increased $1.6 million or 8.5% as compared to 1998.

         In 1999, salaries and benefits increased $828 thousand or 8.8% when
compared to the same period in 1998 due to normal promotions, salary increases
and the additions to staff associated with the new branch opening in Paramus,
New Jersey. Occupancy and furniture and equipment expense increased $303
thousand when compared to the same period in 1998 of which approximately $176
thousand of the increase can be attributed to a full year of operations of the
Paramus branch, which was opened in the fourth quarter of 1998. Contributing to
the increase in non-interest expenses for 1999 were higher advertising and
promotion expenses of $168 thousand, an increase in Y2K expenses of $61
thousand, and approximately $70 thousand in expenses associated with the
establishment of ICC. All other expenses increased by $151 thousand or 3.6% for
1999 as compared to 1998.

         One of the Company's goals is to control expenses in order to maximize
earnings and shareholder value. Generally, the efficiency ratio is one method
utilized to measure operating expenses. The lower the efficiency ratio the more
effective the Company is in utilizing its resources to produce income. The
Company's efficiency ratio was 58.5%, 56.8% and 53.6% in 2000, 1999 and 1998,
respectively. In 2000, the efficiency ratio rose due to the overhead impact of
the Waldwick and Ramsey offices as well as the ICC leasing subsidiary and the
Bank-Line center, all as a result of the Company's expansion programs, which are
intended to enhance the Company's franchise value in its trade area. However,
the Company still managed to outperform its peers as the national peer group
average was 60.6% (peer group data as of September 30, 2000 - based upon the
most recent published report by SNL Securities). The national peer group average
was 60.0% for 1999 and 1998 (published by SNL Securities).

<TABLE>
<CAPTION>

Table 5
-------------------------------------------------------------------------
Non-interest Expenses
-------------------------------------------------------------------------
for the years ended December 31,
(in thousands)
                                              2000        1999      1998
                                            --------   -------   -------
<S>                                        <C>        <C>        <C>


Salaries and benefits                      $ 11,034   $ 10,265   $ 9,437
Occupancy, furniture and equipment            3,995      3,743     3,440
Advertising and promotion                     1,065      1,033       865
Acquisition                                       -          -     1,392
Other expenses
  Professional fees                           1,120      1,101     1,184
  Directors' fees, travel and retirement        504        546        88
  Data Processing                               575        517       538
  All other                                   2,884      2,858     2,472
                                            --------   -------   -------
                                            $21,177    $20,063   $19,416
                                            ========   =======   =======

</TABLE>


Income Taxes

         In 2000, income taxes amounted to $4.6 million as compared to $5.0
million and $4.9 million for 1999 and 1998, respectively. The effective tax rate
in 2000 was 33.2% as compared to 34.0% and 36.3% for 1999 and 1998,
respectively. Detailed information on income taxes is shown in Notes 1 and 16 to
the Consolidated Financial Statements.


Financial Condition

Loan Portfolio

         At December 31, 2000, total loans amounted to $560.9 million, an
increase of $48.9 million or 9.6% over the previous year. The growth was
predominately in commercial loans and lease financing, which increased $28.4
million and $19.3 million, respectively. Of the total commercial loan growth,
commercial real estate mortgage loans grew $15.4 million to $181.7 million and
represented 32.4% of total loans as compared to $166.4 million or 32.5% of all
loans at the end of 1999. These loans are secured primarily by first priority
mortgage liens on owner-occupied commercial properties. Commercial and financial
loans grew $13.0 million and were primarily in adjustable rate time and demand
loan products. The growth in lease financing was attributed to ICC, which in its
first year of operations produced approximately $17.4 million in equipment
financing leases in 2000, of which $2.3 million were syndicated (sold). ICC
generated $136 thousand in non-interest income from syndication activity. In
addition, ICC purchased $7.4 million of equipment leases during 2000. The
average equipment lease balance at December 31, 2000 was approximately $22
thousand.

         The commercial loan growth was largely within the subsidiary Bank's
delineated community, which confirms the Company's pledge of striving to be the
largest community-based banking organization in Bergen County, New Jersey
dedicated to community service and helping its customers grow and prosper.

         While a significant portion of the Company's loans are collateralized
by real estate located in northern New Jersey, the Company does not have any
concentration of loans in any single industry classified under the North
American Industry Classification System, which exceeds 6% of its total loans.


                                       17

<PAGE>
<TABLE>
<CAPTION>

Table 6
----------------------------------------------------------------------------------------------------------
Loan Portfolio
----------------------------------------------------------------------------------------------------------
at December 31,


                                           2000           1999          1998           1997           1996
                                ---------------   ------------   -----------   ------------   ------------
<S>                                    <C>           <C>            <C>           <C>            <C>

Amounts of loans by type (in thousands)
  Commercial and financial             $ 76,702       $ 63,684      $ 64,067       $ 51,573       $ 51,908
  Real estate-construction                3,755          4,008           974          4,229          4,799
  Real estate-mortgage
    1-4 family residential
      First liens                       110,369        110,269        89,852         73,309         62,170
      Junior liens                       11,195          9,829        14,322         16,795         18,645
      Available for sale                      -              -             -              -          1,195
      Home equity                       142,610        144,747       142,781        143,177        121,504
    Commercial                          181,722        166,354       148,875        134,972        117,641
  Installment
    Credit cards and related plans          879            947         2,033          2,415          2,704
    Other                                 4,924          2,756         1,200          1,702          3,494
  Lease financing                        28,723          9,382         9,613         10,101              -
  Term federal funds                          -              -         5,000              -              -
                                ---------------   ------------   -----------   ------------   ------------
      Total                            $560,879       $511,976      $478,717       $438,273       $384,060
                                ===============   ============   ===========   ============   ============


Percent of loans by type
  Commercial and financial                13.6 %         12.5 %        13.3 %         11.8 %         13.5 %
  Real estate-construction                 0.7            0.8           0.2            1.0            1.2
  Real estate-mortgage
    1-4 family residential
      First liens                         19.7           21.5          18.8           16.7           16.2
      Junior liens                         2.0            1.9           3.0            3.8            4.9
      Available for sale                     -              -             -              -            0.3
      Home equity                         25.4           28.3          29.8           32.7           31.6
    Commercial                            32.4           32.5          31.1           30.8           30.6
  Installment
    Credit cards and related plans         0.2            0.2           0.4            0.5            0.7
    Other                                  0.9            0.5           0.3            0.4            1.0
  Lease financing                          5.1            1.8           2.0            2.3              -
  Term federal funds                         -              -           1.1              -              -
                                ---------------   ------------   -----------   ------------   ------------
      Total                              100.0 %        100.0 %       100.0 %        100.0 %        100.0 %
                                ===============   ============   ===========   ============   ============



     The following  table sets forth the maturity  distribution of the Company's
loan  portfolio as of December 31, 2000.  The table  excludes  real estate loans
(other than construction loans), and installment loans: (in thousands)

                                                   Due after
                                    Due in         one year      Due after
                                   one year         through         five
                                   or less        five years       years          Total
                                ---------------   ------------   -----------   ------------
Commercial and financial                $1,346        $32,423       $42,933        $76,702
Lease financing                            570         27,255           898         28,723
Real estate-construction                   140          3,615             0          3,755
                                ---------------   ------------   -----------   ------------
     Total                              $2,056        $63,293       $43,831       $109,180
                                ===============   ============   ===========   ============


     The following table sets forth, as of December 31, 2000, the sensitivity of
the amounts due after one year to changes in interest rates: (in thousands)

                                  Due after
                                   one year        Due after
                                   through           five
                                  five years         years
                                ---------------   ------------
Fixed interest rate                   $ 43,274        $ 7,761
Variable interest rate                  20,019         36,070
                                ---------------   ------------
     Total                            $ 63,293       $ 43,831
                                ===============   ============
</TABLE>


                                       18
<PAGE>

Loan Quality

         The lending activities of the Company are guided by the basic lending
policy established by the Company's Board of Directors. Loans must meet the
tests of a prudent loan, which include criteria regarding the character,
capacity and capital of the borrower, collateral provided for the loan and
prevailing economic conditions. Generally, the Company obtains an independent
appraisal of real property, within regulatory guidelines, when it is considered
the primary collateral for a loan.

         The Company employs a full-time loan review officer who evaluates the
credit risk for substantially all large commercial loans. This review process is
intended to identify adverse developments in individual credits, regardless of
whether such credits are also included on the "watchlist" discussed below and
whether or not the loans are delinquent. The loan review officer reports
directly to the Executive Vice President and Chief Financial Officer of the
Company and provides quarterly reports to the Board of Directors.

         Management maintains a "watchlist" system under which credit officers
are required to provide early warning of possible deterioration in the credit
quality of loans. These loans may not currently be delinquent, but may present
indications of financial weakness, such as deteriorating financial ratios of the
borrowers, or other concerns. Identification of such financial weaknesses at an
early stage allows early implementation of responsive credit strategies. The
"watchlist" report is presented to Executive Management monthly and to the Board
of Directors on a quarterly basis.

Allowance for Loan and Lease Losses and Related Provision

         The provision for loan and lease losses represents management's
determination of the amount necessary to bring the allowance for loan and lease
losses ("ALLL") to a level that management considers adequate to reflect the
risk of future estimated losses inherent in the Company's loan portfolio as of
the balance sheet date. In its evaluation of the adequacy of the ALLL,
management considers past loss experience, changes in the composition of
performing and nonperforming loans, concentrations of credit, economic
conditions, collateral coverage, the condition of borrowers facing financial
pressure and the relationship of the current level of the ALLL to the credit
portfolio and to nonperforming loans. While the ALLL is management's best
estimate of loan losses incurred as of the balance sheet date, the process of
determining the adequacy of the ALLL is necessarily judgmental and subject to
changes in external conditions. Accordingly, there can be no assurance that
existing levels of the ALLL will ultimately prove adequate to cover actual loan
losses.

         Loan loss provisions for 2000 amounted to $750 thousand, a decrease of
$450 thousand from the prior year. In 1999, the loan loss provision amounted to
$1.2 million, an increase of $249 thousand from 1998. The decrease in the loan
loss provision for 2000 was attributable, in part, to the decline in loans
charged off experience. During 2000, loans charged off amounted to $219 thousand
as compared to $1.4 million in 1999. The decrease was primarily due to the
charge off of one commercial loan amounting to $1.1 million in 1999. In 2000,
management determined that the ALLL was at a level sufficient to absorb probable
losses in the loan portfolio, and, accordingly, smaller provisions were taken
during the period.


<TABLE>
<CAPTION>
Table 7
--------------------------------------------------------------------------------------------------------------
 Loan Loss Experience
--------------------------------------------------------------------------------------------------------------
for the  years ended December 31,
(dollars in thousands)
                                              2000           1999          1998         1997          1996
                                          -------------   -----------   -----------   ----------   -----------
<S>                                       <C>             <C>           <C>           <C>          <C>


Average loans outstanding                     $536,971      $494,022      $462,296     $402,799      $353,659
                                          =============   ===========   ===========   ==========   ===========

Allowance at beginning of year                  $5,476        $5,645        $5,231       $3,968        $3,926
                                          -------------   -----------   -----------   ----------   -----------
Loans charged off
          Commercial                                 -         1,234            15          293             8
          Installment                               25            59           135          141            78
          Real estate                              186           120           470          139           770
          Lease financing                            8             -             -            -            57
                                          -------------   -----------   -----------   ----------   -----------
              Total                                219         1,413           620          573           913
                                          -------------   -----------   -----------   ----------   -----------

Recoveries of loans previously charged off
          Commercial                                27            14            35           84            75
          Installment                               21            20            18           29            45
          Real estate                               99            10            30           70            88
                                          -------------   -----------   -----------   ----------   -----------
              Total                                147            44            83          183           208
                                          -------------   -----------   -----------   ----------   -----------
Net loans charged off                               72         1,369           537          390           705
                                          -------------   -----------   -----------   ----------   -----------

Additions to allowance charged to expense          750         1,200           951        1,653           747
                                          -------------   -----------   -----------   ----------   -----------
Allowance at end of year                        $6,154        $5,476        $5,645       $5,231        $3,968
                                          =============   ===========   ===========   ==========   ===========

Allowance to total loans                          1.10 %        1.07 %        1.18 %       1.19 %        1.03 %
Allowance to nonaccrual loans                   441.15        491.12        471.20       345.51        157.02
Allowance to nonaccrual loans and
     loans past due 90 days or more             441.15        491.12        471.20       316.07        155.49
Ratio of net charge-offs to average loans         0.01          0.28          0.12         0.10          0.20

</TABLE>

                                       19
<PAGE>



         At December 31, 2000, the ratio of the ALLL to total loans was 1.10% as
compared to 1.07% at the end of the prior year. The ALLL represented 441.2% of
nonaccrual loans and loans past due 90 days or more at December 31, 2000, down
from 491.1% at the end of 1999. Each of the ratios were impacted by a $280
thousand increase in nonaccrual loans and loans past due 90 days or more in 2000
as compared to the end of the year in 1999. Refer to the section titled
"Nonperforming Assets" and table 9 for more detail on the nonaccrual loans and
loans past due 90 days or more.

<TABLE>
<CAPTION>

Table 8
------------------------------------------------------------------------------------------------------------------------------------
Allocation of Allowance for Loan and Lease Losses
------------------------------------------------------------------------------------------------------------------------------------
at December 31,
(dollars in thousands)

                                2000                    1999                   1998               1997                  1996
                        ----------------------  --------------------  --------------------  -----------------   -----------------
                                     % of                   % of                  % of               % of                % of
                                   Loans to               Loans to              Loans to           Loans to            Loans to
                        Amount   Total Loans    Amount   Total Loans  Amount   Total Loans  Amount Total Loans  Amount Total Loans
                        ----------------------  --------------------  --------------------  -----------------   -----------------
<S>                     <C>      <C>            <C>      <C>          <C>      <C>          <C>     <C>         <C>    <C>

Commercial and financial   $ 931       13.6 %    $ 634       12.5 %   $  917       14.4 %    $773      11.8 %   $  982      13.5 %
Installment                   35        1.1         82        0.7         93       90.7       147       0.9        165       1.7
Real estate                2,713       80.2      2,191       85.0      2,330       82.9     2,628      85.0      2,101      84.8
Lease financing              435        5.1         81        1.8        119        2.0       115       2.3          -         -
Unallocated                2,040          -      2,488          -      2,186          -     1,568         -        720         -
                        --------- ------------  ------- ------------  -------   ----------  ------  ---------   -----------------
                          $6,154      100.0 %   $5,476      100.0 %   $5,645      100.0 %  $5,231     100.0 %   $3,968     100.0 %
                        ========= ============  ======= ============  =======   ==========  ======  =========   =================

     The above  allocation  is intended for  analytical  purposes and may not be
indicative of the categories in which further loan loses occur.

</TABLE>
                                       20

<PAGE>

Nonperforming Assets

         Nonperforming assets consist of nonaccrual loans, restructured loans
and foreclosed real estate. Loans are placed on nonaccrual status when, in the
opinion of management, the future collection of interest or principal according
to contractual terms may be doubtful or when principal or interest payments are
in arrears 90 days or more. Foreclosed real estate, representing real estate
collateral acquired by legal foreclosure procedures, is valued using independent
appraisals, and the Company's policy is to obtain revised appraisals annually.
The Company intends to dispose of each property at or near its current
valuation. However, there can be no assurance that disposals will be made as
soon as anticipated or at expected values.

         Table 9 below presents the detail of nonperforming assets and the
aggregate of loans whose principal and/or interest has not been paid according
to contractual terms. At December 31, 2000, nonperforming assets increased $58
thousand or 3.7% as compared to the end of the prior year and can be attributed
to the $280 thousand increase in nonaccrual loans and loans past due 90 days or
more. The increase in nonaccrual loans is due to $304 thousand of nonaccrual
leases in the Company's equipment lease finance portfolio. Nonperforming assets
decreased $223 thousand or 12.3% in 1999 as compared to 1998.

         Based on the current information available, except for the loans
included in the table, management believes that there were no material potential
problem loans or leases, either individually or in the aggregate, at December
31, 2000.

<TABLE>
<CAPTION>
Table 9
----------------------------------------------------------------------------------------------------------------------------
Loan Delinquencies and Nonperforming Assets
----------------------------------------------------------------------------------------------------------------------------
at December 31,
(dollars in thousands)

                                                         2000           1999          1998         1997          1996
                                                      ------------    ----------   -----------   ----------   -----------
<S>                                                   <C>             <C>          <C>           <C>          <C>
Loans delinquent and accruing interest
  Loans past due 30-89 days                                $2,058          $190          $379         $832          $838
  Loans past due 90 days or more                                -             -             -          141            25
                                                      ------------    ----------   -----------   ----------   -----------
    Total loans delinquent and accruing interest           $2,058          $190          $379         $973          $863
                                                      ============    ==========   ===========   ==========   ===========

Nonaccrual loans                                           $1,395        $1,115        $1,198       $1,514        $2,527
Foreclosed real estate                                        250           250            84            -           610
Restructured loans                                              -           222           528          573           725
                                                      ------------    ----------   -----------   ----------   -----------
  Total nonperforming assets                               $1,645        $1,587        $1,810       $2,087        $3,862
                                                      ============    ==========   ===========   ==========   ===========
   Total nonperforming assets and loans
    past due 90 days or more                               $1,645        $1,587        $1,810       $2,228        $3,887
                                                      ============    ==========   ===========   ==========   ===========

Nonaccrual loans to total loans                              0.25 %        0.22 %        0.25 %       0.35 %        0.66 %
Nonperforming assets to total loans and
  foreclosed real estate                                     0.29          0.31          0.38         0.48          1.00
Nonperforming assets to total assets                         0.21          0.22          0.26         0.33          0.67
Nonaccrual loans and loans past due 90 days
  or more to total loans                                     0.25          0.22          0.25         0.38          0.66
Nonperforming assets and loans past due 90 days
  or more to total loans and foreclosed real estate          0.29          0.31          0.38         0.51          1.01
Nonperforming assets and loans past due 90 days
  or more to total assets                                    0.21          0.22          0.26         0.36          0.68

</TABLE>

                                       21
<PAGE>



Securities Held to Maturity and Securities Available for Sale

         The Company identifies as "securities available for sale" securities
used as part of its asset/ liability management strategy, or securities that may
be sold in response to, among other things, changes in interest rates and
prepayment risk. Debt securities purchased with the intent and ability to hold
until maturity are classified as "held to maturity". See Notes 1 and 4 of Notes
to Consolidated Financial Statements for additional information concerning
securities.

         Table 10 presents a summary of the contractual maturities and weighted
average yields (adjusted to a taxable equivalent basis) of "securities held to
maturity" and "securities available for sale". Historical cost was used to
calculate the weighted average yields.

<TABLE>
<CAPTION>
  Table 10
--------------------------------------------------------------------------------------------------------------------
  Securities
--------------------------------------------------------------------------------------------------------------------
  at December 31, 2000
  (dollars in thousands)

                                                              After 1      After 5                        Weighted
                                                   Within    But Within  But Within    After               Average
                                                   1 Year     5 Years     10 Years    10 Year    Total      Yield
                                                  ---------  ----------  -----------  --------  --------  ----------
<S>                                               <C>         <C>        <C>          <C>       <C>       <C>

  Securities held to maturity at amortized cost
  Mortgage-backed securities                      $   598      $4,999      $2,377     $4,672    $ 12,646    6.96 %
  Obligations of U.S. agencies                      5,998       9,163           -          -      15,161    6.81
  Obligations of states & political subdivisions    2,801       2,051       1,497      6,464      12,813    6.78
  Other debt securities                               322         100           -          -         422    6.78
                                                  ---------  ----------  -----------  --------  --------
                                                    9,719      16,313       3,874     11,136      41,042    6.35
                                                  ---------  ----------  -----------  --------  --------
  Securities available for sale at market value
  Obligations of U.S. Treasury                          -       2,022           -          -       2,022    6.43
  Mortgage-backed securities                        4,544      35,954      12,448     26,899      79,845    6.98
  Obligations of U.S. agencies                     11,987       8,127           -          -      20,114    6.29
  Obligations of states & political subdivisions    1,233       9,855           -      2,653      13,741    6.82
  Other debt securities                                 -         620           -          -         620    8.99
                                                ---------  ----------  -------------  --------  --------
       Total                                       17,764      56,578      12,448     29,552     116,342    6.39
                                                ---------  ----------  -------------  --------  --------
                                                  $27,483     $72,891     $16,322    $40,688    $157,384
                                                =========  ==========  =============  =======   ========

  Weighted average yield                             6.28 %      6.77 %      6.73 %     7.41 %      6.84 %


     The following  table sets forth the carrying value of the Company's held to
maturity  and  available  for sale  securities  portfolios  for the years ended,
December 31: (dollars in thousands)


                                                         2000                    1999                  1998
                                                ---------------------  ----------------------   --------------------
                                                 Amount      %           Amount         %        Amount        %
                                                ---------  ----------  -------------  -------   -------  -----------

  Securities held to maturity
  Obligations of U.S. Treasury                          -       -         $ 9,997      18.3 %   $15,992     29.6 %
  Mortgage-backed securities                     $ 12,646    30.8 %        20,232      37.1      18,921     34.9
  Obligations of U.S. agencies                     15,161    37.0           7,992      14.7       7,986     14.7
  Obligations of states & political subdivisions   12,813    31.2          16,195      29.7      11,111     20.5
  Other debt securities                               422     1.0             124       0.2         149      0.3
                                                ---------  ----------  -------------  -------   -------  -----------
                                                 $ 41,042   100.0 %      $ 54,540     100.0 %   $54,159    100.0 %
                                                =========  ==========  =============  =======   =======  ===========

  Securities available for sale
  Obligations of U.S. Treasury                  $   2,022     1.7 %       $ 6,103       5.7 %   $34,041     35.5 %
  Mortgage-backed securities                       79,845    66.4          67,453      62.9      43,066     45.0
  Obligations of U.S. agencies                     20,114    16.7          27,080      25.2      13,824     14.4
  Obligations of states & political subdivisions   13,741    11.4           2,941       2.7           -        -
  Other debt securities                               620     0.5               -         -           -        -
  Equity securities                                 3,970     3.3           3,772       3.5       4,840      5.1
                                                ---------  ----------  -------------  -------   -------  -----------
                                                 $120,312   100.0 %      $107,349     100.0 %   $95,771    100.0 %
                                                =========  ==========  =============  =======   =======  ===========
</TABLE>

                                       22
<PAGE>


         The Company's total investment portfolio decreased by $535 thousand or
0.3% to $161.4 million at December 31, 2000 as compared to the prior year. The
composition of investment securities continued to shift from U.S. Treasury
securities to obligations of states and political subdivisions and
mortgage-backed securities. Mortgage-backed securities include collateralized
mortgage obligations ("CMO"). Substantially all of the mortgage-backed
securities held by the Company are issued or backed by federal agencies. The
decline in U.S. Treasury securities was largely due to maturities. Total gross
unrealized gains and total gross unrealized losses for the investment portfolio
amounted to $1.7 million and $337 thousand, respectively, at December 31, 2000.

         During 2000, a shift in the composition of the investment portfolio
from investments held to maturity to the available for sale portfolio was
principally due to market conditions and the Company's asset/liability
management strategy. At December 31, 2000, available for sale securities
amounted to $120.3 million or 74.6% of total securities, compared to $107.3
million or 66.3% of total securities at year-end 1999.

         The Company's held to maturity portfolio decreased by $13.5 million or
24.7% to $41.0 million at December 31, 2000 as compared to the prior year. The
decrease was mostly due to a decline in U.S. Treasury notes and state and
political subdivision notes as a result of maturities. The decrease was in part
offset by an increase in obligations of U.S. agencies.

         The Company's available for sale portfolio increased by $13.0 million
or 12.1% to $120.3 million at December 31, 2000 as compared to the prior year.
The growth was largely due to purchases of securities in 2000. During 2000,
there were two limited portfolio restructures. The first restructuring occurred
in the first quarter of 2000, which involved the sale of short-term U.S.
Treasury and U.S. Agency securities and floating rate U.S. Agency securities.
The Company used the proceeds to purchase non-callable U.S. Agency medium term
notes and state and political subdivision medium term notes. The second
restructuring occurred in the fourth quarter of 2000, which involved the sale of
short-term U.S. Agency securities and the purchase of longer-term state and
political subdivision notes and mortgage-backed securities. The limited
portfolio restructurings were aimed at improving the risk/reward characteristics
of the securities portfolio.

Deposits

         Deposits, which include non-interest-bearing demand deposits,
interest-bearing demand deposits, savings and time deposits, are an essential
and cost-effective funding source for the Company. The Company attributes its
success in growing deposits to the emphasis it places on building core customer
relationships. The Company offers a variety of products designed to meet the
financial needs of the customers based on their identifiable "life stages".
Deposits in 2000 averaged $648.4 million as compared to $604.0 million in 1999,
an increase of $44.4 million or 7.3%. At December 31, 2000, total deposits
amounted to $668.9 million, an increase of $69.9 million or 11.7% from year-end
1999. During 2000, the Company ran several marketing campaigns to generate time
deposits to fund asset growth. In addition to funding asset growth, the
marketing campaigns provided the Company an opportunity to cross sell new
customers with other products and services, aimed at expanding core customer
relationships.

         The growth in the deposit base occurred mostly in time deposits and
other interest bearing deposits, which increased on average $18.9 million and
$18.7 million, respectively, at December 31, 2000 as compared to the prior year.
Other interest bearing deposits include interest bearing demand, money market
and savings accounts. During 2000, the Company's overall yield on deposits
increased by 47 basis points due mostly to an increase in interest rates and a
change in the deposit mix.

         Time deposits amounted to $208.5 million at December 31, 2000, an
increase of $46.1 million or 28.4% from year-end 1999. The growth in time
deposits occurred principally in time deposits less than $100,000, which was
largely the result of successful marketing campaigns during 2000. Time deposits
greater than $100,000, which represents an alternate source of wholesale funding
for the Company, did not materially change for 2000 as compared to 1999. Time
deposits greater than $100,000 represented 3.2% of total deposits at December
31, 2000 and 3.5% at December 31, 1999. The Company's yield on total time
deposits increased by 57 basis points to 5.60% for 2000 as compared to 1999.

         Other interest bearing deposits, which comprise the largest segment of
the Company's total deposits, amounted to $352.6 million at December 31, 2000,
an increase of $18.5 million or 5.5% from year-end 1999. The growth was largely
in commercial and municipal money market checking and savings deposits. The
Company's yield on other interest bearing deposits increased by 52 basis points
to 3.26% for 2000 as compared to 1999.

         Contributing to the growth in deposits and positively impacting the
overall yield on deposit liabilities was a $5.3 million or 5.2% increase in
non-interest bearing demand at December 31, 2000 as compared to year-end 1999.


<TABLE>
<CAPTION>
Table 11
------------------------------------------------------------------------------------------------------------------------------------
Deposit Summary
------------------------------------------------------------------------------------------------------------------------------------
at December 31,
(dollars in thousands)
                                             2000               1999                1998                1997              1996
                                     ------------------  -----------------   ------------------  ----------------  -----------------
<S>                                  <C>         <C>     <C>       <C>       <C>        <C>      <C>       <C>      <C>      <C>

Non-interest bearing demand           $107,702   16.1 %  $ 102,392   17.1 %  $ 107,408   17.9 %  $ 95,436  17.6 %  $ 78,450 % 16.0 %
Interest bearing demand                229,713   34.3      213,970   35.8      194,177   32.4     154,301  28.6     121,878   24.8
Money market                            56,646    8.5       49,256    8.2       50,665    8.5      41,815   7.7      41,372    8.4
Savings                                 66,270    9.9       70,907   11.8       76,026   12.7      81,202  15.0      82,817   16.8
Time deposits less  than $100,000      187,330   28.0      141,444   23.6      145,337   24.3     134,287  24.9     139,994   28.5
Time deposits greater than $100,000     21,199    3.2      $21,023    3.5       25,119    4.2      33,724   6.2      27,126    5.5
                                     ---------   ------  ---------- -------   --------   -------  -------- ------- --------  -------
                                      $668,860  100.0 %   $598,992  100.0 %   $598,732  100.0 %  $540,765  100.0 % $491,637  100.0 %
                                     =========   ======  ========== ======   ==========  ======= ========= ======= ========  =======


The following table shows the time remaining to maturity of time certificates of
deposit of $100,000 or more as of December 31, 2000:
(in thousands)

Three months or less                    $ 11,717
Over three months through six months       2,282
Over six months through twelve months      4,501
Over twelve months                         2,699
                                        ---------
                                         $21,199
                                        =========
</TABLE>
                                       23


<PAGE>

Market Risk

         Market risk is generally described as the sensitivity of income to
adverse changes in interest rates, foreign currency exchange rates, commodity
prices, and other relevant market rates or prices. Market rate sensitive
instruments include: financial instruments such as investments, loans,
mortgage-backed securities, deposits, borrowings and other debt obligations;
derivative financial instruments, such as futures, forwards, swaps and options;
and derivative commodity instruments, such as commodity futures, forwards, swaps
and options that are permitted to be settled in cash or another financial
instrument.

         The Company does not have any material exposure to foreign currency
exchange rate risk or commodity price risk. The Company did not enter into any
market rate sensitive instruments for trading purposes nor did it engage in any
hedging transactions utilizing derivative financial instruments during 2000. The
Company's real estate loan portfolio, concentrated primarily in northern New
Jersey, is subject to risks associated with the local and regional economies.
The Company's primary source of market risk exposure arises from changes in
market interest rates ("interest rate risk").

Interest Rate Risk

         Interest rate risk is generally described as the exposure to
potentially adverse changes in current and future net interest income resulting
from: fluctuations in interest rates; product spreads; and imbalances in the
repricing opportunities of interest-rate-sensitive assets and liabilities.
Therefore, managing the Company's interest rate sensitivity is a primary
objective of the Company's senior management. The Company's Asset/Liability
Committee ("ALCO") is responsible for managing the exposure to changes in market
interest rates. ALCO attempts to maintain stable net interest margins by
periodically evaluating the relationship between interest-rate-sensitive assets
and liabilities. The evaluation, which is performed at least quarterly, attempts
to determine the impact on net interest margin from current and prospective
changes in market interest rates.

         The Company manages interest rate risk exposure with the utilization of
financial modeling and simulation techniques. These methods assist the Company
in determining the effects of market rate changes on net interest income and
future economic value of equity. The objective of the Company is to maximize net
interest income within acceptable levels of risk established by policy. The
techniques utilized for managing exposure to market rate changes involve a
variety of interest rate, pricing and volume assumptions. These assumptions
include projections on growth, prepayment and withdrawal levels as well as other
embedded options inherently found in financial instruments. The Company reviews
and validates these assumptions at least annually, or more frequently, if
economic or other conditions change. At December 31, 2000, the Company simulated
the effects on net interest income given an instantaneous and parallel shift in
the yield curve of up to 200 basis points in either direction. Based on the
simulation, it was estimated that net interest income, over a twelve-month
horizon, would not decrease by more than 10.3%. At December 31, 2000, the
Company was within policy limits established for changes in net interest income
and future economic value of equity.

         The simulation described above does not represent a Company forecast
and should not be relied upon as being indicative of expected operating results.
These hypothetical estimates are based upon numerous assumptions including: the
nature and timing of interest rate levels including yield curve shape;
prepayments on loans and securities; deposit decay rates; pricing decisions on
loans and deposits; reinvestment/replacement of asset and liability cashflows;
and others. While assumptions are developed based upon current economic and
local market conditions, the Company cannot make any assurances as to the
predictive nature of these assumptions including how customer preferences or
competitor influences might change.

         Further, as market conditions vary from those assumed in the
simulation, actual results will also differ due to: prepayment/refinancing
levels deviating from those assumed; the varying impact of interest rate changes
on caps or floors on adjustable rate assets; the potential effect of changing
debt service levels on customers with adjustable rate loans; depositor early
withdrawals and product preference changes; and other internal/external
variables. Furthermore, the simulation does not reflect actions that ALCO might
take in response to anticipated changes in interest rates or competitive
conditions in the market place.

         In addition to the above-mentioned techniques, the Company utilizes
sensitivity gap analysis as an interest rate risk measurement. Sensitivity gap
is determined by analyzing the difference between the amount of interest-earning
assets maturing or repricing within a specific time period and the amount of
interest bearing liabilities maturing or repricing within that same period of
time. Sensitivity gap analysis provides an indication of the extent to which the
Company's net interest income may be affected by future changes in market
interest rates. The cumulative gap position expressed as a percentage of total
assets provides one relative measure of the Company's interest rate exposure.

         The cumulative gap between the Company's interest-rate-sensitive assets
and its interest-rate-sensitive liabilities repricing within a one-year period
was (13.4%) at December 31, 2000. Since the cumulative gap was negative, the
Company has a "negative gap" position, which theoretically will cause its assets
to reprice more slowly than its deposit liabilities. In a declining interest
rate environment, interest costs may be expected to fall faster than the
interest received on earning assets, thus increasing the net interest spread. If
interest rates increase, a negative gap means that the interest received on
earning assets may be expected to increase more slowly than the interest paid on
the Company's liabilities therefore decreasing the net interest spread.

         Certain shortcomings are inherent in the method of analysis presented
in Table 12. Although certain assets and liabilities may have similar maturities
or periods of repricing, they may react in different degrees to changes in
market interest rates. The rates on certain types of assets and liabilities may
fluctuate in advance of changes in market rates, while rates on other types of
assets and liabilities may lag behind changes in market rates. In the event of a
change in interest rates, prepayment and early withdrawal levels could deviate
significantly from those assumed in calculating the table. The ability of
borrowers to service their debt may decrease in the event of an interest rate
increase. Management considers these factors when reviewing its sensitivity gap
position and establishing its ongoing asset/liability strategy.

                                       24
<PAGE>

<TABLE>
<CAPTION>
Table 12
------------------------------------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity Analysis
------------------------------------------------------------------------------------------------------------------------------------
at December 31, 2000
(dollars in thousands)
                                                                                                                   Non-
                                                     3          6     6 Mos. to   1 to 3    3 to 5      Over     interest
Subject to rate change within                      Months     Months   1 Year     Years      Years    5 Years    Sensitive   Total
                                                 ---------- ---------  --------  ---------  --------  --------- ---------- -------
<S>                                              <C>        <C>        <C>       <C>        <C>       <C>       <C>        <C>
Assets
   Net loans                                      $138,065  $ 31,418   $ 59,095   $175,668  $94,786   $60,621   $ (4,928)  $554,725
   Investment securities                            17,152    23,210     27,246     56,219   22,021    14,500      1,006    161,354
   Cash and amounts due from banks                  11,050         -          -          -        -         -     22,100     33,150
   Other noninterest earning assets                      -         -          -          -        -         -     21,015     21,015
                                                 ---------- ---------  --------  ---------  --------  ---------  ---------- -------
   Total assets                                    166,267    54,628     86,341    231,887  116,807    75,121     39,193    770,244
                                                 ---------- ---------  --------  ---------  --------  ---------  ---------- --------

Liabilities and stockholders' equity
   Demand deposits                                  36,986    36,986     73,974     94,858   46,455    48,157          -    337,415
   Savings deposits                                  5,799     5,799     11,597     29,788    9,189     4,098          -     66,270
   Fixed maturity certificates of deposits          46,125    31,898     96,022     27,343    7,141         -          -    208,529
   Money market accounts                             8,497     8,497     16,993     12,184    5,632     4,842          -     56,646
   Securities sold under agreements to repurchase   17,500     1,000          -          -        -         -          -     18,500
   Short-term borrowings                             6,000         -      7,000          -        -         -          -     13,000
   Other liabilities                                     -         -          -          -        -         -      7,900      7,900
   Stockholders' equity                                  -         -          -          -        -         -     61,984     61,984
                                                 ---------- ---------  --------  ---------  --------  ---------  ---------- -------
   Total liabilities and stockholders' equity      120,907    84,180    205,586    164,173   68,417    57,097     69,884   $770,244
                                                 ---------- ---------  --------  ---------  --------  ---------  ---------- -------

Gap                                               $ 45,360  $(29,552) $(119,245)  $ 67,714  $48,390   $18,024   $(30,691)
                                                 ========== =========  ========  =========  ========  =========  ==========
Gap to total assets                                   5.89 %   (3.84)%   (15.48)%     8.79 %   6.28 %    2.34 %
Cumulative Gap                                     $45,360   $15,808  $(103,437)  $(35,723) $12,667   $30,691
                                                 ========== =========  ========  =========  ========  =========
Cumulative Gap to total assets                        5.89 %    2.05 %   (13.43)%    (4.64)%   1.64 %    3.98 %

</TABLE>

Liquidity

         A fundamental component of the Company's business strategy is to manage
liquidity to ensure the availability of sufficient resources to meet all
financial obligations and to finance prospective business opportunities.
Liquidity management is critical to the stability of the Company. The liquidity
position of the Company over any given period of time is a product of it's
operating, financing and investing activities. The extent of such activities is
often shaped by such external factors as competition for deposits and loan
demand.

         Traditionally, financing for the Company's loans and investments is
derived primarily from deposits, along with interest and principal payments on
loans and investments. At December 31, 2000, total deposits amounted to $668.9
million, an increase of $69.9 million or 11.7% over the prior comparable year.
At December 31, 2000, advances from the FHLB, overnight borrowings and
securities sold under agreements to repurchase totaled $31.5 million and
represented 4.1% of total assets as compared to $43.4 million and 6.1% of total
assets, at December 31, 1999. In 2000, the Company's deposit liabilities grew
faster than its earning assets resulting in a decrease in borrowings.

         Loan production continued to be the Company's principal investing
activity. Net loans at December 31, 2000 amounted to $554.7 million, an increase
of $48.2 million or 9.5% compared to the same period in 1999.

         The Company's most liquid assets are cash and due from banks and
federal funds sold. At December 31, 2000, the total of such assets amounted to
$33.2 million or 4.3% of total assets, compared to $17.7 million or 2.5% of
total assets at year-end 1999. The increase in liquid assets, principally
federal funds sold, was driven by the growth in deposit liabilities.

         Another significant liquidity source is the Company's available for
sale securities. At December 31, 2000, available for sale securities amounted to
$120.3 million or 74.6% of total securities, compared to $107.3 million or 66.3%
of total securities at year-end 1999.

         In addition to the aforementioned sources of liquidity, the Company has
available various other sources of liquidity, including federal funds purchased
from other banks and the Federal Reserve discount window. The Bank also has a
$72.2 million line of credit available through its membership in the FHLB.

         Management believes that the Company's sources of funds are sufficient
to meet its present funding requirements.

Capital Adequacy

         Stockholders' equity totaled $62.0 million or 8.0% of total assets at
December 31, 2000, compared to $58.3 million or 8.3% of total assets at December
31, 1999. The $3.7 million increase was largely attributable to net income of
$9.3 million and a $1.2 million change in other comprehensive income. The
increase was largely offset by stock repurchases and cash dividends of $3.8
million and $3.3 million, respectively, during 2000.

     Guidelines  issued by the Federal  Reserve  Board and the  Federal  Deposit
Insurance  Corporation  ("FDIC") establish capital adequacy  guidelines for bank
holding  companies  and  state-chartered   banks.  The  guidelines  establish  a
risk-based capital framework consisting of (1) a definition of capital and (2) a
system for assigning  risk weights.  Capital  consists of Tier 1 capital,  which
includes  common   stockholders'   equity  less  certain   intangibles,   and  a
supplementary  component called Tier 2 capital,  which includes a portion of the
allowance  for loan and lease  losses.  Effective  October 1, 1998,  the Federal
Reserve  Board and the FDIC  adopted an amendment  to their  risk-based  capital
guidelines that permits insured depository institutions to include in their Tier
2 capital up to 45% of the pre-tax net unrealized gains on certain available for
sale equity securities.  All assets and off-balance-sheet  items are assigned to
one of four weighted risk categories  ranging from 0% to 100%.  Higher levels of
capital are required for the categories perceived as representing greater risks.
An institution's risk-based capital ratio is determined by dividing

                                       25
<PAGE>


its  qualifying  capital  by  its  risk-weighted  assets.  The  guidelines  make
regulatory  capital  requirements more sensitive to differences in risk profiles
among  banking  institutions,  take  off-balance  sheet  items  into  account in
assessing  capital  adequacy and minimize the  disincentive  to holding  liquid,
low-risk assets.  Banking  organizations are generally  expected to operate with
capital positions well above the minimum rates.  Institutions with higher levels
of risk, or which experience or anticipate significant growth, are also expected
to operate well above  minimum  capital  standards.  At December  31, 2000,  the
Company's and the Bank's Tier 1 risk-based  capital ratio was 11.75% and 11.66%,
respectively, well in excess of minimum capital standards.

         These guidelines focus principally on broad categories of credit risk,
although the framework for assigning assets and off-balance sheet items to risk
categories does incorporate elements of transfer risk. The risk-based capital
ratio does not, however, incorporate other factors that may affect a company's
financial condition, such as overall interest rate exposure, liquidity, funding
and market risks, the quality and level of earnings, investment or loan
concentrations, the quality of loans and investments, the effectiveness of loan
and investment policies and management's ability to monitor and control
financial and operating risks.

         In addition to the risk-based guidelines discussed above, the Federal
Reserve Board and the FDIC require that a bank holding company and bank which
meet the regulators' highest performance and operation standards and which are
not contemplating or experiencing significant growth maintain a minimum leverage
ratio (Tier 1 capital as a percent of quarterly average adjusted assets) of 3%.
For those financial institutions with higher levels of risk or that are
experiencing or anticipating significant growth, the minimum leverage ratio will
be increased. At December 31, 2000, the Company's and the Bank's leverage ratio
was 8.02% and 7.99%, respectively.

Effects of Inflation and Changing Prices

         The financial statements and related financial data presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation.

         Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than do general levels of inflation. Interest rates do not
necessarily move in the same magnitude as the prices of goods and services.

Recently issued accounting pronouncements

         On January 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments, and
Hedging Activities". SFAS 133 established accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. Under SFAS 133, certain contracts
that were not formerly considered derivatives may now meet the definition of a
derivative. The adoption of SFAS 133 did not have a significant impact on the
financial position or results of operations of the Company because the Company
does not have any derivative activity.

         On December 31, 2000, the Company adopted SFAS 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".
SFAS 140 requires the reclassification of certain pledged assets and disclosures
regarding collateral for the December 31, 2000 Consolidated Balance Sheet. The
Company's pledged assets to secured parties cannot be sold or repledged by those
parties, therefore, no reclassification of pledged assets on the consolidated
balance sheet was necessary for such transactions. Other provisions of SFAS 140
are not required to be implemented until after March 31, 2001. The Company is
currently assessing the impact, if any, from the full implementation of this
standard.

                                       26
<PAGE>

Forward Looking Statements

         In addition to discussing historical information, certain statements
included in or incorporated into this report relate to the financial condition,
results of operations and business of the Company which are not historical
facts, but which are "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. When used herein, the words
"anticipate," "believe," "estimate," "expect," "will" and other similar
expressions are generally intended to identify such forward looking statements.
Such statements are intended to be covered by the safe harbor provisions for
forward looking statements contained in such Act and we are including this
statement for purposes of invoking these safe harbor provisions. These forward
looking statements include, but are not limited to, statements about the
operations of the Company, the adequacy of the Company's allowance for future
losses associated with the loan portfolio, the prospects of continued loan and
deposit growth and improved credit quality. The forward looking statements in
this report involve certain estimates or assumptions, known and unknown risks
and uncertainties, many of which are beyond the control of the Company and
reflect what we currently anticipate will happen in each case. What actually
happens could differ materially from what we currently anticipate will happen
due to a variety of factors, including, among others, (i) increased competitive
pressures among financial services companies; (ii) changes in the interest rate
environment; (iii) general economic conditions, internationally, nationally, or
in the State of New Jersey; and (iv) legislation or regulatory requirements or
changes adversely affecting the business of the Company. Readers should not
place undue expectations on any "forward looking statements." We are not
promising to make any public announcement when we consider "forward looking
statements" in this document are no longer accurate, whether as a result of new
information, what actually happens in the future or for any other reason.

<TABLE>
<CAPTION>
Table 13
----------------------------------------------------------------------------------------------------------------------
Quarterly Common Stock Price Range
----------------------------------------------------------------------------------------------------------------------
for the years ended December 31,

The Company's common stock is quoted on the NASDAQ National Market System under the symbol "IFCJ."


                                                    High         Low        Cash
                                                   Sales        Sales    Dividends
                                                   Price        Price     Declared
                                                  --------    --------   -----------
<S>       <C>                                     <C>         <C>         <C>
1998
          First quarter (1) . . . . . . . . . .    $21.25      $18.17      $0.100
          Second quarter . . . . . . . . . . . .    23.25       19.25       0.100
          Third quarter  . . . . . . . . . . . .    20.88       15.31       0.100
          Fourth quarter  . . . . . . . . . . .     17.75       14.06       0.100

1999
          First quarter  . . . . . . . . . . .     $17.50      $16.00      $0.120
          Second quarter . . . . . . . . . . . .    17.38       15.50       0.120
          Third quarter  . . . . . . . . . . . .    19.63       16.63       0.120
          Fourth quarter  . . . . . . . . . . . .   18.13       16.13       0.120

2000
          First quarter  . . . . . . . . . . .     $17.50      $13.63      $0.125
          Second quarter . . . . . . . . . . . .    14.38       12.13       0.125
          Third quarter  . . . . . . . . . . . .    13.75       12.00       0.125
          Fourth quarter  . . . . . . . . . . . .   15.00       12.94       0.125

The number of stockholders of record as of February 15, 2001 was 1,208.
----------------------------------------------------------------------------------------------------------------------
<FN>

(1)  On February 26, 1998, the Company declared a 3 for 2 Stock Split distributed on April 17, 1998 to shareholders
      of  record on March 20, 1998.  The high and low sales prices and the cash dividends have been restated to reflect
       the effects of the stock split.
</FN>
</TABLE>

                                       27

<PAGE>

Independent Auditors' Report


Board of Directors and Stockholders
Interchange Financial Services Corporation
Saddle Brook, New Jersey

         We have audited the accompanying consolidated balance sheets of
Interchange Financial Services Corporation and subsidiaries (the "Company") as
of December 31, 2000 and 1999 and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2000. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

         We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

         In our opinion, the consolidated financial statements present fairly,
in all material respects, the financial position of Interchange Financial
Services Corporation and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.


/s/ Deloitte & Touche, LLP
Deloitte & Touche LLP
Parsippany, New Jersey
January 18, 2001

                                       28
<PAGE>

<TABLE>
<CAPTION>
Interchange Financial Services Corporation
-------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------------------------------------
December 31,
(dollars in thousands)

                                                                                         2000          1999
                                                                                  -------------     ---------
<S>                                                                               <C>               <C>

Assets
Cash and due from banks                                                               $ 22,100      $ 17,669
Federal funds sold                                                                      11,050             -
                                                                                  -------------     ---------
Total cash and cash equivalents                                                         33,150        17,669
                                                                                  -------------     ---------

Securities held to maturity at amortized cost (estimated market value
      of $41,400 and $53,784 for 2000 and 1999, respectively)                           41,042        54,540
                                                                                  -------------     ---------
Securities available for sale at estimated market value (amortized cost
     of $119,306 and $108,399 for 2000 and 1999, respectively)                         120,312       107,349
                                                                                  -------------     ---------

Loans                                                                                  560,879       511,976
Less:  Allowance for loan and lease losses                                               6,154         5,476
                                                                                  -------------     ---------
Net loans                                                                              554,725       506,500
                                                                                  -------------     ---------

Premises and equipment, net                                                             11,239        10,289
Foreclosed real estate                                                                     250           250
Accrued interest receivable and other assets                                             9,526         9,528
                                                                                  -------------     ---------
Total assets                                                                          $770,244      $706,125
                                                                                  =============     =========


Liabilities
Deposits
    Non-interest bearing                                                              $107,702      $102,392
    Interest bearing                                                                   561,158       496,600
                                                                                  -------------     ---------
Total deposits                                                                         668,860       598,992
                                                                                  -------------     ---------

Securities sold under agreements to repurchase                                          18,500        16,431
Short-term borrowings                                                                   13,000        13,975
Long-term borrowings                                                                         -        13,000
Accrued interest payable and other liabilities                                           7,900         5,451
                                                                                  -------------     ---------
Total liabilities                                                                      708,260       647,849
                                                                                  -------------     ---------

Commitments and contingent liabilities

Stockholders' equity:
Common stock, without par value; 15,000,000 shares authorized;
    6,530,498 and  6,728,098 shares issued and outstanding for
    2000 and 1999, respectively                                                          5,397         5,397
Capital surplus                                                                         21,077        21,244
Retained earnings                                                                       47,735        41,741
Accumulated other comprehensive income/(loss)                                              526          (675)
                                                                                  -------------    ----------
                                                                                        74,735        67,707
Less:  Treasury stock                                                                   12,751         9,431
                                                                                  -------------    ----------
Total stockholders' equity                                                              61,984        58,276
                                                                                  -------------    ----------
Total liabilities and stockholders' equity                                            $770,244      $706,125
                                                                                  =============    ==========

-------------------------------------------------------------------------------------------------------------
 See notes to consolidated financial statements.
</TABLE>

                                       29
<PAGE>

<TABLE>
<CAPTION>
Interchange Financial Services Corporation
-----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
-----------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands, except per share data)

                                                                                     2000          1999         1998
                                                                                 -------------- -----------  -----------
<S>                                                                              <C>            <C>          <C>

Interest income
Interest and fees on loans                                                             $44,499     $39,521      $38,904
Interest on federal funds sold                                                             700         596        1,474
Interest on interest bearing deposits                                                        -           -           55
Interest and dividends on securities
   Taxable interest income                                                               9,796       8,432        7,934
   Interest income exempt from federal income taxes                                        537         492          181
   Dividends                                                                               259         260          272
                                                                                 -------------- -----------  -----------
Total interest income                                                                   55,791      49,301       48,820
                                                                                 -------------- -----------  -----------

Interest expense
Interest on deposits                                                                    22,060      17,700       18,467
Interest on securities sold under agreements to repurchase                               1,235         392          806
Interest on short-term borrowings                                                          182         608            1
Interest on long-term borrowings                                                           750          83          590
                                                                                 -------------- -----------  -----------
Total interest expense                                                                  24,227      18,783       19,864
                                                                                 -------------- -----------  -----------

Net interest income                                                                     31,564      30,518       28,956
Provision for loan and lease losses                                                        750       1,200          951
                                                                                 -------------- -----------  -----------
Net interest income after provision for loan and lease losses                           30,814      29,318       28,005
                                                                                 -------------- -----------  -----------

Non-interest income
Service fees on deposit accounts                                                         2,386       2,300        2,551
Net gain on sale of securities                                                             312         859        1,021
Net gain on sale of loans and leases                                                       136          86            -
Other                                                                                    1,377       2,094        1,356
                                                                                 -------------- -----------  -----------
Total non-interest income                                                                4,211       5,339        4,928
                                                                                 -------------- -----------  -----------

Non-interest expenses
Salaries and benefits                                                                   11,034      10,265        9,437
Occupancy                                                                                2,939       2,698        2,405
Furniture and equipment                                                                  1,056       1,045        1,035
Advertising and promotion                                                                1,065       1,033          865
Acquisition                                                                                  -           -        1,392
Other                                                                                    5,083       5,022        4,282
                                                                                 -------------- -----------  -----------
Total non-interest expenses                                                             21,177      20,063       19,416
                                                                                 -------------- -----------  -----------

Income before income taxes                                                              13,848      14,594       13,517
Income taxes                                                                             4,592       4,959        4,908
                                                                                 -------------- -----------  -----------
Net income                                                                             $ 9,256     $ 9,635      $ 8,609
                                                                                 ============== ===========  ===========

Basic earnings per common share                                                         $1.42       $1.37        $1.20

Diluted earnings per common share                                                       $1.41       $1.36        $1.19

--------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
</TABLE>
                                       30
<PAGE>

<TABLE>
<CAPTION>
Interchange Financial Services Corporation
------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(dollars in thousands, except share data)

                                                                                  Accumulated
                                                                                     Other
                                                         Comprehensive Retained  Comprehensive  Common  Capital   Treasury
                                                           Income      Earnings    Income       Stock   Surplus     Stock     Total
                                                         -----------  ---------- ------------- ------- --------- --------- ---------
<S>                                                      <C>          <C>        <C>           <C>     <C>       <C>       <C>
Balance at January 1, 1998                                             $29,698     $1,185       $5,396  $21,557   $ (1,706) $56,130
Comprehensive income
    Net Income                                               $8,609      8,609                                                8,609
    Other comprehensive income, net of taxes
       Unrealized  gains on debt securities                     207
       Unrealized losses securities transferred from
         held to maturity to available for sale
         - Acquisition                                          (17)
       Unrealized lossess on equity securities                  343
       Less: gains on disposition of equity securities         (526)
                                                         -----------
    Other comprehensive income                                    7                     7                                         7
                                                         -----------
Comprehensive income                                         $8,616
                                                         ===========
Dividends on common stock                                               (2,825)                                              (2,825)
Fractional shares on 3 for 2 stock split and merger shares                                                  (5)                  (5)
Forfeiture of bonus stock                                                                                              (49)     (49)
Issued 12,769 shares of common stock in connection
    with Executive Compensation Plan                                                                        70         162      232
Exercise of 50,394 option shares                                                                     1    (366)        638      273
                                                                      ---------- ------------ ---------  ------- ----------- -------
Balance at December 31, 1998                                            35,482        1,192     5,397     21,256      (955)  62,372

Comprehensive income
    Net Income                                               $9,635      9,635                                                9,635
    Other comprehensive income, net of taxes
       Unrealized losses on AFS debt securities              (1,354)
       Less:  gains on disposition of securities
              (excludes equities)                               (90)
       Unrealized gains securities transferred from held to
           maturity to available to sale - Acquisition           23
       Unrealized loss on equity securities                     (18)
       Less:  gains on disposition of equity securities        (428)
                                                         -----------
    Other comprehensive loss                                 (1,867)                 (1,867)                                 (1,867)
                                                         -----------
Comprehensive income                                         $7,768
                                                         ===========

Dividends on common stock                                               (3,376)                                              (3,376)
Issued 14,489 shares of common stock in connection
    with Executive Compensation Plan                                                                          62       184      246
Exercised 7,836 option shares                                                                                (74)      121       47
Purchased 494,360 shares of common stock                                                                            (8,781)  (8,781)
                                                                     ---------- ------------ ---------  ---------  --------- -------
 Balance at December 31, 1999                                           41,741         (675)    5,397     21,244    (9,431)  58,276


    Net Income                                               $9,256      9,256                                                9,256
    Other comprehensive income, net of taxes
       Unrealized gains on AFS debt securities                1,262
       Less:  gains on disposition of securities                (61)
                                                         -----------
    Other comprehensive income                                1,201                    1,201                                  1,201
                                                         -----------
                                                         -----------
Comprehensive income                                        $10,457
                                                         ===========

Dividends on common stock                                               (3,262)                                              (3,262)
Issued 11,406 shares of common stock in connection
    with Executive Compensation Plan                                                                          (6)       196     190
Exercised 16,634 option shares                                                                              (161)       281     120
Purchased 225,640 shares of common stock                                                                             (3,797) (3,797)
                                                                     ---------- ------------ ---------  ---------  ---------- ------
Balance at December 31, 2000                                           $47,735         $526    $5,397    $21,077   $(12,751) $61,984
                                                                     ========== ============ =========  =========  ========== ======


------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements

</TABLE>
                                       31

<PAGE>
<TABLE>
<CAPTION>
INTERCHANGE FINANCIAL SERVICES CORPORATION
------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------
For the Years Ended, December 31,
(in thousands)

                                                                                2000       1999       1998
                                                                              ---------- ---------- ----------
<S>                                                                           <C>        <C>        <C>

Cash flows from operating activities
Net income                                                                    $ 9,256    $ 9,635    $ 8,609
Adjustments to reconcile net income to net cash provided by operating activities
  Depreciation and amortization                                                 1,377      1,400      1,374
  Amortization of securities premiums                                             371        675        964
  Accretion of securities discounts                                              (297)      (178)      (168)
  Amortization of premiums in connection with acquisition                         312        312        384
  Provision for loan and lease losses                                             750      1,200        951
  Net gain on sale of  loans and leases                                          (136)       (86)         -
  Net gain on sale of merchant credit card portfolio                                -       (329)         -
  Net gain on sale of securities                                                 (313)      (859)    (1,021)
  Net gain on sale of foreclosed real estate                                        -        (36)         -
  Net loss on disposal of fixed assets                                              -          2          3
Decrease (increase) in operating assets
  Accrued interest receivable                                                    (396)       (72)      (270)
  Deferred taxes                                                                 (186)    (1,059)       228
  Other                                                                          (789)     1,442        437
(Decrease) increase in operating liabilities
  Accrued interest payable                                                        737        (32)       (88)
  Other                                                                         1,712       (229)       552
                                                                            ---------- ---------- ----------
Cash provided by operating activities                                          12,398     11,786     11,955
                                                                            ---------- ---------- ----------

Cash flows from investing activities
(Payments for) proceeds from
  Net originations of loans and leases                                        (38,030)   (25,751)   (31,848)
  Purchase of loans and leases                                                (13,548)   (15,196)    (4,627)
  Purchase of term federal funds                                                    -          -     (7,500)
  Repayment of term federal funds                                                   -      5,000      2,500
  Sale of loans and leases                                                      2,739      1,155        409
  Sale of merchant credit card portfolio                                            -        329          -
  Purchase of securities available for sale                                   (55,687)   (56,347)   (28,688)
  Maturities of securities available for sale                                  11,135     16,152     16,971
  Sale of securities available for sale                                        33,902     26,193      1,622
  Sale of foreclosed real estate                                                    -        120          -
  Purchase of securities held to maturity                                     (11,479)   (18,949)   (30,435)
  Maturities of securities held to maturity                                    22,958     16,402     26,808
  Sale of securities held to maturity                                           2,002      2,003          -
  Purchase of fixed assets                                                     (2,122)    (1,769)    (1,703)
  Sale of fixed assets                                                              -          3          4
                                                                            ---------- ---------- ----------
Cash used in investing activities                                             (48,130)   (50,655)   (56,487)
                                                                            ---------- ---------- ----------

Cash flows from financing activities
Proceeds from (payments for)
  Deposits in excess of withdrawals                                            69,868        260     57,967
  Securities sold under agreements to repurchase and other borrowings          57,300     57,906     17,300
  Retirement of securities sold under agreement to repurchase and
   other borrowings                                                           (69,206)   (33,048)   (21,659)
  Dividends                                                                    (3,262)    (3,376)    (2,825)
  Common stock issued                                                             190        246        226
  Treasury stock                                                               (3,797)    (8,781)       (49)
  Exercise of option shares                                                       120         47        273
                                                                            ---------- ---------- ----------
Cash provided by financing activities                                          51,213     13,254     51,233
                                                                            ---------- ---------- ----------
(Decrease) increase in cash and cash equivalents                               15,481    (25,615)     6,701
Cash and cash equivalents, beginning of year                                   17,669     43,284     36,583
                                                                            ---------- ---------- ----------
Cash and cash equivalents, end of year                                        $33,150    $17,669    $43,284
                                                                            ========== ========== ==========

Supplemental disclosure of cash flow information:
Cash paid for:
  Interest                                                                    $16,907    $18,815    $19,953
  Income taxes                                                                  4,645      7,028      3,844

Supplemental disclosure of non-cash investing and financing activities:
  Loans transferred to foreclosed real estate                                       -        250         84
  Decrease (increase) - market valuation of securities available for sale      (2,057)     2,949         15
  Reclassification of long term borrowings to short term borrowings            13,000          -          -

------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
</TABLE>

                                       32
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

         The consolidated financial statements have been prepared in accordance
with accounting principles and practices generally accepted in the United States
of America within the banking industry. The following is a description of the
business of Interchange Financial Services Corporation and subsidiaries (the
"Company") and its significant accounting and reporting policies used in the
preparation of the consolidated financial statements:

   Nature of Business

         The Company, a New Jersey business corporation, is a registered bank
holding company whose principal subsidiary is Interchange Bank (the "Bank"),
formerly known as Interchange State Bank. The Bank is principally engaged in the
business of attracting commercial and retail deposits and investing those funds
into commercial business and commercial mortgage loans as well as residential
mortgage and consumer loans. When available funding exceeds loan demand, the
Bank generally invests in high quality debt securities. Currently, the Bank
conducts operations typical of a community bank in the northeast region of New
Jersey (primarily Bergen County). In addition, the Bank is also engaged in
providing its customers a broad range of financial services, such as equipment
leasing, mutual funds and annuities, brokerage services, conventional insurance,
internet banking and title insurance.

   Principles of consolidation

         The accompanying consolidated financial statements include the accounts
of the Company, including its wholly-owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain prior period amounts have been reclassified to conform with the
financial statement presentation of 2000. These reclassifications have no effect
on stockholders' equity or net income as previously reported.

Use of Estimates

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant estimates pertain to the allowance for loan and lease losses and the
fair value of financial instruments.

 Cash and cash equivalents

         For the purposes of presentation in the consolidated statements of cash
flows, cash and cash equivalents include cash on hand, amounts due from banks,
interest-bearing demand deposits and federal funds sold.

Securities held to maturity and securities available for sale

         Debt securities purchased with the intent and ability to hold until
maturity are classified as securities held to maturity and are carried at cost,
adjusted for the amortization of premiums and accretion of discounts. Management
determines whether the security will be classified as held to maturity at the
time of purchase.

         All other securities, including equity securities, are classified as
securities available for sale. Securities classified as available for sale may
be sold prior to maturity in response to, but not limited to, changes in
interest rates, changes in prepayment risk or for asset/liability management
strategies. These securities are carried at fair value and any unrealized gains
and losses are reported, net of taxes, as a separate component of stockholders'
equity. Gains and losses from the sale of these securities are determined using
the specific identification method.

Loans

         Generally, loans are carried at the principal amounts outstanding, net
of unearned discount and deferred loan origination fees and costs. Interest
income is accrued and credited to income as earned. Origination fees and certain
direct loan origination costs are deferred and amortized to interest income over
the estimated life of the loan as an adjustment to the yield.

     Mortgage  loans  held for sale are  carried at lower of  aggregate  cost or
market  value.  Gains and  losses on loans  sold are  included  in  non-interest
income.

         Direct finance leases have terms ranging from three to seven years.
Under direct finance lease accounting, the balance sheet includes the gross
minimum lease payments receivable, unguaranteed estimated residual values of the
leased equipment, and capitalized indirect costs, reduced by unearned lease
income.

         The lease residual values represent the expected proceeds from the sale
of leased equipment at the end of the term of the lease and are determined on
the basis of analyses prepared by the Bank's equipment leasing subsidiary,
Interchange Capital Company L.L.C. ("ICC"), based upon professional appraisals,
historical experience and industry data. Management reviews the estimated
residual values on a periodic basis, and impairments in value, if any, are
recognized as an immediate charge to income.

         Loans are placed on nonaccrual status when, in the opinion of
management, the future collection of interest or principal according to
contractual terms may be doubtful or when principal or interest payments are in
arrears 90 days or more. Amounts accrued are evaluated for collectibility.
Interest income on nonaccrual loans is recognized on a cash basis, to the extent
there is no doubt of the future collection of principal. Loans are returned to
accrual status when management deems that collection of principal and interest
is reasonable and probable.

         Loans are considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect all amounts due
according to contractual terms of the loan agreement. The collection of all
amounts due according to contractual terms means that both the contractual
interest and principal payments of a loan will be collected as scheduled in the
loan agreement.

         All commercial and commercial mortgage loans are evaluated for
impairment. One-to-four family residential mortgage loans and consumer loans
with small balances are pooled together as homogeneous loans and, accordingly,
are not covered by Statement of Financial Accounting Standards 114. "Accounting
by Creditors for Impairment of a Loan." All nonaccrual commercial and commercial
mortgage loans as well as non-homogeneous one-to-four family residential
mortgage loans and consumer loans are considered impaired.

         The impairment of a loan is measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the fair
value of the underlying collateral. The fair value of collateral, reduced by
costs to sell on a discounted basis, is utilized if a loan is collateral
dependent or foreclosure is probable.

                                       33
<PAGE>

Allowance for loan and lease losses

         The allowance for loan and lease losses ("ALLL") is established through
charges to income. Loan losses are charged against the ALLL when management
believes that the future collection of principal is unlikely. Subsequent
recoveries, if any, are credited to the ALLL. If the ALLL is considered
inadequate to absorb future loan losses on existing loans, based on, but not
limited to, increases in the size of the loan portfolio, increases in
charge-offs or changes in the risk characteristics of the loan portfolio, then
the provision for loan and lease losses is increased.

         The Company's ALLL is an amount considered adequate to absorb estimated
losses on existing loans and leases that may become uncollectible based on
management's evaluations of the size and current risk characteristics of the
loan portfolio as of the balance sheet date. The evaluations consider such
factors as changes in the composition and volume of the loan portfolio, the
impact of changing economic conditions on the credit worthiness of the
borrowers, review of specific problem loans and management's assessment of the
inherent risk and overall quality of the loan portfolio.

Premises and equipment

         Premises and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are computed using
the straight-line method. Premises and equipment are depreciated over the
estimated useful lives of the assets. Leasehold improvements are amortized over
the term of the lease, if shorter. Estimated lives are 30 to 40 years for
premises and 3 to 20 years for furniture and equipment. Maintenance and repairs
are charged to expenses as incurred, while renewals and major improvements are
capitalized.

Foreclosed real estate

         Foreclosed real estate is carried at the lower of cost or estimated
fair value, less estimated selling costs, at time of foreclosure. When a
property is acquired, the excess of the carrying amount over fair value, if any,
is charged to the ALLL. Subsequent valuations are performed periodically and the
carrying value is adjusted by a charge to foreclosed real estate expense to
reflect any subsequent declines in the estimated fair value. As a result,
further declines in real estate values may result in increased foreclosed real
estate expense. Routine holding costs are charged to foreclosed real estate
expense as incurred.

Income taxes

         Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using current tax rates.
The effect on deferred taxes of a change in tax rates is recognized in income in
the period the change occurs. Deferred tax assets are reduced, through a
valuation allowance, if necessary, by the amount of such benefits that are not
expected to be realized based on current available evidence.

 Per share amounts

         Basic earnings per common share is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding during the reporting period. Diluted earnings per common share is
computed similar to that of basic earnings per common share except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if all potentially dilutive common shares were
issued during the reporting period.

Recently issued accounting pronouncements

         On January 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments, and
Hedging Activities. SFAS 133 established accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. Under SFAS 133, certain contracts
that were not formerly considered derivatives may now meet the definition of a
derivative. The adoption of SFAS 133 did not have a significant impact on the
financial position or results of operations of the Company because the Company
does not have any derivative activity.

         On December 31, 2000, the Company adopted SFAS 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".
SFAS 140 requires the reclassification of certain pledged assets and disclosures
regarding collateral for the December 31, 2000 Consolidated Balance Sheet. The
Company's pledged assets to secured parties cannot be sold or repledged by those
parties, therefore, no reclassification of pledged assets on the consolidated
balance sheet was necessary for such transactions. Other provisions of SFAS 140
are not required to be implemented until after March 31, 2001. The Company is
currently assessing the impact, if any, from the full implementation of this
standard.


Note 2.  Acquisitions

         On May 31, 1998, the Company completed its acquisition of Jersey Bank.
The transaction was accounted for as a pooling of interests. Each of the
outstanding shares of Jersey Bank's common stock, including shares of common
stock that had been converted from outstanding shares of preferred stock, was
converted into 1.5 shares of the Company's common stock. Total consideration
tendered in the transaction amounted to 780,198 shares of the Company's common
stock.

         In 1994, the Bank assumed the deposit liabilities of Volunteer Federal
Savings Association of Little Ferry, New Jersey. The premiums paid to acquire
the deposits in the Volunteer transaction and in a 1991 branch acquisition are
being amortized over a period ranging from seven to ten years. Amortization in
2000, 1999 and 1998, which is included in non-interest expenses, amounted to
$313,000, $313,000 and $383,000, respectively.

Note 3.  Restrictions on Cash and Due from Banks

         The subsidiary bank is required to maintain a reserve balance with the
Federal Reserve Bank of New York based upon the level of its deposit liability.
The average amount of this reserve balance for 2000 and 1999 was approximately
$775,000.

                                       34
<PAGE>

Note 4.  Securities Held to Maturity and Securities Available for Sale

Securities held to maturity  and  securities  available  for sale consist of the
     following: (in thousands)

<TABLE>
<CAPTION>

                                                     ----------------------------------------------------------
                                                                         December 31, 2000
                                                     ----------------------------------------------------------
                                                                        Gross          Gross        Estimated
                                                      Amortized      Unrealized      Unrealized      Market
                                                         Cost           Gains          Losses         Value
                                                     -------------   ------------   -------------  ------------
<S>                                                  <C>             <C>            <C>            <C>

Mortgage-backed securities                                $12,646            $96             $48      $ 12,694
Obligations of U.S. agencies                               15,161            244               8        15,397
Obligations of states & political subdivisions             12,813            137              64        12,886
Other debt securities                                         422              1               -           423
                                                     -------------   ------------   -------------  ------------
                                                           41,042            478             120        41,400
                                                     -------------   ------------   -------------  ------------

Obligations of U.S. Treasury                                1,996             26               -         2,022
Mortgage-backed securities                                 79,242            758             155        79,845
Obligations of U.S. agencies                               19,924            194               4        20,114
Obligations of states & political subdivisions             13,562            237              58        13,741
Other debt securities                                         612              8               -           620
Equity securities                                           3,970              -               -         3,970
                                                     -------------   ------------   -------------  ------------
                                                          119,306          1,223             217       120,312
                                                     -------------   ------------   -------------  ------------

   Total securities                                      $160,348         $1,701            $337      $161,712
                                                     =============   ============   =============  ============


                                                     ----------------------------------------------------------
                                                                         December 31, 1999
                                                     ----------------------------------------------------------
                                                                        Gross          Gross        Estimated
                                                      Amortized      Unrealized      Unrealized      Market
                                                         Cost           Gains          Losses         Value
                                                     -------------   ------------   -------------  ------------
Obligations of U.S. Treasury                              $ 9,997            $ 5             $ 8       $ 9,994
Mortgage-backed securities                                 20,232             60             289        20,003
Obligations of U.S. agencies                                7,992              8              51         7,949
Obligations of states & political subdivisions             16,195              -             481        15,714
Other debt securities                                         124              -               -           124
                                                     -------------   ------------   -------------  ------------
                                                           54,540             73             829        53,784
                                                     -------------   ------------   -------------  ------------

Obligations of U.S. Treasury                                6,016             87               -         6,103
Mortgage-backed securities                                 68,331            104             982        67,453
Obligations of U.S. agencies                               27,141             51             112        27,080
Obligations of states & political subdivisions              3,139              -             198         2,941
Equity securities                                           3,772              -               -         3,772
                                                     -------------   ------------   -------------  ------------
                                                          108,399            242           1,292       107,349
                                                     -------------   ------------   -------------  ------------
   Total securities                                      $162,939           $315          $2,121      $161,133
                                                     =============   ============   =============  ============

  At December 31, 2000, the contractual maturities of securities held to maturity and securities available for sale are as follows:
    (in thousands)

                                                             Securities                     Securities
                                                          Held to Maturity              Available for Sale
                                                     ----------------------------   ---------------------------
                                                        Amortized      Market         Amortized      Market
                                                         Cost           Value           Cost          Value
                                                     -------------   ------------   -------------  ------------
   Within 1 year                                           $9,720         $9,717         $17,766       $17,764
   After 1 but within 5 years                              16,313         16,581          56,038        56,578
   After 5 but within 10 years                              3,874          3,968          12,409        12,448
   After 10 years                                          11,135         11,134          29,123        29,552
   Equity securities                                            -              -           3,970         3,970
                                                     -------------   ------------   -------------  ------------
                           Total                          $41,042        $41,400        $119,306      $120,312
                                                     =============   ============   =============  ============

</TABLE>
                                       35

<PAGE>


         Gross realized gains from the sale of securities available for sale
amounted to $341,000 and $860,000 in 2000 and 1999, respectively. Gross realized
losses from the sale of securities available for sale amounted to $31,000 and
$4,000 in 2000 and 1999, respectively. There were no gross realized losses in
1998. These amounts are included in net gain on sale of securities. Also,
included in net gain on sale of securities for 1998 is a gain of $145,000
realized from the call of a security before its maturity.

         Proceeds from the sale of securities held to maturity (scheduled to
mature within 3 months) amounted to $2.0 million in each of the years ended
December 31, 2000 and 1999 and resulted in realized gains of $2,000 and $3,000
for those periods, respectively. There were no sales of securities held to
maturity during 1998.

         Securities with carrying amounts of $49.3 million and $48.3 million at
December 31, 2000 and 1999, respectively, were pledged for public deposits,
Federal Home Loan Bank advances, securities sold under repurchase agreements and
other purposes required by law.

 Note 5.  Loans

     The  composition  of the loan  portfolio  is  summarized  as  follows:  (in
thousands)

<TABLE>
<CAPTION>
                                     ----------------------
                                        December 31,
                                     ----------------------
                                       2000        1999
                                     -----------  ---------
<S>                                  <C>         <C>
Commercial and financial               $76,702    $63,684
Real estate
   Residential                         264,174    264,845
   Commercial                          181,722    166,354
   Construction                          3,755      4,008
Installment                              5,803      3,703
Lease financing                         28,723      9,382
                                    -----------  ---------
                                       560,879    511,976
Allowance for loan and lease losses      6,154      5,476
                                    -----------  ---------
Net loans                             $554,725   $506,500
                                    ===========  =========


     Nonperforming  loans  include loans which are accounted for on a nonaccrual
basis and troubled debt restructurings.  Nonperforming loans are as follows: (in
thousands)

                                    --------------------------------
                                          D e c e m b e r 31,
                                    --------------------------------
                                       2000        1999      1998
                                    -----------  ---------  --------
Nonaccrual loans
   Commercial and financial              $ 305      $ 308     $ 266
   Residential real estate                 419        398       583
   Commercial real estate                  367        409       346
   Lease financing                         304          -         -
   Installment                               -          -         3
                                    -----------  ---------  --------
                                         1,395      1,115     1,198
                                    -----------  ---------  --------

Troubled debt restructurings
   Commercial and financial                  -        222       528
                                    -----------  ---------  --------

Total nonperforming assets              $1,395     $1,337    $1,726
                                    ===========  =========  ========

Interest income that would have
  been recorded during the year
  on nonaccrual loans outstanding
  at year-end in accordance with
  original terms                          $143       $120      $147

Interest income included in net income
   during the year on nonaccrual
   loans outstanding at year-end           $93        $74       $71




         At December 31, 2000, 1999 and 1998, there were no loans or leases on
which interest is accruing and included in income, but which were contractually
past due 90 days or more as to principal or interest payments.

         Certain officers and directors of the Company and their affiliated
companies are customers of and are engaged in transactions with the Company in
the ordinary course of business on substantially the same terms as those
prevailing with other non-affiliated borrowers and suppliers.

     The following table  summarizes  activity with respect to these loans:  (in
thousands)

                                   ------------------------
                                   Years Ended December 31,
                                   ------------------------
                                     2000         1999
                                   ----------   ---------
Balance at beginning of year          $7,354      $7,623
Additions                                491       1,776
Reductions                              (478)     (2,045)
                                   ----------   ---------
Balance at end of year                $7,367      $7,354
                                   ==========   =========
</TABLE>

                                       36
<PAGE>


Note 6.  Allowance for Loan and Lease Losses

     The  Company's  recorded  investment in impaired  loans is as follows:  (in
thousands)

<TABLE>
<CAPTION>
                                                --------------------------------------------
                                                             December 31,
                                                --------------------------------------------
                                                         2000                  1999
                                                ---------------------- ---------------------
                                                 Investment   Related  Investment  Related
                                                     in      Allowance     in      Allowance
                                                  Impaired   for Loan   Impaired   for Loan
                                                    Loans     Losses     Loans      Losses
                                                ---------- ----------- ---------- ----------
<S>                                             <C>        <C>         <C>        <C>
Impaired loans
   With a related allowance for loan losses
          Commercial and financial                  $ 298        $ 7       $272       $41
          Commercial real estate                      367         10        667        17
   Without a related allowance for loan losses          -          -          -         -
                                                ---------- ----------- ---------- ---------
                                                     $665       $ 17       $939       $58
                                                ========== =========== ========== =========

--------------------------------------------------------------------------------------------
The impairment of the above loans was measured based on the fair value of collateral.



     The following table sets  forth-certain  information  about impaired loans:
(in thousands)

                                              ------------------------
                                              Years Ended December 31,
                                              ------------------------
                                                 2000       1999
                                              ---------- ----------
Average recorded investment                      $677     $1,181
                                              ========== ==========
Interest income recognized during time period
   that loans were impaired, using cash-basis
   method of accounting                           $41        $90
                                              ========== ==========



     Changes  in the  allowance  for loan and lease  losses  are  summarized  as
follows: (in thousands)

                                    -------------------------------
                                         Year Ended December 31,
                                    -------------------------------
                                       2000      1999       1998
                                     --------- ---------- ----------
Balance at beginning of year          $5,476     $5,645     $5,231
Additions (deductions)
     Provision charged to operations     750      1,200        951
     Recoveries on loans previously
     charged off                         147         44         83
     Loans charged off                  (219)    (1,413)      (620)
                                     --------- ---------- ----------
Balance at end of year                $6,154     $5,476     $5,645
                                     ========= ========== ==========
------------------------------------------------------------------------
     For years ended December 31, 2000, 1999 and 1998, the provisions charged to
expense for federal  income tax  purposes  amounted  to  approximately  $71,000,
$1,369,000, and $537,000, respectively.

</TABLE>


Note 7.  Premises and Equipment, net

    Premises and equipment are summarized as follows: (in thousands)

                                                   ---------------------
                                                        December 31,
                                                   ---------------------
                                                      2000       1999
                                                   ---------   ---------
Land                                                $1,980      $1,980
Buildings                                            3,019       3,009
Furniture, fixtures and equipment                    6,397       6,154
Leasehold improvements                               9,047       7,899
                                                   ---------   ---------
                                                    20,443      19,042
Less: accumulated depreciation and amortization      9,204       8,753
                                                   ---------   ---------
                                                   $11,239     $10,289
                                                   =========   =========

Note 8.  Deposits

    Deposits are summarized as follows: (in thousands)

                                          -------------------------------------
                                                      December 31,
                                          -------------------------------------
                                                2000               1999
                                          ------------------ ------------------
Non-interest bearing demand deposits               $107,702           $102,392
Interest bearing demand deposits                    229,712            213,970
Money market deposits                                56,646             49,256
Savings deposits                                     66,270             70,907
Time deposits                                       208,530            162,467
                                          ------------------ ------------------
                                                   $668,860           $598,992
                                          ================== ==================

         At December 31, 2000 and 1999, the carrying amounts of certificates of
deposit that individually exceed $100 thousand amounted to $21,199,000, and
$21,023,000, respectively. Interest expense relating to certificates of deposit
that individually exceed $100 thousand was approximately $1,156,000, $1,371,000,
and $1,616,000 in 2000, 1999, and 1998, respectively.

                                       37

<PAGE>


Note 9. Securities Sold Under Agreements to Repurchase and Short-term Borrowings

     Securities  sold under  agreements to repurchase and short-term  borrowings
are summarized as follows: (in thousands)
                                                     ---------------------------
                                                            December 31,
                                                     ---------------------------
                                                          2000          1999
                                                     --------------- -----------
Securities sold under agreements to repurchase              $18,500     $16,431
Federal Funds Purchased                                           -      13,975
Federal Home Loan Bank advances                              13,000           -
                                                     --------------- -----------
                                                            $31,500     $30,406
                                                     =============== ===========

         Federal Home Loan Bank ("FHLB") advances, which amounted to $13.0
million at December 31, 2000, was comprised of two borrowings. One of the
borrowings consists of a $7.0 million advance that has a fixed rate of 6.28%
maturing in October 2002 and is collateralized by U.S. Treasury and U.S. agency
securities. The FHLB has an option to call the $7.0 million advance on October
26, 2001. The other borrowing consists of a $6.0 million advance that has a
fixed rate of 6.30% maturing in December 2001 and is collateralized by U.S.
Treasury and U.S. agency securities. The FHLB has an option to call the $6.0
million advance after December 2000. In addition, the Bank has a $72.2 million
line of credit available through its membership in the FHLB of New York.

Note 10.  Long-term Borrowings

         Long-term borrowings were comprised of two FHLB advances, which
amounted to $13.0 million at December 31, 1999. These advances have been
classified as short-term borrowings in 2000 since they are callable within one
year.

Note 11.  Benefit Plans

         In 1993, the Bank established a non-contributory defined benefit
pension plan covering all eligible employees (the "Pension Plan"). The funding
policy is to contribute an amount that is at least the minimum required by law.
The plan assets consist of investments in fixed income funds and equity mutual
funds. Retirement income is based on years of service under the plan and,
subject to certain limits, on final average compensation. Effective January 1,
1994, the Bank established a supplemental plan covering all eligible employees
(the "Supplemental Plan") that provides for retirement income that would have
been paid but for the limitation under the qualified Pension Plan.

         Effective August 1, 1994, the Company established a retirement plan for
all directors of the Bank who are not employees of the Company or of any
subsidiary or affiliate of the Company (the "Directors' Plan"). As a part of
this Directors' Plan, the Company contributes annually to a life insurance
policy or annuity contract for each director with 5 years or more of service, as
follows:

                  Years of Service            Amount Contributed
                  -----------------           ------------------
                           6                        $5,000
                           7                         6,000
                           8                         7,000
                           9                         8,000
                           10                        9,000
                       11 or more                   10,000

         The Bank owns the life insurance policies or annuity contracts.
Retirement income to a director who has completed five years of service through
ten years of service will be based on the cash value of the life insurance
policy or annuity contract. After ten years of service, the retirement income
will be based on the greater of the cash value of the life insurance policy or
annuity contract or an amount determined by multiplying the Bank's standard
annual retainer fees (currently $10,000) at the director's retirement date by
the director's years of service.

     Net pension cost of each plan consists of the following: (in thousands)
<TABLE>
<CAPTION>

                                      Pension Plan       Supplemental Plan      Directors' Plan
                                  ---------------------- ------------------- ----------------------
                                    2000    1999   1998    2000  1999  1998    2000    1999   1998
                                  -------- ------ ------ ------- ----- ----- -------- ------ ------
<S>                               <C>      <C>    <C>    <C>     <C>   <C>   <C>      <C>    <C>

Service cost                         $197   $251   $222     $24   $25   $22      $57    $61    $59
Interest cost                          95     85     65      17    14    12       88     80     76
Expected return on plan assets        (88)   (85)   (71)      -     -     -        -      -      -
Amortization of prior service cost      -      -      -       8     8     8        -     92    147
Recognized net actuarial gain         (27)    (8)    (6)      -     -     -        -      -      -
                                  -------- ------ ------ ------- ----- ----- -------- ------ ------
Net periodic benefit cost            $177   $243   $210     $49   $47   $42     $145   $233   $282
                                  ======== ====== ====== ======= ===== ===== ======== ====== ======
</TABLE>

                                       38

<PAGE>

         The following table sets forth the funded status, as of December 31, of
each plan and amounts recognized in the Company's Consolidated Balance Sheets
and the major assumptions used to determine these amounts: (dollars in
thousands)
<TABLE>
<CAPTION>


                                                  Pension Plan              Supplemental Plan            Directors' Plan
                                             ------------------------    -----------------------    -------------------------
                                                2000          1999          2000         1999           2000          1999
                                             ----------    ----------    ---------    ----------    -----------    ----------
<S>                                          <C>           <C>           <C>          <C>           <C>            <C>

Change in pension obligation
Pension obligation at beginning of year        $1,233        $1,223        $ 215         $ 200        $ 1,251       $ 1,195
Service cost                                      197           251           24            25             57            61
Interest cost                                      95            85           18            14             88            80
Actuarial (gain) loss                             131          (303)          17           (24)           (28)          (85)
Benefits paid                                     (30)          (23)           -             -              -             -
Other                                               -             -            -             -           (109)            -
                                              ----------    ----------    ---------    ----------    -----------    ----------
Pension obligation at end of year               1,626         1,233          274           215          1,259         1,251
                                              ----------    ----------    ---------    ----------    -----------    ----------

Change in plan assets
Fair value of plan assets at beginning of year  1,088         1,064            -             -              -             -
Actual return on plan assets                      113            47            -             -              -             -
Employer contribution                              27             -            -             -              -             -
Benefits paid                                     (30)          (23)           -             -              -             -
                                              ----------    ----------    ---------    ----------    -----------    ----------
Fair value of plan assets at end of year        1,198         1,088            -             -              -             -
                                              ----------    ----------    ---------    ----------    -----------    ----------

Funded Status                                    (428)         (145)        (274)         (215)        (1,259)       (1,251)
Unrecognized net actuarial (gain) loss           (351)         (483)           9            (9)           (73)          (46)
Unrecognized prior service cost                    (5)           (5)          65            73              -             -
                                              ----------    ----------    ---------    ----------    -----------    ----------
Accrued pension cost                           $ (784)       $ (633)      $ (200)       $ (151)       $(1,332)     $ (1,297)
                                              ==========    ==========    =========    ==========    ===========    ==========


Weighted-average assumptions (1)
Discount rate                                     8.00  %       8.00  %      8.00  %       8.00  %        8.00  %       8.00  %
Expected return on plan assets                    8.00          8.00         8.00          8.00           8.00          8.00
Rate of compensation increase                     5.00          5.00          N/A           N/A           N/A            N/A

-------------------------------------------------------------------------------------------------------------------------
(1)  Weighted average assumptions were applied at the beginning of the period.

</TABLE>


         In 1976, the Bank established a Capital Investment Plan (the
"Investment Plan") which permits employees to make basic contributions up to 4%
of base compensation. In 1998, the Investment Plan was amended to permit
employees to make basic contributions up to 6%. Additional contributions up to
10% of compensation may be made when coupled with basic contributions. Under the
Investment Plan, the Bank provides a matching contribution equal to 50% of the
basic contribution of each participant. In addition, the Bank makes a fixed
contribution on behalf of each participant equal to 1% of such participant's
base compensation, which is in the form of the Company's stock. The Bank's
contribution to the Investment Plan amounted to $165,000 and $163,000 in 2000
and 1999, respectively.

                                       39
<PAGE>


Note 12.  Stock Option and Incentive Plan

         In 1989, the Company adopted a stock option plan, retitled the Stock
Option and Incentive Plan of 1997 (the "Stock Plan") that covers certain key
employees. Under this plan, as amended, a maximum of 637,875 options to purchase
shares of common stock may be granted at fair market value at the date of grant.
Options granted expire if not exercised within ten years of date of grant and
are exercisable according to a vesting schedule, starting one year from the date
of grant. Pursuant to the Stock Plan, incentive stock options or non-qualified
stock options may be granted to employees.

         In 2000, the Company adopted a stock option plan, titled "Outside
Director's Incentive Compensation Plan" (the "Director's Stock Plan") that
covers those members of the Board of Directors of the Company who have not
served as a full-time employee of the Company or any of its subsidiaries during
the prior twelve-month period. Under this plan, a maximum of 100,000 options to
purchase shares of common stock may be granted at fair market value at the date
of grant. Options granted expire if not exercised within ten years of date of
grant and are exercisable according to a vesting schedule, starting one year
from the date of grant. Only non-qualified stock options are granted under the
Director's Stock Plan.

         The status of options granted under the Stock Plan and Director's Stock
Plan as of December 31, and changes during each of the three years then ended is
summarized below:

<TABLE>
<CAPTION>

                                             2000                 1999             1998
                                   ------------------------  ----------------- -----------------
                                                 Weighted-           Weighted-         Weighted-
                                                  Average            Average           Average
                                                 Exercise            Exercise          Exercise
Incentive Stock Options                Options     Price     Options  Price    Options  Price
----------------------------------- ------------ ----------  ------- --------  ------- --------
<S>                                    <C>       <C>         <C>     <C>       <C>     <C>
Outstanding at January 1                152,988    $ 13.85   110,824 $ 11.91   121,935  $ 6.62
Granted                                  57,250      16.50    58,750   16.97    49,875   18.17
Exercised                               (16,634)      7.36    (7,836)   6.05   (50,394)   5.27
Forfeited                                (8,875)     17.36    (8,750)  17.30   (10,592)  12.05
                                       ---------             -------           -------
Outstanding at December 31              184,729      15.09   152,988   13.85   110,824   11.91
                                       =========             =======           =======

Options exercisable at December 31       83,560      12.93    71,238    9.79    58,440    7.29
                                       =========             =======           =======
Weighted-average fair value of options
    granted during the year ended
    December 31(per option)               $4.46                $5.03             $5.98



                                              2000
                                   ------------------------
                                                 Weighted-
                                                  Average
                                                 Exercise
Non-Qualified Stock Options            Options     Price
------------------------------------------------ ----------
Outstanding at January 1                      -          -
Granted                                  11,000    $ 14.00
Exercised                                     -          -
Forfeited                                     -          -
                                       ---------
Outstanding at December 31               11,000      14.00
                                       =========
Options exercisable at December 31            -          -
                                       =========

Weighted-average fair value of options
    granted during the year ended
    December 31 (per option)              $3.76


     The following table summarizes  information about options outstanding under
the Stock Plan and Director's Stock Plan at December 31, 2000:

                      Options Outstanding                           Options Exercisable
----------------------------------------------------------------- -------------------------
                                         Weighted-
                                          Average     Weighted-                 Weighted-
        Range of                         Remaining     Average                   Average
        Exercise             Number     Contractual    Exercise      Number     Exercise
         Prices           Outstanding       Life        Price     Exercisable     Price
------------------------- ------------- ------------- ----------- -------------------------

Incentive Stock Options
       $ 5 - $10                38,729      3.32          $ 7.48        38,729      $ 7.48
       $15 - $20               146,000      8.22           17.10        44,831       17.63
                          -------------                           -------------
                               184,729                                  83,560
                          -------------                           -------------

Non-Qualified Stock Options
       $10 - $15                11,000      9.32           14.00             -           -

                          -------------                           -------------
Total                          195,729                                  83,560
                          =============                           =============


</TABLE>
                                       40

<PAGE>

         The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2000, 1999 and 1998, respectively: dividend yield
of 3.21%, 2.76%, 2.20%; expected volatility of 23.89%, 22.63% and 23.33%;
risk-free interest rate of 6.48%, 5.31% and 5.62%; and expected lives of 7
years. The effects of applying these assumptions in determining the pro-forma
net income may not be representative of the effects on pro-forma net income for
future years.

         If compensation cost for Stock Plan and Director's Stock Plan awards
had been measured based on the fair value of the stock options awarded at the
grant dates, net income and diluted earnings per common share would have been
reduced to the pro-forma amounts below for the years ended December 31: (in
thousands, except share data)

                                    2000      1999      1998
                                  ---------  -------   -------
Net Income
      As reported                   $9,256   $9,635    $8,609
      Pro-forma                      9,174    9,572     8,572

Diluted earnings per common share
      As reported                    $1.41    $1.36     $1.19
      Pro-forma                       1.40     1.36      1.18



         Pursuant to the Stock Plan, restricted stock is awarded to key
employees providing for the award of Interchange's common stock subject to
certain vesting and restrictions. The awards are recorded at fair market value
and amortized into salary expense over the vesting period. The following table
sets forth the changes in restricted stock awards outstanding for the years
ended December 31, 2000, 1999 and 1998.


 Restricted Stock Awards              2000          1999         1998
                                  ------------- ------------- -----------
Outstanding at beginning of year        24,172        21,591      23,783
Granted                                 11,406        14,489      12,769
Vested                                 (12,375)      (11,908)    (11,320)
Forfeited                                    -             -      (3,641)
                                  ------------- ------------- -----------
Outstanding at end of year              23,203        24,172      21,591
                                  ============= ============= ===========


         The amount of compensation costs related to restricted stock awards
included in salary expense in 2000, 1999 and 1998 amounted to $167,939, $144,908
and $101,381, respectively.

                                       41

<PAGE>


Note 13.  Stockholders' Equity

      The Company and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements. Under capital
adequacy guidelines, the Company and the Bank must meet specific capital levels
that involve quantitative measures of their assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Company's and the Bank's capital amounts and the Bank's classification, under
the regulatory framework for prompt corrective action, are also subject to
qualitative judgments by the regulators about components, risk weighting, and
other factors.

      Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets.
Management believes, as of December 31, 2000, that the Company and the Bank meet
all capital adequacy requirements to which they are subject.

      As of December 31, 2000, the most recent notification from the Federal
Reserve Bank categorized the Bank as "well capitalized" under the regulatory
framework for prompt corrective action. To be categorized as "well capitalized,"
the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth in the following table. There are no conditions or
events since that notification that management believes have changed the
institution's category.




The Company's and the Bank's capital amounts and ratios are as follows: (dollars
in thousands)

<TABLE>
<CAPTION>

                                                                                                        To Be Well
                                                                                                    Capitalized Under
                                                                               For Capital          Prompt Corrective
                                                       Actual               Adequacy Purposes       Action Provisions
                                             --------------------------   ---------------------   ----------------------
                                                Amount         Ratio        Amount       Ratio      Amount       Ratio
                                             ------------    ----------   -----------   -------   ----------    --------
<S>                                          <C>             <C>          <C>           <C>       <C>            <C>

As of December 31, 2000:
  Total Capital (to Risk Weighted Assets):
   The Company                                   $67,632         12.92 %     $41,864      8.00 %        N/A         N/A
   The Bank                                       67,165         12.83        41,865      8.00      $52,331       10.00%
  Tier 1 Capital (to Risk Weighted Assets):
   The Company                                    61,478         11.75        20,932      4.00          N/A         N/A
   The Bank                                       61,011         11.66        20,932      4.00       31,398        6.00
  Tier 1 Capital (to Average Assets):
   The Company                                    61,478          8.02        22,992      3.00          N/A         N/A
   The Bank                                       61,011          7.99        22,917      3.00       38,196        5.00

As of December 31, 1999:
  Total Capital (to Risk Weighted Assets):
   The Company                                   $64,209         13.91 %     $36,925      8.00 %        N/A         N/A
   The Bank                                       64,877         14.01        37,054      8.00      $46,318       10.00%
  Tier 1 Capital (to Risk Weighted Assets):
   The Company                                    58,733         12.72        18,463      4.00          N/A         N/A
   The Bank                                       59,401         12.82        18,527      4.00       27,791        6.00
  Tier 1 Capital (to Average Assets):
   The Company                                    58,733          8.32        21,167      3.00          N/A         N/A
   The Bank                                       59,401          8.45        21,080      3.00       35,133        5.00


</TABLE>
                                       42
<PAGE>


Shares of common stock


     On June 2, 1999, the Board of Directors  authorized a program to repurchase
up to 10  percent,  or  approximately  720  thousand  shares,  of the  Company's
outstanding  common stock. The Company completed the purchases  pursuant to this
program  during the first  quarter of 2000.  The total cost of the purchases was
approximately  $12.6  million,  of which $3.8 million was purchased in 2000. The
repurchased  shares are held as treasury stock and will be principally  used for
the exercise of stock  options,  incentive  plan stock awards and other  general
corporate purposes.

The following table summarizes the activity in common shares:

                                                             Shares in
                                             Shares Issued    Treasury
                                             ------------    ----------
Balance, December 31, 1998                     7,200,133        74,500
    Purchase of treasury stock                  (494,360)      494,360
    Issuance of stock from treasury               22,325       (22,325)
                                             ------------    ----------

Balance, December 31, 1999                     6,728,098       546,535
    Purchase of treasury stock                  (225,640)      225,640
    Issuance of stock from treasury               28,040       (28,040)
                                             ------------    ----------

Balance, December 31, 2000                     6,530,498       744,135
                                             ============    ==========

Note 14.  Earnings Per Share

     The reconciliation of the numerators and denominators of the basic and
diluted earnings per common share computations for the years ended December 31,
are as follows: (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                   2000                        1999                      1998
                                      ------------------------------- ----------------------------------------------------
                                                 Weighted     Per             Weighted    Per            Weighted   Per
                                                  Average    Share            Average    Share           Average   Share
                                       Income     Shares     Amount   Income   Shares   Amount  Income   Shares   Amount
                                      ---------- ---------- --------- ------- --------- ------- --------- -------- --------
<S>                                   <C>        <C>        <C>       <C>     <C>       <C>     <C>       <C>      <C>
Basic Earnings per Common Share
Income available to common
   shareholders                          $9,256      6,540     $1.42   $9,635    7,031    $1.37  $8,609    7,189    $1.20
                                                            =========                   ========                  ========

Effect of Dilutive Shares
Options issued                                          18                          31                        48
                                                 ----------                   ---------                  --------

Diluted Earnings per Common Share
Income available to common
   shareholders                          $9,256      6,558     $1.41   $9,635    7,062    $1.36  $8,609    7,237    $1.19
                                      ========== ========== ========= ================= ================ ======== ========

</TABLE>

Note 15.  Other Non-interest Expenses

      Expenses included in other non-interest expenses which exceed one percent
of the aggregate of total interest income and non-interest income for the years
ended, December 31, are as follows: (in thousands)

                          2000       1999      1998
                       ----------- --------- ---------

Professional fees          $1,120    $1,101    $1,184
Data Processing               575       517       538
Directors' fees, travel
   and retirement             504       546        88




                                       43
<PAGE>

Note 16.   Income Taxes

     Income tax  expense  for the years  ended  December  31, is  summarized  as
follows: (in thousands)

                2000        1999     1998
              -------     -------   --------
Federal:
  current     $5,264       $5,114     $4,399
  deferred      (789)        (316)      (344)
State:
  current        117          161        315
  deferred         -            -        538
              ----------  --------  ---------
              $4,592       $4,959     $4,908
              ==========  ========  =========

      The effects of temporary differences that give rise to significant
portions of the Company's deferred tax assets and liabilities as of December 31,
are as follows: (in thousands)

                                                            2000         1999
                                                          ----------    --------
Deferred tax assets
  Excess of book over tax allowance for loan losses         $ 2,099      $1,638
  Excess of book over tax depreciation                          359         253
  Excess of book over tax provision for benefit plan expense    791         714
  Core deposit premium                                          276         223
  Other                                                         242         108
  Unrealized losses - securities available for sale               -         367
                                                          ----------    --------
   Total deferred tax assets                                  3,767       3,303
                                                          ----------    --------

Deferred tax liabilities
  Unrealized gains - securities available for sale              342           -
  Loan origination fees                                         200         199
  Other                                                         219         179
                                                          ----------    --------
   Total deferred tax liabilities                               761         378
                                                          ----------    --------
   Net deferred tax assets                                   $3,006      $2,925
                                                          ==========    ========

      Net deferred tax assets are included in other assets on the consolidated
balance sheet. It is more likely than not that deferred tax assets of $3.0
million will be principally realized through future reversals of existing
taxable temporary differences and, to a lesser extent, future taxable income and
tax planning strategies.

The provision for income taxes differs from the expected statutory  provision as
follows:

                                             -----------------------------------
                                                        December 31,
                                             -----------------------------------
                                               2000         1999         1998
                                             ----------   ---------    ---------
  Expected provision at statutory rate             35%          35%         34%
  Difference resulting from:
   State income tax, net of federal benefit         1            1           2
   Interest income exempt from federal taxes       (2)          (1)         (1)
   Other                                           (1)          (1)          1
                                             ----------     --------   ---------
                                                   33%           34%        36%
                                             ==========     ========   =========



Note 17.  Restrictions of Subsidiary Bank Dividends

      Under New Jersey State law, the Bank may declare a dividend only if, after
payment thereof, its capital would be unimpaired and its remaining surplus would
equal 50 percent of its capital. At December 31, 2000, undistributed net assets
of the Bank were $61,517,000 of which $57,199,000 was available for the payment
of dividends. In addition, payment of dividends is limited by the requirement to
meet the capital guidelines issued by the Board of Governors of the Federal
Reserve System.

Note 18.   Commitments and Contingent Liabilities

      The Company has contingent liabilities and outstanding commitments that
include agreements to extend credit which arise in the normal course of business
and which are not shown in the accompanying financial statements.

      Loan commitments are made to accommodate the financial needs of the
Company's customers. Standby letters of credit commit the Company to make
payments on behalf of customers when certain specified future events occur. They
are issued primarily to support performance bonds. Both arrangements have credit
risks essentially the same as that involved in extending loans to customers and
are subject to the normal credit policies of the Company.

     A summary of commitments to extend credit at December 31, are summarized as
follows: (in thousands)

                           2000          1999
                         ---------    ----------
Home equity loans         $60,697       58,523
Other loans                50,313       43,153
Standby letters of credit     440          449
                         ---------    ----------
                         $111,450     $102,125
                         =========    ==========


      The minimum annual rental under non-cancelable operating leases for
premises and equipment, exclusive of payments for maintenance, insurance and
taxes, is summarized as follows: (in thousands)


2001                             $1,341
2002                              1,283
2003                              1,241
2004                              1,128
2005                              1,060
thereafter                        4,721
                               ----------
Total minimum lease payments    $10,774
                               ==========


     Rent  expense  for  all  leases  amounted  to   approximately   $1,400,000,
$1,256,000 and $1,101,000 in 2000, 1999, and 1998, respectively.

     A director of the Company  provided legal  services  through his affiliated
firm. Fees paid for these services amounted to approximately $335,000,  $325,000
and $331,000 in 2000, 1999, and 1998, respectively.

     The Company is also a party to routine litigation involving various aspects
of its  business,  none of which,  in the  opinion of  management  and its legal
counsel,  is  expected  to have a material  adverse  impact on the  consolidated
financial condition, results of operations or liquidity of the Company.

                                       44
<PAGE>

Note 19.   Fair Value of Financial Instruments

     Fair value estimates of the Company's  financial  instruments are made at a
particular point in time,  based on relevant market  information and information
about the  financial  instrument.  Fair values are most  commonly  derived  from
quoted market prices.  In the event market prices are not available,  fair value
is determined  using the present value of  anticipated  future cash flows.  This
method is  sensitive  to the  various  assumptions  and  estimates  used and the
resulting fair value estimates may be significantly affected by minor variations
in those  assumptions or estimates.  In that regard, it is likely the Company in
immediate  settlement  of  the  financial   instruments  would  realize  amounts
different from the fair value estimates.

     The  following  table sets forth the carrying  amounts and  estimated  fair
values of the Company's financial instruments: (in thousands)

<TABLE>
<CAPTION>
                          ------------------------------------------------------------
                                                   December 31,
                           ------------------------------------------------------------
                                      2000                                 1999
                           ---------------------------           ----------------------
                             Carrying         Fair                Carrying      Fair
                              Amount         Value                 Amount      Value
                           ------------   ------------           ----------  ----------
<S>                        <C>            <C>                    <C>         <C>

 Cash and cash equivalents     $33,150        $33,150              $17,669     $17,669
 Securities held to maturity    41,042         41,400               54,540      53,784
 Securities available for sale 120,312        120,312              107,349     107,349
 Loans, net                    554,725        561,819              506,500     495,452
                           ------------   ------------           ----------  ----------
                              $749,229       $756,681             $686,058    $674,254
                           ============   ============           ==========  ==========

 Deposits                     $668,860       $669,533             $598,992    $597,887
 Short-term borrowings          31,500         31,500               30,406      30,406
 Long-term borrowings                -              -               13,000      12,906
                           ------------   ------------           ----------  ----------
                              $700,360       $701,033             $642,398    $641,199
                           ============   ============           ==========  ==========
</TABLE>


         The methods and significant assumptions used to determine the estimated
fair values of the Company's financial instruments are as follows:

Cash and cash equivalents

         Cash and cash equivalents include cash on hand, amounts due from banks
and federal funds sold. The estimated fair values of these financial instruments
approximate their carrying values since they mature overnight or are due on
demand.

Securities held to maturity and securities available for sale

         Estimated fair values are based principally on quoted market prices,
where available, or dealer quotes. In the event quoted market prices are not
available, fair values are estimated using market prices of similar securities.

Loans

         The loan portfolio is segregated into various categories for purposes
of estimating fair value. The fair values of certain loans that reprice
frequently and have no significant change in credit risk is assumed to equal
their carrying values. The fair value of other types of loans is estimated by
discounting the future cash flows using interest rates that are currently being
offered for loans with similar terms to borrowers with similar credit quality.
The fair value of nonperforming loans is estimated using methods employed by
management in evaluating the ALLL.

Deposits

         The estimated fair values of deposits with no stated maturity, such as
demand deposits, savings, NOW and money market accounts are, by definition,
equal to the amount payable on demand at the reporting date. The fair values of
fixed-rate certificates of deposit are based on discounting the remaining
contractual cash flows using interest rates currently being offered on
certificates of deposit with similar attributes and remaining maturities.

Short-term borrowings

         The fair value of short-term borrowings is assumed to equal the
carrying value in the financial statements, as these instruments are short-term.

Long-term borrowings

         Fair value estimates of long-term borrowings are based on discounting
the remaining contractual cash flows using rates, which are comparable to rates
currently being offered for borrowings with similar remaining maturities.

Off-balance-sheet financial instruments

         The fair values of commitments to extend credit and unadvanced lines of
credit approximate the fees currently charged to enter into similar
transactions, considering the remaining terms of the commitments and the
credit-worthiness of the potential borrowers. At December 31, 2000 and 1999, the
estimated fair values of these off-balance-sheet financial instruments were
immaterial.

                                       45
<PAGE>

Note 20. Parent Company Information (in thousands)

<TABLE>
<CAPTION>

                                             --------------------------
                                                   December 31,
                                             --------------------------
Condensed balance sheets                       2000     1999     1998
                                             ---------- ------- -------
<S>                                          <C>        <C>    <C>
Assets
  Cash                                            $467    $641    $355
  Securities available for sale                      -       -   1,321
  Investment in subsidiaries
   Bank                                         61,517  58,944  59,591
   Other                                           142     646     646
  Dividends receivable                             816       -     720
  Other assets                                       -       -     602
                                             ---------- ------- -------
   Total assets                                $62,942 $60,231 $63,235
                                             ========== ======= =======

Liabilities
  Dividends payable                               $815    $805    $720
  Loans from subsidiaries                            -   1,000       -
  Other liabilities                                142     150     143
                                             ---------- ------- -------
                                                   957   1,955     863
                                             ---------- ------- -------

Stockholders' equity
  Common stock                                   5,397   5,397   5,397
  Capital Surplus                               21,077  21,244  21,256
  Retained earnings                             47,736  41,741  35,482
  Accumulated other comprehensive income           526    (675)  1,192
                                             ---------- ------- -------
                                                74,736  67,707  63,327
  Less:  Treasury stock                         12,751   9,431     955
                                             ---------- ------- -------
   Total stockholders' equity                   61,985  58,276  62,372
                                             ---------- ------- -------
   Total liabilities and stockholders' equity  $62,942 $60,231  $63,235
                                             ========= ======== =======

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

                                             --------------------------
                                             Years Ended December 31,
                                             --------------------------
Condensed statements of income                 2000     1999     1998
                                             --------- -------- -------
Dividends from subsidiary bank                  $8,587  $8,641  $2,556
Dividends on equity securities                       -       8      37
Net gain on sale of securities                       -     714     876
Management fees                                      -      39      39
                                             ---------- ------- -------
   Total revenues                                8,587   9,402   3,508
                                             ---------- ------- -------

Interest on short-term borrowings                   77      92       -
Operating expenses                                 122     448     643
                                             ----------- ------ -------

Income before equity in undistributed earnings
  of subsidiaries                                8,388   8,862   2,865
Equity in undistributed earnings of subsidiaries   868     773   5,744
                                             ----------- ------ -------
   Net income                                   $9,256  $9,635  $8,609
                                             ========== ======= =======

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

                                             --------------------------
                                              Years Ended December 31,
                                             --------------------------
Condensed statements of cash flows             2000     1999     1998
                                             --------- -------- -------
Cash flows from operating activities:
  Net income                                   $ 9,256 $ 9,635  $ 8,609
  Adjustments to reconcile net income
   to net cash provided by operating activities
   Net gain on sale of securities                    -    (714)   (876)
   Decrease (increase) in other assets            (816)  1,618  (1,048)
   Increase in dividends payable                    11      86     150
   Increase (decrease) in other liabilities         (8)      7       -
  Equity in undistributed income of subsidiaries  (868)   (774) (5,744)
                                             ---------- ------- -------
   Net cash provided by operating activities     7,575   9,858   1,091
                                             ---------- ------- -------

Cash flows from investing activities:
  Sale of securities available for sale              -   1,292   1,622
                                             ----------- ------ -------
   Net cash provided by investing activities         -   1,292   1,622
                                             ----------- ------ -------

Cash flows from financing activities:
  Cash dividends paid                           (3,262) (3,376) (2,801)
  Loan from subsidiary                               -   1,000       -
  Repayment of loan from subsidiary             (1,000)      -       -
  Treasury stock                                (3,797) (8,781)    (49)
  Common stock issued                              190     246     226
  Exercise of option shares                        120      47     266
                                             ---------- ------- -------
   Net cash used in financing activities        (7,749)(10,864) (2,358)
                                             ---------- ------- -------

Net increase/(decrease) in cash                   (174)    286     355
Cash at beginning of year                          641     355       -
                                             ---------- ------- -------
Cash at end of year                              $ 467   $ 641   $ 355
                                             ========== ======= =======
</TABLE>

                                       46

<PAGE>


Note 21. Quarterly  Financial Data  (unaudited) (in thousands,  except per share
     data)
<TABLE>
<CAPTION>
  --------------------------------------------------------------------------------------------------------
                                                     First          Second        Third        Fourth
                       2000                          Quarter       Quarter       Quarter       Quarter
  --------------------------------------------------------------------------------------------------------
<S>                                                  <C>          <C>            <C>           <C>

   Interest income                                     $12,926       $13,656       $14,519       $14,690
   Interest expense                                      5,326         5,773         6,546         6,583
   Net interest income                                   7,600         7,884         7,973         8,107
   Provision for loan losses                               300           300           150             -
   Net gain on sale of securities                           97             -             -           215
   Income before income taxes                            2,832         3,406         3,621         3,989
   Net income                                            1,890         2,292         2,416         2,658

   Basic earnings per common share                        0.29          0.35          0.37          0.41
   Diluted earnings per common share                      0.29          0.35          0.37          0.41

  --------------------------------------------------------------------------------------------------------
                                                     First          Second        Third        Fourth
                       1999                          Quarter       Quarter       Quarter       Quarter
  --------------------------------------------------------------------------------------------------------

   Interest income                                     $11,850       $12,228       $12,567       $12,656
   Interest expense                                      4,512         4,580         4,732         4,959
   Net interest income                                   7,338         7,648         7,835         7,697
   Provision for loan losses                               300           300           300           300
   Net gain on sale of securities                          527           329             3             -
   Income before income taxes                            3,460         3,761         4,068         3,306
   Net income                                            2,286         2,478         2,705         2,166

   Basic earnings per common share                        0.32          0.34          0.38          0.32
   Diluted earnings per common share                      0.32          0.34          0.38          0.32

</TABLE>

                                       47