UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   -----------
                                    FORM 10-K
                                   -----------

        [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
            EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

                         Commission File number 1-10518

                   INTERCHANGE FINANCIAL SERVICES CORPORATION
             (Exact name of registrant as specified in its charter)

             New Jersey                                         22-2553159
             ----------                                         ----------
    (State or other jurisdiction of                           (IRS Employer
              incorporation)                                Identification No.)

    Park 80 West/Plaza Two, Saddle Brook, NJ                       07663
    ----------------------------------------                       -----
    (Address of principal executive offices)                    (Zip Code)

       Registrant's telephone number, including area code: (201) 703-2265

        Securities registered pursuant to Section 12(b) of the Act: None
           Securities registered pursuant to Section 12(g) of the Act:
                                 Title of Class
                                 --------------
                           Common Stock (no par value)

Indicate by check mark whether the registrant is a well known  seasoned  issuer,
as defined in Rule 405 of the Securities Act.
                                 Yes |_| No |X|

Indicate  by  check  mark if the  registrant  is not  required  to file  reports
pursuant to Section 13 or Section 15 (d) of the Exchange Act.
                                 Yes |_| No |X|

Indicate by checkmark  whether the registrant (1) has filed all reports required
to be filed by  Sections  13 or 15(d)  of the  Securities  Exchange  Act of 1934
during the preceding 12 months (or for such shorter  period that the  registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days.
                                 Yes |X| No |_|

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
                                 Yes |X| No |_|

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer. See definition of "accelerated
filer and large  accelerated  filer" in Rule  12b-2 of the  Exchange  Act (check
one):

|_| Large Accelerated Filer   |X| Accelerated Filer   |_| Non-accelerated Filer

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).

                                 Yes |_| No |X|

     The  aggregate   market  value  of   registrant's   voting  stock  held  by
non-affiliates  of the  registrant on June 30, 2005 based on the average bid and
ask price for such stock on that date was approximately $351,544,000.

     The number of outstanding  shares of the Registrant's  common stock, no par
value per share, as of February 28, 2006, was 20,327,867.

<PAGE>

Documents incorporated by reference:

Portions of registrant's definitive Proxy Statement for the 2006 Annual Meeting
of Shareholders are incorporated by reference to Part III of this Form 10-K.

<PAGE>

                   INTERCHANGE FINANCIAL SERVICES CORPORATION
                       INDEX TO ANNUAL REPORT ON FORM 10-K

PART I                                                                     PAGE

Item 1.  Business............................................................1
Item 1A. Risk Factors........................................................8
Item 1B. Unresolved Staff Comments...........................................10
Item 2.  Properties..........................................................10
Item 3.  Legal Proceedings...................................................10
Item 4.  Submission of Matters to a Vote of Security Holders.................10


PART II

Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters,
             and Issuer  Purchases of Equity Securities......................11
Item 6.  Selected Financial Data.............................................12
Item 7.  Management's Discussion and Analysis of Financial
             Condition and Results of Operations.............................14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..........35
Item 8.  Financial Statements and Supplementary Data.........................39
Item 9.  Changes in and Disagreements with Accountants
             on Accounting and Financial Disclosure..........................78
Item 9A. Controls and Procedures.............................................78
Item 9B. Other Information...................................................81


PART III

Item 10. Directors and Executive Officers of the Registrant..................81
Item 11. Executive Compensation..............................................82
Item 12. Security Ownership of Certain Beneficial Owners
             and Management and Related Stockholder Matters..................83
Item 13. Certain Relationships and Related Transactions......................84
Item 14. Principal Accounting Fees and Services..............................84


PART IV

Item 15. Exhibits, Financial Statement Schedules.............................85
Signatures...................................................................87

<PAGE>

                                     PART I

Item 1.  Business

   General
   _______

     Interchange  Financial Services  Corporation (the "Company"),  a New Jersey
business  corporation,  is a bank holding  company  registered with the Board of
Governors of the Federal  Reserve  System under the Bank Holding  Company Act of
1956,  as amended.  The Company was  incorporated  in the State of New Jersey on
October 15, 1984. It acquired all of the outstanding  stock of Interchange  Bank
(formerly  known as Interchange  State Bank), a New Jersey state  chartered bank
(the "Bank" or  "Interchange"),  in 1986.  The Bank is the  Company's  principal
operating  subsidiary.  In  addition  to the Bank,  the  Company has three other
wholly owned direct  subsidiaries:  Clover Leaf Mortgage  Company,  a New Jersey
corporation  established in 1988, which is not currently engaged in any business
activity;  and Interchange Statutory Trust I and Interchange Statutory Trust II,
which were formed for the sole purpose of issuing  trust  preferred  securities.
The Company  does not qualify as the primary  beneficiary  for our  wholly-owned
trusts  in  accordance   with  Financial   Accounting   Standards  Board  (FASB)
Interpretation  No. 46 (FIN 46) and FIN No.  46(R),  "Consolidation  of Variable
Interest Entities." As a result, these trusts are not consolidated.

     The Company's  principal executive office is located at Park 80 West/ Plaza
Two, Saddle Brook, New Jersey 07663, and the telephone number is (201) 703-2265.

     As  of  December  31,  2005,  the  Company  had   consolidated   assets  of
approximately   $1.6  billion,   deposits  of  approximately  $1.3  billion  and
shareholders' equity of approximately $179.0 million.

     As a holding  company,  the Company provides support services to its direct
and indirect  subsidiaries.  These include executive  management,  personnel and
benefits,  risk management,  data  processing,  strategic  planning,  legal, and
accounting and treasury.

   Banking Subsidiary
   __________________

     The Bank,  established  in 1969,  is a  full-service  New  Jersey-chartered
commercial bank  headquartered in Saddle Brook, New Jersey. The Bank is a member
of the  Federal  Reserve  System and its  deposits  are  insured by the  Federal
Deposit  Insurance  Corporation  (the "FDIC").  It offers  banking  services for
individuals  and  businesses  through  thirty (30)  banking  offices and one (1)
supermarket  mini-branch  in Bergen and Essex  Counties,  New  Jersey.  The Bank
maintains  thirty-four  (34) automated  teller  machines  (operating  within the
StarTM , PlusTM, CIRRUSTM, VISATM, NYCETM, and MasterCardTM networks), which are
located  at  thirty  of the  banking  offices,  a  supermarket,  and the  Bank's
operations center.

     Subsidiaries  of the Bank include:  FCBC, LLC established in 2004 to hold a
49% investment in Benjamin  Title LLC, a title  insurance  company,  Clover Leaf
Investment  Corporation,  established  in 1988 to engage in the  business  of an
investment  company  pursuant to New Jersey law;  Clover Leaf Insurance  Agency,
Inc., established in 1990 to engage in sales of tax-deferred  annuities;  Bridge
View Investment  Company, an investment company operating pursuant to New Jersey
law; and Interchange Capital Company,  L.L.C.,  established in 1999 to engage in
equipment lease  financing.  All of the Bank's  subsidiaries are organized under
New  Jersey  law  and  are  100%  owned  by the  Bank.  Clover  Leaf  Investment
Corporation has 99% ownership of one subsidiary,  Clover Leaf Management  Realty
Corporation,  established  in 1998 as a Real Estate  Investment  Trust  ("REIT")
which manages certain real estate assets of the Company.  Bridge View Investment
Company has one wholly owned subsidiary,  Bridge View Delaware,  Inc.  ("BVDI").
BVDI is an investment company operating pursuant to Delaware law.

                                       1

<PAGE>

   Growth of the Company and the Bank
   __________________________________

     On October 13, 2005 the Company  completed its acquisition of Franklin Bank
("Franklin"),  a one branch bank operating in Nutley,  Essex County, New Jersey.
At October 13, 2005 Franklin had  approximately,  $87.0 million in total assets,
$77.2 million in total loans and $76.0 million in deposits.

     Under the terms of the agreement, the total consideration to be received by
Franklin  shareholders in the merger is fixed at 1,323,575  shares of the common
stock of the Company. Based upon the Company's average closing stock price three
days  prior to and  after  the date of  announcement  of the  acquisition  which
occurred  on  June  23,  2005  of  $17.94,  the  transaction   represents  total
consideration  of  approximately  $24.9 million,  including  approximately  $1.2
million for the cash payment for option holders. Under the definitive agreement,
each Franklin shareholder received 1.2264 Company shares for each Franklin share
held immediately prior to the merger.

     The  acquisition  was accounted for as a purchase and the cost in excess of
fair value acquired was allocated  first to net identified  intangibles and then
to  goodwill.  Based  on the  fair  values  the  Company  recorded  goodwill  of
approximately $13.0 million.

     The  Company's  acquisition  of Franklin  is  intended  to further  enhance
Interchange's  presence in northern New Jersey.  As a result of the acquisition,
the Bank now operates 30 banking offices and has  approximately  $1.6 billion in
assets.  The  acquisition  of  Franklin  was  accomplished  through  a merger of
Franklin with and into the Bank.

     On April 30, 2003,  the Company  completed its  acquisition  of Bridge View
Bancorp  ("Bridge  View"),  a bank holding  company  headquartered  in Englewood
Cliffs,  New Jersey for  approximately  $33.5 million in cash and 2.9 million in
shares with an approximate  value of $85.7 million.  Bridge View's primary asset
was Bridge  View Bank which  operated  eleven  branches  in Bergen  County,  New
Jersey. As of the acquisition date Bridge View had approximately $291 million in
total assets,  $184 million in loans and $259 million in deposits without giving
effect to any purchase accounting adjustments. The transaction was accounted for
as a purchase and the assets and liabilities of former Bridge View were recorded
at their  respective fair values as of April 30, 2003. Based on the fair values,
the Company recorded purchase  accounting  adjustments related to: loans of $1.6
million;  securities  of $376  thousand;  other  assets of $1.9  million;  other
liabilities  of $3.7  million;  core  deposit  intangibles  of $4.3  million and
goodwill of $54.4 million.

   Description of Banking and Related Operations
   _____________________________________________

     Through  the Bank,  the  Company  offers a wide range of  consumer  banking
products and services  including  checking  and savings  accounts,  money market
accounts,  certificates of deposit, individual retirement accounts,  residential
mortgages,  home equity loans and lines of credit,  home  improvement  loans and
automobile  loans.  The Bank also offers a VISA(R)  Credit Card and  convenience
services; such as, the Interchange Debit Card which allows our customers to make
purchases wherever the VISA(R) Debit Card is accepted and is also used as an ATM
card to perform basic banking transactions.

     Other  services that the Bank offers are InterBank  online banking and Bill
Paying.  InterBank allows our customers to access account  information,  process
transfers  between  accounts,  view paid check images,  place a stop payment and
much more.  The InterBank  Bill Paying service lets customers pay bills online -
controlling  which merchants they pay, the amount they pay and when they pay all
with safety,  speed,  simplicity and confidence.  When customers are not able to
get to a branch or do their  banking  online,  they can be in touch  with  their
accounts by phone 24 hours a day, 7 days a week with Interchange Bank-Line.

     The Bank's online  services can be accessed  through the Bank's web site at
www.interchangebank.com.  As discussed herein,  additional products and services
may be accessed through the Bank's web site.

     The Bank also is engaged in the  financing of local  business and industry,
providing  credit  facilities  and  related  services  for  smaller  businesses,
typically  those with $1 million to $5 million in

                                       2
<PAGE>

annual sales.  Commercial loan customers of the Bank are businesses ranging from
light   manufacturing   and  local  wholesale  and  distribution   companies  to
medium-sized service firms and local retail businesses. Most types of commercial
loan products are offered,  including  working  capital  lines of credit,  small
business   administration  loans,  term  loans  for  fixed  asset  acquisitions,
commercial  mortgages,  equipment lease financing and other forms of asset-based
financing.  In addition, the Bank offers a full line of cash management services
for the corporate  customer,  including  online  banking  through  Interbanking,
Business Check Card, Merchant Services,  Lockbox and Escrow Management. The Bank
also develops  corporate  retirement plans for it's customers through the Bank's
Investment Services Department.

     In addition to its origination  activities,  the Bank purchases packages of
loans. These loans are subjected to the Bank's independent credit analysis prior
to purchase.  The Bank has experienced  opportunities to sell its other products
and  services to the  borrowers  whose loans are  purchased  and  believes  that
purchasing  loans will continue to be a desirable way to augment its  portfolios
as opportunities arise.

     The Bank also engages in a full service brokerage platform, including sales
of annuities,  mutual funds, insurance,  stocks, bonds and virtually all general
securities.  An  Investment  Services  Program  is offered  through an  alliance
between the Bank and Sorrento Pacific Financial,  LLC ("SPF") and ICBA Financial
Services,  Inc. ("ICBAIS"),  under which non-insured deposit products offered by
SPF and ICBAIS are made  available  to the Bank's  customers.  The Bank has also
expanded its product  offerings by entering into an agreement with a third party
provider to offer  direct  access,  online  discount  brokerage  services to its
customers.  The Bank offers  securities  trading through its web site,  which is
hyperlinked to Sorrento  Pacific  Financial,  LLC.,  member  NASD/SIPC,  so that
customers can access their brokerage accounts via the Internet.  There is also a
direct link from the Company's web site to the Nasdaq  National  Market to allow
investors  to keep  informed  of the daily  quotes and market  activity  for the
Company's common stock.

     Additional  information  about the Bank and the Company may be found on our
web site at  www.interchangebank.com.  Information contained on our Internet web
site  is not  part  of  this  Annual  Report  on  Form  10-K  and  is not  being
incorporated by reference into this report.

   Market Areas
   ____________

     The  Company's   principal  market  for  its  deposit  gathering  and  loan
origination   activities   covers  major   portions  of  Bergen  County  in  the
northeastern corner of New Jersey adjacent to New York City. Bergen County has a
relatively large affluent base for the Company's services. The principal service
areas  of  the  Company  represent  a  diversified  mix  of  stable  residential
neighborhoods with a wide range of per household income levels; offices, service
industries and light industrial  facilities;  and large shopping malls and small
retail outlets.

   Competition
   ___________

     Competition  in the  banking and  financial  services  industry  within the
Company's  primary  market  area is  strong.  The Bank  actively  competes  with
national and state-chartered commercial banks, operating on a local and national
scale,   and  other   financial   institutions,   including   savings  and  loan
associations,  mutual savings banks,  and credit unions.  In addition,  the Bank
faces competition from less heavily regulated  entities such as money management
firms,  consumer  finance and credit card  companies  and various other types of
financial  services  companies.  Many of these  institutions are larger than the
Bank,  some are  better  capitalized,  and a  number  pursue  community  banking
strategies similar to those of the Bank.

     The Bank  believes  that  opportunities  continue  to exist to satisfy  the
deposit and borrowing needs of small and middle market businesses.  Larger banks
continued to show an appetite  for only the largest  loans,  finding  themselves
challenged to administer  smaller loans  profitably.  Interchange has the desire
and the  ability to give  smaller and  mid-sized  businesses  the  service  they
require.  Many small

                                       3
<PAGE>

businesses eventually become midsize businesses,  with a corresponding change in
their financial requirements.  By designing programs to accommodate the changing
needs of growing businesses,  Interchange believes it is extending the longevity
of  valuable  customer  relationships.  For  example,  through  our  subsidiary,
Interchange  Capital  Company,  L.L.C.,  we are  able to  extend  cost-effective
equipment leasing  solutions for a variety of expansion and upgrading  projects.
The Bank  believes  that it is able to  maintain  its  relationship  with  these
growing  businesses  because of its ability to be  responsive  to both small and
midsize business constituencies.

   Personnel
   _________

     The Company had 322  full-time-equivalent  employees at year-end  2005. The
Company believes its relationship with employees to be good.

   Regulation and Supervision
   __________________________

     Banking is a complex,  highly regulated industry.  The primary goals of the
bank regulatory structure are to maintain a safe and sound banking system and to
facilitate the conduct of sound monetary policy.  In furtherance of those goals,
Congress has created several largely autonomous  regulatory agencies and enacted
myriad  legislation that governs banks,  bank holding  companies and the banking
industry.  Descriptions and references to the statutes and regulations below are
brief summaries thereof and do not purport to be complete.  The descriptions are
qualified  in  their  entirety  by  reference  to  the  specific   statutes  and
regulations discussed.

     The Company

     The Company is a  registered  bank holding  company  under the Bank Holding
Company  Act of 1956,  as  amended  (the  "BHCA"),  and as such,  is  subject to
supervision  and  regulation  by the Board of Governors  of the Federal  Reserve
System  (the  "Federal  Reserve").  As a bank  holding  company,  the Company is
required to file an annual report with the Federal  Reserve and such  additional
information as the Federal Reserve may require  pursuant to the BHCA and Federal
Regulation Y. The Federal Reserve may conduct examinations of the Company or any
of its subsidiaries.

     The BHCA requires  every bank holding  company to obtain the prior approval
of the Federal  Reserve  before it may acquire all or  substantially  all of the
assets of any bank (although the Federal Reserve may not assert  jurisdiction in
certain bank mergers that are regulated under the Bank Merger Act), or ownership
or control of any voting shares of any bank if after such  acquisition  it would
own or control  directly or indirectly more than 5% of the voting shares of such
bank.

     The BHCA also  provides  that,  with  certain  limited  exceptions,  a bank
holding company may not (i) engage in any activities other than those of banking
or managing or controlling  banks and other authorized  subsidiaries or (ii) own
or control more than five percent (5%) of the voting  shares of any company that
is not a  bank,  including  any  foreign  company.  A bank  holding  company  is
permitted, however, to acquire shares of any company the activities of which the
Federal Reserve, after due notice and opportunity for hearing, has determined to
be so closely  related to banking or  managing or  controlling  banks as to be a
proper  incident  thereto.  The Federal Reserve has issued  regulations  setting
forth specific  activities  that are  permissible  under the  exception.  A bank
holding  company  and its  subsidiaries  are also  prohibited  from  engaging in
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services.

     Under  certain  circumstances,  prior  approval of the  Federal  Reserve is
required under the BHCA before a bank holding company may purchase or redeem any
of its equity securities.

     Traditionally,  the activities of bank holding  companies have been limited
to the  business of banking and  activities  closely  related or  incidental  to
banking.  The  Gramm-Leach-Bliley  Financial Services  Modernization Act of 1999
(the "Modernization  Act"), enacted on November 11, 1999, with an effective date
of March 11,  2000,  expanded  the types of  activities  in which a bank holding
company  may  engage.  Subject to various  limitations,  the  Modernization  Act
generally permits a

                                       4
<PAGE>

bank  holding  company  to elect to  become a  "financial  holding  company."  A
financial  holding  company may affiliate  with  securities  firms and insurance
companies and engage in other  activities  that are "financial in nature." Among
the  activities  that are deemed  "financial  in nature"  are,  in  addition  to
traditional lending activities, securities underwriting,  dealing in or making a
market  in  securities,   sponsoring  mutual  funds  and  investment  companies,
insurance   underwriting  and  agency   activities,   certain  merchant  banking
activities,  and  activities  that the Federal  Reserve  considers to be closely
related to banking.

     A bank holding  company may become a financial  holding  company  under the
Modernization  Act if each of its subsidiary banks is "well  capitalized"  under
the Federal Reserve  guidelines (See "Capital  Adequacy  Guidelines"  below), is
well  managed  and has at  least  a  satisfactory  rating  under  the  Community
Reinvestment Act. In addition,  the bank holding company must file a declaration
with the  Federal  Reserve  that the bank  holding  company  wishes  to become a
financial  holding company.  A bank holding company that falls out of compliance
with such  requirements may be required to cease engaging in certain  activities
permitted only for financial  holding  companies.  Any bank holding company that
does not elect to become a  financial  holding  company  remains  subject to the
current restrictions of the BHCA.

     Under the  Modernization  Act,  the Federal  Reserve  serves as the primary
"umbrella" regulator of financial holding companies,  with supervisory authority
over each parent company and limited authority over its  subsidiaries.  Expanded
financial  activities of financial holding companies will generally be regulated
according to the type of such financial activity:  banking activities by banking
regulators,  securities  activities  by  securities  regulators,  and  insurance
activities  by  insurance   regulators.   The  Modernization  Act  also  imposes
additional restrictions and heightened disclosure requirements regarding private
information collected by financial institutions.

     Presently,  the  Company  has not  chosen  to  become a  financial  holding
company.

     Monetary Policy

     The banking industry is affected by the monetary and fiscal policies of the
Federal Reserve. An important function of the Federal Reserve is to regulate the
national  supply of bank credit to moderate  recessions  and to curb  inflation.
Among  the  instruments  of  monetary  policy  used by the  Federal  Reserve  to
implement  its  objectives  are:  open-market  operations  in U.  S.  government
securities,  changes in the discount  rate and the federal  funds rate (which is
the rate banks  charge  each other for  overnight  borrowings),  and  changes in
reserve requirements on bank deposits.

     Sarbanes-Oxley Act

     On July 30, 2002, the  Sarbanes-Oxley  Act of 2002 was signed into law. The
Act addresses  many aspects of financial  accounting,  corporate  governance and
public company  disclosure.  Among other things,  it establishes a comprehensive
framework for the oversight of public company auditing and for strengthening the
independence of auditors and audit  committees.  Under the Act, audit committees
are responsible for the  appointment,  compensation and oversight of the work of
the auditors.  The  non-audit  services that can be provided to a company by its
auditor are limited. Audit committee members are subject to new rules addressing
their  independence.  The Act also requires  enhanced and accelerated  financial
disclosures,  and it establishes various responsibility measures (including, for
example,  requiring the chief executive  officer and chief financial  officer to
certify to the quality of a company's financial reporting).  The Act imposes new
restrictions  on and  accelerated  reporting  requirements  for certain  insider
trading  activities.  It imposes a variety of new  penalties for fraud and other
violations  and  creates a new  federal  felony for  securities  fraud.  Various
sections  of the Act are  applicable  to the  Company.  Portions of the Act were
effective immediately; others became effective or are in the process of becoming
effective  through rulings by the Securities and Exchange  Commission,  based on
timelines set forth in the law.


                                       5
<PAGE>

     Capital Adequacy Guidelines

     The Federal  Reserve  issued  guidelines  establishing  risk-based  capital
requirements for bank holding  companies having more than $150 million in assets
and member banks of the Federal  Reserve  System.  The guidelines  established 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   shareholders'   equity  less  certain   intangibles   and  a
supplementary component called Tier 2, which includes a portion of the allowance
for loan  losses.  Effective  October 1, 1998,  the Federal  Reserve  adopted an
amendment to its 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  the greater risks.  The Federal  Reserve
established a minimum  risk-based capital ratio of 8% (of which at least 4% must
be Tier 1). An institution's  risk-based capital ratio is determined by dividing
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  disincentives  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.  In addition to the risk-based
guidelines  discussed  above,  the Federal Reserve  requires that a bank holding
company and bank which meet the regulator's  highest performance and operational
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, 2005, the Company and
the Bank  satisfied  these  ratios  to be  categorized  as a  "well-capitalized"
institutions,  which in the regulatory  framework for prompt  corrective  action
imposes the lowest level of supervisory restraints.

     Capital adequacy 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.

     The  Federal  Reserve is vested  with broad  enforcement  powers  over bank
holding  companies  to forestall  activities  that  represent  unsafe or unsound
practices or constitute violations of law. These powers may be exercised through
the issuance of cease and desist orders or other actions. The Federal Reserve is
also empowered to assess civil money penalties  against companies or individuals
that  violate  the BHCA,  to order  termination  of  non-banking  activities  of
non-banking  subsidiaries of bank holding  companies and to order termination of
ownership and control of  non-banking  subsidiaries  by bank holding  companies.
Neither the Company nor any of its  affiliates  has ever been the subject of any
such actions by the Federal Reserve.

     The Basel  Committee  on  Banking  Supervision  presented  its  "Basel  II"
regulatory capital guidelines in July 2004, which would require changes by large
banks in the way in which their risk-based capital  requirements are calculated.
Federal banking  regulators are considering the extent and timing of application
of the  guidelines  to U.S.  depository  institutions.  It is  uncertain  at the
present time if Interchange will be either required or permitted to make changes
in its regulatory capital structure in accordance with Basel II guidelines.

     The Bank

                                       6
<PAGE>

     As a New Jersey  state-chartered bank, the Bank's operations are subject to
various  requirements  and  restrictions of state law pertaining to, among other
things,  lending limits,  reserves,  interest rates payable on deposits,  loans,
investments,  mergers and  acquisitions,  borrowings,  dividends,  locations  of
branch offices and capital adequacy. The Bank is subject to primary supervision,
periodic  examination and regulation by the New Jersey Department of Banking and
Insurance  ("NJDBI").  If, as a result of an  examination  of a bank,  the NJDBI
determines  that the financial  condition,  capital  resources,  asset  quality,
earnings  prospects,  management,  liquidity,  or other  aspects  of the  bank's
operations are unsatisfactory or that the bank or its management is violating or
has violated any law or regulation, various remedies are available to the NJDBI.
Such remedies  include the power to enjoin  "unsafe and unsound"  practices,  to
require  affirmative  action  to  correct  any  conditions  resulting  from  any
violation or practice,  to issue an administrative  order that can be judicially
enforced, to, among other things, direct an increase in capital, to restrict the
growth of the Bank,  to  assess  civil  penalties  and to  remove  officers  and
directors.  The Bank has never been the  subject of any  administrative  orders,
memoranda of understanding or any other regulatory action by the NJDBI. The Bank
also is a  member  of the  Federal  Reserve  System  and  therefore  subject  to
supervisory  examination by and  regulations of the Federal  Reserve Bank of New
York.

     The  Bank's  deposits  are  insured  by the  Bank  Insurance  Fund  ("BIF")
administered  by the FDIC up to a maximum of $100,000  per  depositor.  For this
protection, the Bank pays a quarterly statutory deposit insurance assessment to,
and is subject to the rules and regulations of, the FDIC.

     The Bank's  ability to pay  dividends is subject to certain  statutory  and
regulatory  restrictions.  The New  Jersey  Banking  Act of  1948,  as  amended,
provides  that no  state-chartered  bank may pay a dividend on its capital stock
unless,  following the payment of each such  dividend,  the capital stock of the
bank will be  unimpaired,  and the bank will have a surplus of not less than 50%
of its  capital,  or, if not, the payment of such  dividend  will not reduce the
surplus of the bank.  In  addition,  the payment of  dividends is limited by the
requirement  to meet the  risk-based  capital  guidelines  issued by the Federal
Reserve Board and other regulations.

     To the  extent  that the  foregoing  information  describes  statutory  and
regulatory provisions,  it is qualified in its entirety by reference to the full
text of those provisions.  Also, as such statutes,  regulations and policies are
continually under review by Congress and state legislature and federal and state
regulatory  agencies.  A change in statutes,  regulations or regulatory policies
applicable  to the  Company  or the Bank  could  have a  material  effect on the
business of the Company.

   Future Legislation
   __________________

     Various  legislation  ranging  from  consumer  protection   legislation  to
additional   legislation   proposing  to  substantially   change  the  financial
institution  regulatory  system is  considered  by  Congress  from time to time.
Future legislation may change banking statutes and our operating  environment in
substantial and unpredictable ways. For instance, new legislation could increase
or decrease the cost of doing business,  limit or expand permissible activities,
or change the competitive balance among various types of financial institutions.
We cannot  predict  whether any  legislation  will be enacted  that would have a
material effect on our business.

   Available Information
   _____________________

     The Company's annual reports on Form 10-K,  quarterly reports on Form 10-Q,
current  reports  on Form  8-K and all  amendments  to  those  reports  filed or
furnished  pursuant to Section  13(a) or 15(d) of the Exchange Act are available
free of charge through the Company's web site as soon as reasonably  practicable
after such material is  electronically  filed or furnished to the Securities and
Exchange  Commission.  The documents can also be obtained on the  Securities and
Exchange  Commission  website at www.sec.gov.  The Company's web site address is
www.interchangebank.com.

                                       7
<PAGE>

Forward Looking Information

     In  addition  to  discussing  historical  information,  certain  statements
included  in  or  incorporated  into  this  report  relating  to  the  financial
condition,  results of  operations  and business of the  Company,  which are not
historical facts, may be deemed "forward-looking  statements" within the meaning
of the Private  Securities  Litigation Reform Act of 1995. When used herein, the
words  "anticipate,"   "believe,"   "estimate,"   "expect,"  and  other  similar
expressions  (including  when  preceded  or  followed  by the  word  "not")  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.   Such  forward-looking
statements  include,  but are not limited to, statements about the operations of
the Company,  the adequacy of the Company's allowance for losses associated with
the loan and lease portfolio,  the quality of the loan and lease 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,  reducing  interest  margins or
increasing   interest  rate  risk;  (iii)   deterioration  in  general  economic
conditions,  internationally,  nationally,  or in the State of New Jersey;  (iv)
disruptions  caused by  terrorism,  such as the events of September 11, 2001, or
military  actions  in the  Middle  East  or  other  areas;  (v)  legislation  or
regulatory  requirements  or changes  adversely  affecting  the  business of the
Company;  and (vi) other risks detailed in reports filed by the Company with the
Securities and Exchange Commission.  Readers should not place undue expectations
on  any  forward-looking  statements.  We  undertake  no  obligation  to  update
forward-looking  statements or to make any public  announcement when we consider
forward-looking statements in this document to be no longer accurate, whether as
a result of new  information,  what  actually  happens  in the future or for any
other reason.

Item 1A.  Risk Factors

     The following are certain  risks that  management  believes are specific to
our  business.  This  should  not be viewed as an all  inclusive  list or in any
particular order.

   Future loan losses may exceed our allowance for loan losses
   ___________________________________________________________

     We are subject to credit  risk,  which is the risk of losing  principal  or
interest  due to  borrowers'  failure to repay  loans in  accordance  with their
terms.  A downturn in the economy or the real estate  market in our market areas
or a rapid change in interest  rates could have a negative  effect on collateral
values  and  borrowers'   ability  to  repay.  This  deterioration  in  economic
conditions could result in losses to the Bank in excess of loan loss allowances.
To the extent  loans are not paid timely by  borrowers,  the loans are placed on
non-accrual,  thereby reducing  interest income.  To the extent loan charge-offs
exceed our financial models, increased amounts charged to the provision for loan
losses would reduce income.

   Rapidly changing interest rate environments could reduce our net interest
   _________________________________________________________________________
   margin, net interest income, fee income and net income
   ______________________________________________________

     Interest and fees on loans and securities, net of interest paid on deposits
and  borrowings,  are a large  part of our net  income.  Interest  rates are key
drivers of our net  interest  margin  and  subject  to many  factors  beyond the
control  of  management.  As  interest  rates  change,  net  interest  income is
affected.  Rapid  increases  in  interest  rates in the future  could  result in
interest expense increasing faster than interest income because of mismatches in
financial instrument  maturities.  Further,  substantially higher interest rates
generally  reduce loan demand and may result in slower loan growth  particularly
in construction  lending,  an important  factor in the company's  revenue growth
over the

                                       8
<PAGE>

past two years.  Decreases or increases in interest  rates could have a negative
effect on the spreads  between the interest rates earned on assets and the rates
of interest paid on liabilities, and therefore decrease net interest income. See
"Quantitative and Qualitative Disclosures about Market Risk."

   Slower than anticipated growth in loans and deposits and new product and
   ________________________________________________________________________
   service offerings could result in reduced net income
   ____________________________________________________

     We have placed a strategic  emphasis on growing our loans and deposit  base
and product  offerings.  Executing  this  strategy  carries risks of slower than
anticipated  growth  in  loans,  deposits  and new  products.  Acquiring  loans,
deposits or products  requires a significant  investment  of both  financial and
personnel  resources.  Lower than expected loan and deposit  growth can decrease
anticipated  revenues  and  net  income  generated  by  those  investments,  and
introducing  new  products  could  result  in  more  additional   expenses  than
anticipated and divert resources from current core operations.

   The financial services industry is very competitive
   ___________________________________________________

     We face competition in attracting and retaining deposits, making loans, and
providing other financial  services  throughout our market area. Our competitors
include other community banks, larger banking institutions,  and a wide range of
other  financial  institutions  such  as  credit  unions,   government-sponsored
enterprises,  mutual fund  companies,  insurance  companies  and other  non-bank
businesses.  Many of these competitors have substantially greater resources than
us.  For  a  more  complete  discussion  of  our  competitive  environment,  see
"Business--Competition"   in  Item  1  above.   If  we  are  unable  to  compete
effectively,  we will lose market  share and income from  deposits,  loans,  and
other products may be reduced.

   Decreased volumes and lower gains on sales of mortgage and SBA loans sold
   _________________________________________________________________________
   could adversely impact net income
   _________________________________

     We originate and sell mortgage and certain  Small  Business  Administration
("SBA") loans. Changes in interest rates affect demand for our loan products and
the  revenue  realized  on the sale of loans.  A decrease in the volume of loans
sold can decrease our revenues and net income.

   Inability to hire or retain certain key professionals, management and staff
   ___________________________________________________________________________
   could adversely affect our revenues and net income
   __________________________________________________

     We rely on key  personnel  to manage and  operate our  business,  including
major revenue generating functions such as our loan and deposit portfolios.  The
loss of key staff may adversely  affect our ability to maintain and manage these
portfolios effectively, which could negatively effect our revenues. In addition,
loss of key personnel could result in increased  recruiting and hiring expenses,
which could cause a decrease in our net income.


   Limited geographic area and subject to concentration in those areas
   ___________________________________________________________________

         The Company's profitability is dependent on the profitability of the
Bank, which operates almost exclusively in the state of New Jersey, with
substantial concentrations of its activities and assets primarily in New
Jersey's Bergen and Essex Counties. In addition to adverse changes in general
conditions in the United States, unfavorable changes in local economic
conditions affecting the areas in which the Bank operates may have a significant
adverse impact on operations of the Company.

   Highly regulated environment and may be affected by changes in laws and
   _______________________________________________________________________
   regulations
   ___________

     The Bank is subject to federal and state  banking  laws.  As a bank holding
company,  the Company is subject to the Bank  Holding  Company  Act. As a public
company,  the  Company  is  subject  to  legal  restrictions  and  requirements,
including reporting requirements,  of the SEC,

                                       9
<PAGE>

including   regulations   promulgated  following  passage  by  Congress  of  the
Sarbanes-Oxley  Act. The  regulations  that most directly affect the Company and
the Bank are in the areas of deposit gathering,  lending, asset quality, capital
adequacy,  customer privacy,  financial  reporting and financial  controls.  The
Company's  policy is to fully comply with all  regulatory  requirements  and the
Company is  periodically  examined by the  Federal  Reserve  Board.  The Bank is
periodically  examined  by both the state  banking  regulators  and the  Federal
Reserve Board. Non-compliance with any applicable regulation could have material
adverse consequences to the Company.

Item 1B.  Unresolved Staff Comments

         None.

Item 2.  Properties

     The Company leases  twenty-one  banking offices,  one mini-branch  within a
supermarket,  one operations/support  facility and one  administrative/executive
facility.  It owns seven  banking  offices  and leases land on which it owns two
bank buildings.  All of the facilities are located in Bergen County, New Jersey,
with the exception of the Nutley Branch in Essex County,  which  constitutes the
Company's primary market area.

     In the opinion of  management,  the physical  properties of the Company and
its subsidiaries are suitable and adequate.

Item 3.  Legal Proceedings

     In the ordinary course of business,  the Company and its  subsidiaries  are
involved in routine litigation  involving various aspects of its business,  none
of which, individually or in the aggregate, 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.

Item 4.  Submission of Matters to a Vote of Security Holders

     No matters  were  submitted  to a vote of the  Company's  security  holders
through the  solicitation of proxies or otherwise  during the three months ended
December 31, 2005.

                                       10
<PAGE>

                                     Part II

Item 5. Market for the Registrant's  Common Equity,  Related Stockholder Matters
and  Issuer  Purchases  of  Equity  Securities

     The Company's  common stock is presently listed for quotation on the Nasdaq
National Market System under the symbol "IFCJ".  At January 31, 2006, there were
approximately  1,060  shareholders of record.  A portion of the Company's common
stock is held in "street name" by nominees for beneficial  owners, so the actual
number of shareholders is probably  higher.  The following table sets forth, for
the periods indicated, the reported high and low sales prices by quarter:

                                 High         Low        Cash
                                 Sales       Sales     Dividends
                                 Price       Price     Declared
                              ----------- ------------ ----------

2005
        First quarter  . . . . $ 18.61     $ 16.54     $ 0.09
        Second quarter . . . .   19.30       16.90       0.09
        Third quarter  . . . .   19.96       16.66       0.09
        Fourth quarter . . . .   18.37       15.60       0.09

2004
        First quarter  . . . . $ 18.33     $ 14.80     $ 0.08
        Second quarter . . . .   16.89       14.85       0.08
        Third quarter  . . . .   17.15       15.33       0.08
        Fourth quarter . . . .   17.97       15.82       0.08
____________________________________________________________________

All per share data was  restated to reflect a 3-for-2  stock  split  declared on
January 18, 2005 and paid on February 18, 2005.

     A cash  dividend  of $0.08 and  $0.09 was  declared  on each  common  share
outstanding in each quarter during 2004 and 2005, respectively.

     The Company intends, subject to its financial results, contractual,  legal,
and regulatory  restrictions,  and other factors that its Board of Directors may
deem relevant,  to declare and pay a quarterly cash dividend on its common stock
in the future.  The  principal  source of the funds to pay any  dividends on the
Company's common stock is dividends  received from the Bank. Certain federal and
state regulators  impose  restrictions on the payment of dividends by banks. See
"Business - Regulation and Supervision" for a discussion of these  restrictions.
See  Note  19 of  Notes  to  Consolidated  Financial  Statement  for  additional
information.

                                       11

<PAGE>

   Issuer Purchases of Equity Securities
   _____________________________________

         Set forth below is certain information regarding repurchase of our
common stock during the quarter:

<Table>
<Caption>
                                                       Total Number of Shares      Maximum Number of
                       Total Number    Average Price  Purchased as Part of the    Shares That May Yet Be
                        of Shares        Paid Per      2005 Stock Repurchase       Purchased Under the
          Period       Purchased (1)      Share               Plan (2)                    Plan
------------------------------------  --------------  ------------------------- ------------------------
<S>                    <C>            <C>             <C>                       <C>
  10/1/05 - 10/31/05               -             -                  -                           -
  11/1/05 - 11/30/05          78,063         17.92             78,063                     870,014
  12/1/05 - 12/31/05         243,674         18.02            321,737                     626,340
                      --------------  ------------    -------------------------  -----------------------
   Total for Quarter         321,737         17.99
                      ==============  ============
</Table>

(1) Shares  purchased by the Company during the quarter include shares purchased
pursuant to the Company's stock repurchase  program  publicly  announced in June
2005 and shares owned and tendered by employees and directors in accordance with
the Stock Option and Incentive Plan of 1997, as amended,  the 2005 Omnibus Stock
and Incentive Plan and the Outside Directors Incentive Compensation. See Note 14
of Notes to Consolidated Financial Statements for additional information.

(2) Under the repurchase plan, the board of directors  authorized the Company to
purchase up to 950,000 common shares.

Item 6. Selected Financial Data

     The  following  selected  financial  data are  derived  from the  Company's
audited  Consolidated  Financial  Statements.  The  information  set forth below
should be read in conjunction with the Consolidated Financial Statements and the
Notes thereto appearing  elsewhere in this report and the information  contained
in "Management's  Discussion and Analysis of Financial  Condition and Results of
Operations."


                                       12
<PAGE>
<Table>
<Caption>
CONSOLIDATED FINANCIAL HIGHLIGHTS
Years Ended December 31,
------------------------------------------------------------------------------------------------------------------------------
                                                                2005 (1)       2004        2003 (2)      2002           2001
                                                              -----------  -----------  ------------  -----------   ----------
<S>                                                           <C>          <C>          <C>           <C>           <C>
Income Statement Data (in thousands)
       Interest income                                         $  78,495    $  66,100   $    60,267   $   56,500    $   57,402
       Interest expense                                           23,362       13,654        13,874       17,478        23,444
                                                              ----------   -----------  ------------  -----------   ----------
          Net interest income                                     55,133       52,446        46,393       39,022        33,958
       Provision for loan losses                                     925        1,200         1,815        1,500         1,075
                                                              ----------   -----------  ------------  -----------   ----------
          Net interest income after provision for loan losses     54,208       51,246        44,578       37,522        32,883
       Non-interest income                                        10,381       11,457        10,645        6,514         5,578
       Non-interest expenses                                      35,700       36,008        31,239       25,063        22,873
                                                              ----------   -----------  ------------  -----------   ----------
         Income before income taxes                               28,889       26,695        23,984       18,973        15,588
       Income Taxes                                                9,184        8,481         7,618        6,096         5,048
                                                              ----------   -----------  ------------  -----------   ----------
       Net income                                              $  19,705    $  18,214   $    16,366   $   12,877    $   10,540
                                                              ==========   ==========   ===========   ==========    ==========

Per Share Data
       Basic earnings per common share                            $ 1.01       $ 0.95        $ 0.92       $ 0.88        $ 0.72
       Diluted earnings per common share                            0.99         0.94          0.91         0.86          0.72
       Cash dividends declared                                      0.36         0.33          0.29         0.27          0.24
       Special Cash Dividend                                           -            -             -         0.03             -
       Book value                                                   8.89         7.85          7.45         5.48          4.69
       Tangible book value (3)                                      5.20         4.74          4.39         5.37          4.69

       Weighted average shares outstanding (in thousands)
          Basic                                                   19,418       19,124        17,724       14,714        14,667
          Diluted                                                 19,835       19,476        17,987       14,899        14,734

Balance Sheet Data--end of year (in thousands)
       Total assets                                           $1,631,386   $1,464,141   $ 1,385,872    $ 936,332     $ 830,949
       Securities held-to-maturity and securities
         available-for-sale                                      356,466      388,729       452,060      252,512       193,902
       Loans and leases                                        1,105,969      934,181       796,581      615,641       581,323
       Allowance for loan and lease losses                        10,646        9,797         9,641        7,207         6,569
       Total deposits                                          1,260,108    1,246,138     1,156,797      815,672       726,483
       Securities sold under agreements to repurchase              3,939        4,401        15,618       17,390         6,700
       Short-term borrowings                                      46,150       24,600        46,491            -        18,100
       Long-term borrowings and subordinated debentures          130,953       30,000        10,000       10,000             -
       Total stockholders' equity                             $  179,002   $  150,155   $   143,193    $  80,680     $  68,233

Selected Performance Ratios
       Return on average total assets                               1.28  %      1.29  %       1.35  %      1.43  %       1.31  %
       Return on average total stockholders' equity                12.38        12.54         13.54        17.35         16.06
       Dividend Payout                                             35.59        35.03         30.37        33.56         33.37
       Average total stockholders' equity to average
         total assets                                              10.38        10.25          9.95         8.27          8.13
       Net yield on interest earning assets (taxable
         equivalent) (4)                                            4.05         4.16          4.29         4.68          4.49
       Non-interest income to average total assets                  0.68         0.81          0.88         0.73          0.69
       Non-interest expense to average total assets                 2.33         2.54          2.57         2.79          2.83

Asset Quality--end of year (in thousands)
       Nonaccrual loans and leases to total loans and leases        0.32  %      0.98  %       1.08  %      0.97  %       0.37  %
       Nonperforming assets to total assets                         0.23         0.63          0.63         0.66          0.34
       Allowance for loan and lease losses to nonaccrual loans
         and lease                                                299.21       107.27        112.50       120.86        304.12
       Allowance for loan and lease losses to total loans
         and leases                                                 0.96         1.05          1.21         1.17          1.13
       Net charge-offs to average loans and leases                  0.11         0.12          0.18         0.14          0.11

Liquidity and Capital
       Average loans and leases to average deposits                80.73  %     72.63  %      69.39  %     78.21  %      81.77  %
       Total stockholders' equity to total assets                  10.97        10.26         10.33         8.62          8.21
       Tier 1 capital to risk weighted assets                       8.20         9.36          9.34        12.16         11.74
       Total capital to risk weighted assets                       11.02        10.35         10.46        13.33         12.89
       Tier 1 capital to average assets                            11.93         6.49          6.24         8.12          8.09
---------------------------------------------------------------------------------------------------------------------------------
All per share  data and  weighted  average  shares  were  restated  to reflect a
3-for-2 stock split  declared on May 23, 2002 and January 18, 2005 and paid on
July 12, 2002, and February 18, 2005, respectively.

(1)  On October 13, 2005, the Company completed its acquisition of Franklin Bank ("Franklin").  Franklin  operated one branch
     in Nutley,  Essex County,  New Jersey. At acquisition date Franklin had approximately $87 million in total assets,
     $77 million in loans and $76 million in  deposits  without  giving effect to any purchase  accounting  adjustments.  The
     Company's  results of operations  include  Franklin from  acquisition  date. The  transaction was accounted  for as a
     purchase  and the  assets  and  liabilities  of former Franklin  were recorded at their  respective  fair values as of
     October 13, 2005.  Based  on the  fair  values,  the  significant  purchase  accounting adjustments recorded by the Company
     related to: core deposit intangibles of $2.4 million and goodwill of $13.0 million.

(2)  On April 30, 2003, the Company completed its acquisition of Bridge View Bancorp ("Bridge  View"). Bridge View's primary
     asset was Bridge View Bank which operated eleven branches in Bergen County, New Jersey. At acquisition date Bridge  View had
     approximately  $291  million in total  assets,  $184 million in loans and $259 million in deposits  without giving effect to
     any purchase  accounting  adjustments.  The  Company's  results  of  operations include Bridge View from  acquisition  date.
     The  transaction was accounted for as a purchase and the assets and liabilities of former Bridge View were recorded at their
     respective fair values as of April 30, 2003. Based on the fair values, the Company recorded purchase  accounting  adjustments
     related to: loans of $1.6  million;  securities of $376  thousand;  other assets of $1.9 million;  other liabilities of
     $2.5 million;  core deposit intangibles of $4.3 million and goodwill of $54.4 million.
</TABLE>
                                       13
<PAGE>

<Table>
<Caption>

(3) Tangible book value is calculated by dividing tangible capital (total stockholders' equity less goodwill and other
    intangible assets) by total shares issued. This measure represents a non-GAAP measurement and may not be consistently
    calculated throughout the industry and therefore may not be comparable. Management believes that this non-GAAP measurement
    provides a meaningful way to analyze the Company's tangible book value year over year and versus the industry.

                                                           2005           2004       2003 (2)       2002       2001
                                                      ------------   -----------   -----------  -----------   ----------
<S>                                                   <C>            <C>           <C>          <C>           <C>
          Total stockholders' equity                     $ 179,002     $ 150,155     $ 143,193     $ 80,680     $ 68,233
          Less: goodwill and other intangible assets        74,379        59,612        58,826        1,678            -
                                                      ------------   -----------   -----------  -----------   ----------
               Total tangible capital                    $ 104,623      $ 90,543      $ 84,367      $79,002      $68,233
                                                      ============   ===========   ===========  ===========   ==========

          Total shares issued                               20,139        19,120        19,215       14,723       14,536

               Tangible book value per share                 $5.20         $4.74         $4.39        $5.37        $4.69

(4) Net yield on interest earning assets (taxable equivalent) is calculated by dividing net interest income (on a fully taxable
    equivalent basis utilizing a 34% effective tax rate) by average interest earning assets. This measure represents a non-GAAP
    measurement and may not be consistently calculated throughout the industry and therefore may not be comparable. Management
    believes that this non-GAAP measurement provides a meaningful way to analyze the Company's net interest income year over year
    and versus the industry.

                                                          2005           2004         2003 (2)       2002        2001
                                                       -----------    ----------    -----------    --------   ----------
          Net interest income                           $   55,133    $   52,446      $ 46,393     $ 39,022     $ 33,958
          Tax-equivalent basis adjustment                    1,067           643           533          376          324
                                                       -----------    ----------    ----------     --------   ----------
                Net interest income (on a fully
                   taxable equivalent basis)            $   56,200    $   53,089      $ 46,926     $ 39,398     $ 34,282
                                                       ===========    ==========    ==========     ========   ==========

          Average interest earning assets               $1,389,154    $1,275,734    $1,093,373     $842,191     $764,218

               Net yield on interest earning assets
                  (taxable equivalent)                        4.05 %        4.16 %        4.29 %       4.68 %       4.49 %
</Table>

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

     This section presents  management's  discussion and analysis of the results
of  operations  and  financial  condition  of  Interchange   Financial  Services
Corporation on a consolidated basis (the "Company"). The discussion and analysis
should be read in conjunction with the Company's Financial  Statements and Notes
thereto in Item 8.  "Financial  Statements  and  Supplemental  Data" and Item 6.
"Selected Financial Data" included elsewhere in this report.

     Overview

     The Company is a community bank primarily  operating in Bergen County,  New
Jersey,  one  of  the  most  affluent  counties  in the  country,  and  provides
diversified  financial  services to both  consumer and business  customers.  Our
primary  source of  earnings,  approximately  84%, is derived  from net interest
income which represents the difference between the interest the Company earns on
its assets,  principally  loans and leases (herein  referred to  collectively as
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  ("margin").  We augment our primary
revenue source through other  non-interest  income sources that include  service
charges on deposits,  bank owned life insurance ("BOLI") income,  commissions on
mutual funds and annuities and gains on sales of loans and leases.  In addition,
the  Company  from  time to time  may  recognize  income  on  gains  on sales of
securities, however, we do not consider this a primary source of income as we do
not have a securities trading portfolio.

     2005  continued to challenge the financial  services  sector,  particularly
those  institutions that rely on spread management such as ours. The yield curve
which  had  begun  flattening  in  2004  continued  its  unrelenting  flattening
throughout  most of 2005.  The  flattening  was a result of  persistent 25 basis
point increases in the federal funds rate at each meeting of the Federal Reserve
Open Market  Committee,  which  totaled 325 basis points over the past 18 months
while long-term  rates,  the ten year treasury,  decreased 22 basis points.  The
yields between the 2 and 5 year  treasuries  even inverted for a period of time.
In addition to the  influence the yield curve has on pricing,  competitors  also
have been aggressively and at times imprudently pricing both deposits and loans.

     Our  approach  in  meeting  the  challenges  outlined  has been to  compete
strategically  on  pricing of loans and  deposits  while  utilizing  alternative
funding  sources when  opportunities  arise to mitigate the  cannibalization  or
disintermediation  of our deposit base.  Utilizing this approach has resulted in

                                       14

<PAGE>

successfully growing our commercial loans by over 20% on average year over year.
These results were also achieved  from our  retooling of our  commercial  credit
department  which should assist in our ability to replicate the growth.  We also
saw a strong  increase in our gains on sales of loans of the guaranteed  portion
of SBA loans,  and although the recognition of such gains may not be linear on a
quarterly basis; year over year we expect to see further growth.

     Funding  our loan  growth was a mixture  of cash flows from our  investment
portfolio, growth in deposits and strategic borrowings. Our investment portfolio
is well positioned to take advantage of the rise that has occurred in short-term
rates as  approximately  $185 million of cash flows will be reinvested  over the
next year. The cash flows from the investment portfolio reinvestment rate should
be between  225 and 450 basis  points  higher  than we are  currently  realizing
depending on whether the cash flows are reinvested into securities or loans. The
structure of the cash flows was pre-designed to take advantage of the impending,
and now realized,  Federal Reserve rate hikes. The pre-designed  cash flows from
the securities are mainly attributable to securities  purchased during 2003 at a
time when real rates were at or near their lowest in 45 years.  These securities
were purchased at a time when  significant  inflows from deposits were occurring
and we determined that the strategically  sound approach was to maximize returns
while mitigating extension risk. The short-term impact of specifically  avoiding
stretching  for rate  contributed  to earnings  pressure,  however the long-term
benefits should more than exceed the forgone income.

     Deposit average balances grew 4% year over year,  excluding our acquisition
of Franklin  Bank  ("Franklin").  Our growth in deposits  was  curtailed  by our
decisions  that it was not always in the Company's  best interests to compete on
pricing,  particularly when rates offered on short-term  deposit products by the
competitors at times exceeded the longer-term reinvestment rates or could not be
reinvested  at rates  commensurate  with the risks.  Although,  an  increase  in
deposits may look good in reporting balance sheet growth it does not necessarily
provide overall shareholder value. We continued our march forward as we expanded
beyond Bergen County with the completion of our  acquisition of Franklin  during
the fourth quarter. Franklin provides us with an exceptional platform to realize
core loan and deposit growth. We intend to expand our branch network and service
offerings  further  into Essex and other  adjacent  counties and we have already
located a number of sites.

     While growing our  non-interest  income we sought  opportunities  to reduce
and/or curtail our  non-interest  expense  through well thought out and thorough
process and program reviews. These reviews lead to the freezing of the qualified
pension plan along with the Director's  retirement  plan and the defined benefit
portion of the  Supplemental  Executive  Retirement Plan effective  December 31,
2005.

     In addition,  our ability to work through non-performing loans has resulted
in  non-performing  loans  decreasing  61% as compared to December  31, 2004 and
resulted in our allowance to non-performing loans as a percentage  increasing to
299% from  107%.  This  along  with  other  factors  lead to a  decrease  in the
provision for loan and leases losses as compared to the prior year.

     Return on average  ("ROA") assets was 1.28%,  for 2005 as compared to 1.29%
for 2004.  Our ROA has exceeded  1.20% since 1995.  Our return on average equity
("ROE") was 12.38% versus 12.54% for 2005 and 2004 respectively.

     In  summary,   both  profit  and  growth  were  achieved  in  2005  without
sacrificing  one for the other.  The challenges  presented over the last several
years,  from interest rates falling to the lowest levels in 45 years through the
flattening of the yield curve in 2004 and  continuing  into 2005,  have all been
met with  keeping  both growth and profits in mind.  To that end we were able to
maintain a margin  above 4% and  continued in a select group of banks as of June
30, 2005 based upon SNL data, with assets between $1-5 billion, which maintained
an ROA above 1.20% and a tangible ROE which  exceeded  19%. Only 24, of which we
were one, out of 154 banks were able to have returns which  exceeded 1.20% and a
tangible ROE of 19% or better over the last 3 years.

                                       15
<PAGE>

Earnings Summary

     Net income was a record $19.7 million for the year 2005 and increased  $1.5
million,  or 8.2% when compared to 2004. Earnings per basic common share for the
year ended December 31, 2005  increased  $0.06 to $1.01 as compared to $0.95 for
the preceding  year, an increase of 6.3%.  Earnings per diluted common share for
the year ended  December  31, 2005  increased  $0.05 to $0.99 from $0.94 for the
preceding  year, an increase of 5.3%.  For 2005,  the Company's ROA was 1.28% as
compared to 1.29% in 2004.  The  Company's ROE was 12.38% in 2005 as compared to
12.54% for the previous  year.  Affecting  both ROA and ROE was the net interest
margin. Based on its earnings  performance,  the Company increased the quarterly
dividend  paid on  common  stock  to an  annualized  rate of  $0.40  for 2006 as
compared to $0.36 in 2005, an 11.1% increase.

     Net income was $18.2 million for the year 2004 and increased  $1.8 million,
or 11.3% when compared to 2003.  Earnings per diluted  common share for the year
ended  December 31, 2004  increased  $0.03 to $0.94 from $0.91 for the preceding
year,  an increase of 3.3%.  Earnings  per basic common share for the year ended
December  31,  2004  increased  $0.03  to  $0.95 as  compared  to $0.92  for the
preceding  year, an increase of 3.3%.  For 2004,  the Company's ROA was 1.29% as
compared to 1.35% in 2003.  The  Company's ROE was 12.54% in 2004 as compared to
13.54% for the previous  year.  Affecting  both ROA and ROE was the net interest
margin. Based on its earnings  performance,  the Company increased the quarterly
dividend  paid on  common  stock  to an  annualized  rate of  $0.36  for 2005 as
compared to $0.33 in 2004 and declared a 3-for-2 stock split on January 18, 2005
which was paid on February 18, 2005.

Table 1
-------------------------------------------------------------------------------
Summary of Operating Results
-------------------------------------------------------------------------------
                                           2005         2004         2003
                                       -------------  ----------  -----------

Net income (in thousands)                $  19,705    $  18,214    $  16,366
Basic earnings per common share               1.01         0.95         0.92
Diluted earnings per common share             0.99         0.94         0.91
Return on average total assets                1.28 %       1.29  %      1.35 %
Return on average total equity               12.38 %      12.54  %     13.54 %
Dividend payout ratio*                       35.59 %      35.03  %     30.37 %
Average total stockholders'equity to
    average total assets                     10.38 %      10.25  %      9.95 %

* Cash dividends declared on common shares to net income.

All per share data was  restated to reflect a 3-for-2  stock  split  declared on
January 18, 2005 and paid on February 18, 2005.

Results of Operations
_____________________

Net Interest Income

     Net interest  income,  the difference  between interest income and interest
expense,  is  the  most  significant  component  of the  Company's  consolidated
earnings.  Net  interest  income is  positively  impacted  by a  combination  of
increases in earning assets over interest bearing liabilities and an increase in
the net interest spread between earning assets and interest bearing liabilities.
Net interest  income is  adversely  impacted by a  combination  of a decrease in
earning  assets  over  interest  bearing  liabilities  and a decrease in the net
interest spread between earning assets and interest bearing liabilities. Table 2
sets  forth a summary of average  interest-earning  assets and  interest-bearing
liabilities as of December 31, 2005,  2004 and 2003,  together with the interest
earned and paid on each major type of asset and liability  account for the years
then ended.  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

                                       16
<PAGE>

2005 and 2004,  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.

<Table>
<Caption>
Table 2
-----------------------------------------------------------------------------------------------------------------------------------
Analysis of Net Interest Income
-----------------------------------------------------------------------------------------------------------------------------------
for the years ended December 31,
(dollars in thousands)
                                                       2005                          2004                             2003
                                          ---------------------------  -----------------------------  ----------------------------
                                          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)                            $1,018,245  $66,530  6.53 %   $ 872,322  $54,314    6.23 %  $ 729,581  $49,142   6.74 %
     Taxable securities (2)                  301,749    9,922  3.29       357,641   10,612    2.97      304,418   10,034   3.30
     Tax-exempt securities (2)(3)             66,252    2,996  4.52        35,438    1,666    4.70       27,737    1,287   4.64
     Interest earning deposits                     3        -     -             8        -       -        5,810       61   1.05
     Federal funds sold                        2,905      114  3.82        10,325      151    1.46       25,827      276   1.07
                                          ---------- -------- -------  ---------- --------  -------  ---------- -------- -------
     Total interest-earning assets         1,389,154  $79,562  5.73 %   1,275,734   66,743    5.23 %  1,093,373   60,800   5.56 %
                                                     --------                     --------                      --------
  Non-interest earning assets
     Cash and due from banks                  36,473                       36,181                        34,316
     Allowance for loan and lease losses     (10,300)                      (9,829)                       (8,762)
     Other assets                            119,280                      114,525                        96,646
                                          ----------                  -----------                   -----------
     Total assets                         $1,534,607                  $ 1,416,611                   $ 1,215,573
                                          ==========                  ===========                   ===========

Liabilities and stockholders' equity
  Interest-bearing liabilities
     Demand deposits                       $ 471,194    8,218  1.74 %   $ 471,489    4,881    1.04 %  $ 395,408    4,700   1.19
     Savings deposits                        219,726    2,389  1.09       203,451    1,136    0.56      199,127    1,408   0.71
     Time deposits                           322,302    9,019  2.80       293,609    6,373    2.17      273,382    7,053   2.58
     Short-term borrowings                    44,990    1,153  2.56        29,080      359    1.23       17,875      285   1.59
     Long-term borrowings                     57,938    2,583  4.46        28,863      905    3.14       10,000      428   4.28
                                          ---------- -------- -------  ---------- -------- ---------  ---------  -------  ------
     Total interest-bearing liabilities    1,116,150   23,362  2.09 %   1,026,492   13,654    1.33 %    895,792   13,874   1.55 %
                                                     --------                     --------                       -------
  Non-interest bearing liabilities
     Demand deposits                         248,017                      232,513                       183,451
     Other liabilities                        11,210                       12,393                        15,434
                                          ----------                  -----------                    -----------
     Total liabilities (4)                 1,375,377                    1,271,398                     1,094,677
     Stockholders' equity                    159,230                      145,213                       120,896
                                          ----------                  -----------                    -----------
     Total liabilities and stockholders'
       equity                             $1,534,607                  $ 1,416,611                    $ 1,215,573
                                          ==========                  ===========                    ===========

Net interest income (tax-equivalent basis)             56,200  3.63 %               53,089    3.90 %              46,926   4.01 %
Tax-equivalent basis adjustment                        (1,067)                        (643)                         (533)
                                                     --------                     --------                       -------
Net interest income                                   $55,133                      $52,446                       $46,393
                                                     ========                     ========                       =======

Net interest income as a percent of
  interest-earning assets (tax-equivalent
    basis) (5)                                                 4.05 %                         4.16 %                       4.29 %

----------------------------------------------------------------------------------------------------------------------------------
(1)      Nonaccrual loans and any related interest recorded have been included in computing the average rate
         earned on the loan portfolio. When applicable, tax exempt loans are computed on a fully taxable
         equivalent basis using the corporate federal tax rate of 34% for 2005.

(2)      The average balances are based on amortized cost and do not reflect unrealized gains or losses.

(3)      Computed on a fully taxable equivalent basis using the corporate federal tax rate of 34% for 2005.

(4)      All deposits are in domestic bank offices.

(5)      Net interest margin
</Table>
                                       17
<PAGE>
<Table>
<Caption>
Table 3
-------------------------------------------------------------------------------------------------------------------------------
Effects of Volume and Rate Changes on Net Interest Income
-------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
                                                        Year ended December 31,                 Year ended December 31,
                                                        2005 compared with 2004                 2004 compared with 2003
                                                          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 (1)                          $9,432      $2,784         $12,216      $9,615       $(4,443)     $5,172
                 Taxable securities                 (1,836)      1,149            (687)      1,754        (1,176)        578
                 Tax-exempt securities (2)           1,449        (119)          1,330         362            17         379
                 Interest bearing deposits            (284)        244             (40)        (61)            -         (61)
                 Federal funds sold                      -           -               -        (323)          198        (125)
                                                   -------     -------         -------     -------       -------     -------
                    Total interest income            8,761       4,058          12,819      11,347        (5,404)      5,943
                                                   -------     -------         -------     -------       -------     -------

Interest expense
                 Demand deposits                        (5)      3,342           3,337         904          (723)        181
                 Savings deposits                       98       1,155           1,253          31          (303)       (272)
                 Time deposits                         668       1,978           2,646         594        (1,274)       (680)
                 Short-term borrowings                 268         526             794         179          (105)         74
                 Long-term borrowings                1,183         495           1,678         807          (330)        477
                                                   -------     -------         -------     -------       -------     -------
                     Total interest expense          2,212       7,496           9,708       2,515        (2,735)       (220)
                                                   -------     -------         -------     -------       -------     -------
Change in net interest income                       $6,549     $(3,438)         $3,111      $8,832       $(2,669)     $6,163
                                                   -------     -------         -------     -------       -------     -------
--------------------------------------------------------------------------------------------------------------------------------
</Table>
(1) Non-performing loans are included in interest earning assets.

(2) Computed on a fully taxable equivalent basis using the corporate federal tax
rate of 34%.

     Net  interest  income,  on a taxable  equivalent  basis,  amounted to $56.2
million in 2005,  an increase of $3.1  million,  or 5.9%,  from $53.1 million in
2004.  The increase in net interest  income was largely due to growth in average
interest-earning assets of $113.4 million. The interest earning asset growth was
funded by a $60.2 million growth in average  deposits and a $45.0 million growth
in average  borrowings.  The growth in average deposits  occurred mostly in time
deposits.  The growth in interest earning assets and deposits were partly due to
the Franklin acquisition. The aforementioned increase in net interest income was
achieved  despite an 11 basis  point  decline in the  margin.  The change in the
margin was attributable to the increase in the Company's  funding cost resulting
from an increase in interest rates and a shift in our funding mix.

     Interest income, on a tax-equivalent basis, totaled $79.6 million for 2005,
an increase of $12.8 million,  or 19.2%, as compared to 2004. For the year ended
December 31, 2005 and 2004,  the tax  equivalent  basis  adjustments to interest
income were $1.1  million and $643  thousand,  respectively.  The  increase  was
attributed to a growth in interest  earning assets of $113.4 million,  which was
largely due to increases  in average  loans of $145.9  million.  The increase in
loans occurred mostly in commercial  loans,  which grew by $134.0  million.  The
increase  in  interest  income was partly due to a 50 basis  point  increase  in
interest  earning  asset  yields for 2005 as compared to 2004.  The  increase in
interest earning asset yields was largely attributable to the increase in market
interest rates and a change in our asset mix.

     Interest  expense  totaled  $23.4  million  in 2005,  an  increase  of $9.7
million,  or 71.1%,  as compared to 2004. The increase was principally due to an
increase in the average rates paid on  interest-bearing  liabilities of 76 basis
points to 2.09% in 2005 as compared to 1.33% in 2004, which was mostly due to an
increase in deposit rates paid. The increase in interest expense was largely due
to an increase in rates paid on interest-bearing  demand and time deposits of 70
basis points and 63
                                       18
<PAGE>

basis points,  respectively,  for 2005 as compared to 2004.  Contributing to the
increase  in  interest  expense  was  the  growth  in  average  interest-bearing
liabilities which occurred  primarily in borrowings,  time deposits and savings,
which increased $45.0 million, $28.7 million and $16.3 million, respectively.

     Net  interest  income,  on a taxable  equivalent  basis,  amounted to $53.1
million in 2004,  an increase of $6.2 million,  or 13.1%,  from $46.9 million in
2003.  The increase in net interest  income was largely due to growth in average
interest-earning assets of $182.4 million. The interest earning asset growth was
funded by a $149.7  million  growth in average  deposits.  The growth in average
deposits  occurred  mostly in  interest-bearing  demand and time  deposits.  The
growth in interest  earning  assets and  deposits  were partly due to the Bridge
View acquisition.  The aforementioned increase in net interest income was partly
offset by a 13 basis point  decline in the margin.  The change in the margin was
attributable  to  interest  earning  asset  yields  declining  faster  than  the
Company's  cost of funds,  which was largely due to  short-term  interest  rates
increasing faster than long-term interest rates.

     Interest income, on a tax-equivalent basis, totaled $66.7 million for 2004,
an increase of $5.9 million,  or 9.8%,  as compared to 2003.  For the year ended
December 31, 2004 and 2003,  the tax  equivalent  basis  adjustments to interest
income were $643  thousand  and $533  thousand,  respectively.  The increase was
attributed  to a growth in  interest  earning  assets,  which was largely due to
increases in average loans and  investments of $142.7 million and $60.9 million,
respectively. The increase in interest earning assets for 2004 was partly due to
the Bridge View  acquisition.  The increase in interest income was partly offset
by a 33 basis  point  decline  in  interest  earning  asset  yields  for 2004 as
compared  to 2003.  The  decline in interest  earning  asset  yields was largely
attributable  to the repricing of interest  earning assets and a change in asset
mix.

     Interest  expense  totaled  $13.7  million  in  2004,  a  decrease  of $220
thousand,  or 1.6%, as compared to 2003. The decrease was  principally  due to a
decline in the average rates paid on  interest-bearing  liabilities  of 22 basis
points to 1.33% in 2004 as  compared  to 1.55% in 2003 which was mostly due to a
decline in deposit rates paid.  The decline in interest  expense was largely due
to a decrease in rates paid on time deposits and  interest-bearing  demand of 41
basis points and 15 basis  points,  respectively,  for 2004 as compared to 2003.
The  benefit  derived  from a decline  in  average  rates  more than  offset the
increase   in   interest   expense   associated   with  the  growth  of  average
interest-bearing liabilities of $130.7 million for 2004 as compared to the prior
year. The growth in average  interest-bearing  liabilities occurred primarily in
interest-bearing  demand,  borrowings and time deposits,  which  increased $76.1
million, $30.1 million and $20.2 million, respectively.

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 fees for safe deposit
space;  BOLI income and net gains on sale of securities  and loans.  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.

     Non-interest  income was $10.4 million for the year ended December 31, 2005
as  compared  to $11.5  million  for the same  period in 2004.  The  decrease in
non-interest  income was  primarily due to a decrease in the net gain of sale of
securities of $1.1  million.  Increases  occurred in BOLI and "other"  income of
$103 thousand and $230 thousand,  respectively. A contributor to the increase in
other income was  commercial  loan  prepayment  penalties  which  increased $426
thousand to $854 thousand. The aforementioned increases were offset by decreases
in commissions on mutual funds and  annuities,  service  charges on deposits and
net gain on sale of loans and leases of $170  thousand,  $166  thousand  and $23
thousand,  respectively.  The  decrease  in the net  gain on sale of  loans  was
attributable to a decrease in the gain on sale of residential mortgage loans and
syndication  fees of
                                       19
<PAGE>

$149 thousand and $80 thousand  offset by an increase in the gain on sale of the
guaranteed  portion  of  Small  Business  Administration  ("SBA")  loans of $206
thousand or 27.3% as compared to prior year.

     Non-interest income increased $812 thousand,  or 7.6%, for 2004 as compared
to 2003. The improvement in non-interest  income was largely due to increases in
gain  on  sale  of  securities,  gain on  sale  of  loans  and  leases,  "other"
non-interest  income  of  $651  thousand,  $548  thousand,  and  $341  thousand,
respectively.  Net gains on the sale of loans and  leases was $1.3  million  for
2004 as  compared  to $769  thousand  for 2003,  an  increase  of $548  thousand
primarily  resulting from an increase in the sale of the  guaranteed  portion of
SBA loans. The increase in other income was primarily a result of realizing $393
thousand  from the  collection  of principal on an acquired  commercial  loan in
excess of its carrying  value.  Contributing  to the improvement in non-interest
income were service charges on deposits and commissions on sales of mutual funds
and annuities.  The  aforementioned  increases was partly offset by a decline in
BOLI income of $1.0  million  for 2004 as  compared to 2003,  which was due to a
claim received in 2003 which did not reoccur in 2004.

<Table>
<Caption>

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

                                                        2005       2004      2003
                                                      --------  ---------  --------
<S>                                                   <C>       <C>        <C>
 Service fees on deposit accounts                       $3,587    $ 3,753  $ 3,485
 Net gain on sale of securities                            394      1,444      793
 Net gain on sale of loans and leases                    1,294      1,317      769
 Bank owned life insurance                               1,094        993    2,019
 Commissions on sales of annuities and mutual funds        743        913      883
 All other                                               3,269      3,037    2,696
                                                      --------  --------- --------
   Total                                              $ 10,381   $ 11,457 $ 10,645
                                                      ========  ========= ========

</Table>

Non-interest Expense

     Non-interest  expense  was $35.7  million for the year ended  December  31,
2005, a decrease of $308  thousand,  or 0.9%,  as compared to the same period in
2004.  During  2005,  the  Company  recognized  a $1.2  million  gain due to the
curtailment of the defined benefit pension plan. The curtailment  should provide
a benefit in future years of approximately $500 thousand per year without giving
effect to additional benefits that may have been paid as a result of an increase
in years of  service  or  additional  staff.  Excluding  the $1.2  million  gain
relating to the defined benefit  pension plan,  non-interest  expense  increased
$908 thousand,  or 2.5%. The increase was primarily  attributable to an increase
in salaries and benefits of $1.1 million,  or 5.5%.  Also  contributing  to this
increase were  increases in occupancy  and data  processing of $300 thousand and
$186  thousand,  respectively,  over the same period last year. The increases in
the  aforementioned  were a result of normal  anticipated  growth. The increases
were offset partially by decreases in legal fees,  "directors'  fees, travel and
retirement",  and advertising and promotion of $393 thousand,  $146 thousand and
$109 thousand, respectively, over the same period last year.

     Non-interest  expense for 2004 increased $4.8 million,  or 15.3%,  to $36.0
million as compared  to 2003.  The  increase  was  attributed  to  increases  in
salaries and benefits,  occupancy,  and professional fees of $2.5 million,  $706
thousand,  and $1  million,  respectively.  The  increase  was  due in  part  to
recognizing a full year of operating costs resulting from the merger with Bridge
View for 2004 as compared only eight months in 2003.  In addition,  the increase
in salaries and benefits was attributed to normal increases and expansion of the
Company.  The increase in professional  fees was largely due to costs related to
implementation of Sarbanes-Oxley  Section 404 and the increase in legal expenses
primarily as a result of collection efforts.

                                       20
<PAGE>

Table 5
--------------------------------------------------------------------------------
Non-interest Expense
--------------------------------------------------------------------------------
for the years ended December 31,
(dollars in thousands)

                                     ------------ ------------  ------------
                                          2005        2004          2003
                                     ------------ ------------  ------------
Salaries and benefits                   $ 19,325     $ 19,463      $ 16,994
Occupancy                                  5,583        5,283         4,577
Furniture and equipment                    1,267        1,309         1,327
Advertising and promotion                  1,347        1,456         1,412
Amortization of intangble assets             571          504           360
Other expenses
   Professional fees                       2,227        2,609         1,568
   Data processing                         1,164          978           933
   All other                               4,216        4,406         4,068
                                     ------------ ------------  ------------
      Total                              $35,700     $ 36,008      $ 31,239
                                     ============ ============  ============


Income Taxes

     In 2005,  income taxes amounted to $9.2 million as compared to $8.5 million
and $7.6 million for 2004 and 2003, respectively. Effective February 6, 2006 the
New Jersey Division of Taxation amended certain provisions of the tax code which
effectively  eliminated the Company's  ability to utilize the dividend  received
deduction for it's real estate  investment trust  subsidiary  going forward.  As
such it is  anticipated  that our effective tax rate may increase as a result of
the change.  The effective  tax rate was 31.8% for 2005,  2004 and 2003. In 2004
and 2005 the Company,  through its subsidiaries,  utilized the dividend received
deduction  for  New  Jersey  based  real  estate  investment  trusts.   Detailed
information  on  income  taxes is  shown  in Notes 1 and 18 to the  Consolidated
Financial Statements.

Financial Condition

Loan Portfolio

         At December 31, 2005, total loans amounted to $1.1 billion, an increase
of $171.8 million, or 18.4%, compared to $934.2 million at December 31, 2004.
The commercial loan growth was largely within the subsidiary Bank's delineated
community in New Jersey.

                                       21
<PAGE>
<Table>
<Caption>
Table 6
---------------------------------------------------------------------------------------------------------------
Loan Portfolio
---------------------------------------------------------------------------------------------------------------
at December 31,

                                            2005             2004          2003          2002          2001
                                        --------------   -----------   ------------    -----------   ----------
<S>                                     <C>              <C>           <C>             <C>           <C>
Amounts of loans by type (in thousands)
  Real estate-mortgage
   1-4 family residential
    First liens                             $ 132,443       $ 141,835     $ 100,286     $ 100,302     $113,703
    Junior liens                                1,682           2,544         4,138         6,241        8,384
    Home equity                               158,122         148,027       136,477       125,037      130,658
   Commercial                                 479,120         375,985       330,040       222,628      198,319
   Construction                                92,390          51,162        31,077        11,359        5,265
                                        --------------     -----------    ----------    ----------    ---------
                                              863,757         719,553       602,018       465,567      456,329
                                        --------------     -----------    ----------    ----------    ---------
  Commercial loans
    Commercial and financial                  212,392         186,386       149,462       104,542       85,801
    Lease financing                            24,584          23,535        28,440        26,356       15,850
                                        --------------     -----------    ----------    ----------    ---------
                                              236,976         209,921       177,902       130,898      101,651
                                        --------------     -----------    ----------    ----------    ---------
 Consumer loans
    Lease financing                                94             680        12,416        15,969       18,822
    Installment                                 5,142           4,027         4,245         3,207        4,521
                                        --------------     -----------    ----------    ----------    ---------
                                                5,236           4,707        16,661        19,176       23,343
                                        --------------     -----------    ----------    ----------    ---------
    Total                                 $ 1,105,969       $ 934,181     $ 796,581     $ 615,641     $581,323
                                        ==============     ===========    ==========    ==========    =========

Percent of loans by type
  Real estate-mortgage
   1-4 family residential
    First liens                                  12.0 %          15.2 %        12.6 %        16.3 %       19.6 %
    Junior liens                                  0.2             0.3           0.5           1.0          1.4
    Home equity                                  14.3            15.8          17.1          20.3         22.5
   Commercial                                    43.3            40.2          41.4          36.2         34.1
   Construction                                   8.3             5.5           3.9           1.8          0.9
                                        --------------     -----------    ----------    ----------    ---------
                                                 78.1            77.0          75.5          75.6         78.5
                                        --------------     -----------    ----------    ----------    ---------
  Commercial loans
    Commercial and financial                     19.2            20.0          18.8          17.0         14.8
    Lease financing                               2.2             2.5           3.6           4.3          2.7
                                        --------------     -----------    ----------    ----------    ---------
                                                 21.4            22.5          22.4          21.3         17.5
                                        --------------     -----------    ----------    ----------    ---------
  Consumer loans
    Lease financing                                 -             0.1           1.6           2.6          3.2
    Installment                                   0.5             0.4           0.5           0.5          0.8
                                        --------------     -----------    ----------    ----------    ---------
                                                  0.5             0.5           2.1           3.1          4.0
                                        --------------     -----------    ----------    ----------    ---------
    Total                                       100.0  %        100.0  %      100.0  %      100.0  %     100.0 %
                                        ==============     ===========    ==========    ==========    =========
</Table>

                                       22
<PAGE>

The following table sets forth the maturity distribution of the Company's loan
portfolio as of December 31, 2005.

The table excludes real estate loans (other than construction loans), and
consumer loans: (in thousands)

                                            Due after
                                 Due in      one year    Due after
                                one year     through       five
                                 or less    five years     years      Total
                              ----------    ----------   ---------  --------
Commercial and financial......  $ 78,866     $ 56,456    $ 77,070   $212,392
Lease financing...............       921       21,997       1,666     24,584
Real estate-construction......    45,240       45,371       1,779     92,390
                              ----------    ---------   ---------   --------
     Total                      $125,027     $123,824    $ 80,515   $329,366
                              ==========    =========   =========   ========

The following table sets forth the interest rate characteristics of loans due
after one year as of December 31, 2005: (in thousands)

                                          Due after
                                          one year         Due after
                                           through            five
                                         five years          years
                                        --------------     ----------
Fixed interest rate...............         $ 112,649        $ 39,058
Variable interest rate............            11,175          41,457
                                        --------------     ----------
     Total........................         $ 123,824        $ 80,515
                                        ==============     ==========

Loan Quality

     The lending activities of the Company follow the 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.   In  addition,   the  Company   maintains  a  credit
administration  function which reports directly to the Senior Vice President and
Chief Credit Officer.  The credit  administration  function performs independent
reviews  of  credits   prior  to  the   extension  of  such  credit  based  upon
pre-established  guidelines.  The independent review function allows the Company
to  effectively  price  transactions  based upon credit risk and allows  lending
officers  more time to  allocate  towards  loan  generation  rather  than credit
analysis and underwriting.

     The  Company   maintains  an   independent   loan  review   function.   The
responsibility  of this function rests with the loan review officer who oversees
the evaluation of credit risk for large commercial loans and leases as well as a
sample of smaller commercial loans and leases after the Company extended credit.
The loan review officer also monitors the integrity of the Company's credit risk
rating system. 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.  In
addition,  the loan review officer reviews  commercial leases and consumer loans
considered  homogeneous in nature,  to identify and evaluate the credit risks of
these  portfolios.  The loan review officer reports  directly to the Senior Vice
President and Chief Credit Officer of the Bank who provides quarterly reports to
the Company's Board of Directors on asset quality.

     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

                                       23
<PAGE>

early  implementation  of  responsive  credit  strategies.  Watchlist  loans are
monitored  and/or  managed by our Special Asset Officer who is  responsible  for
supervising  the  collection  of delinquent  loans.  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

     Credit risk  represents the  possibility  that a borrower,  counterparty or
insurer may not perform in accordance  with  contractual  terms.  Credit risk is
inherent in the financial services business and results from extending credit to
customers,   purchasing   securities  and  entering  into  financial  derivative
transactions.  The  Company  seeks to manage  credit risk  through,  among other
techniques, diversification,  limiting credit exposure to any single industry or
customer, requiring collateral, and selling participations to third parties.

     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.  The Company  evaluates  the  adequacy of the ALLL by
performing  periodic,  systematic  reviews of the loan  portfolio.  This process
includes the  identification  and allocation of specific  reserves for loans and
leases,  which are deemed  impaired,  and the allocation of reserves to pools of
non-impaired loans.  Portions of the ALLL are allocated to cover probable losses
in each loan and lease category based on a migration  analysis (loss experience)
of the past five  years,  an  analysis  of  concentration  risk  factors  and an
analysis of the economic  environment in which the Company  operates its lending
business.  The  unallocated  portion of the ALLL is  management's  evaluation of
inherent risk in the portfolio based on changes in the composition of performing
and nonperforming  loans,  concentrations of credit,  economic  conditions,  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  allocations  are made to  specific  loans and  pools of loans,  the total
allowance is available for all loan losses.  While the ALLL is management's best
estimate of the inherent loan losses  incurred as of the balance sheet date, the
process of  determining  the adequacy of the ALLL is  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 2005 amounted to $925 thousand, a decrease of $275
thousand from the prior year. In 2004, the loan loss provision  amounted to $1.2
million,  a decrease of $615 thousand  from 2003.  The decrease in the loan loss
provision  for 2005 was partly  attributable  to an  improvement  in the overall
economic  environment  and  an  improvement  in  the  Company's  historical  net
charge-off  trend which are utilized in developing  adequacy of the ALLL.  Loans
are  charged-off  against the ALLL,  when  management  believes  that the future
collection  of  principal  is  unlikely.  In  2005,  nonperforming  loans  as  a
percentage  of year end loans  declined to 0.32% from 0.98%;  in absolute  terms
nonperforming  loans  decreased $5.5 million to $3.6 million as compared to $9.1
million in 2004. Loans charged-off,  net of recoveries increased $50 thousand to
$1.1  million as  compared to $1.0  million in 2004.  The  charge-offs  occurred
principally in the commercial and commercial lease portfolios. Management of the
Company  determined  that  the  ALLL,  as set  forth  in Table 7, was at a level
sufficient  to cover the  inherent  loan losses in the loan  portfolio as of the
balance sheet date.

                                       24
<PAGE>
<Table>
<Caption>
Table 7
-------------------------------------------------------------------------------------------------------
Loan Loss Experience
-------------------------------------------------------------------------------------------------------
for the  years ended December 31,
(dollars in thousands)

                                                2005         2004        2003       2002        2001
                                             -----------  ----------  ----------  --------  ----------
<S>                                          <C>          <C>         <C>         <C>       <C>
Average loans outstanding                    $ 1,018,245   $ 872,322   $ 729,581  $611,659   $ 579,034
                                             ===========  ==========  ==========  ========  ==========

Allowance at beginning of period             $     9,797   $   9,641   $   7,207  $  6,569   $   6,154
                                             -----------  ----------  ----------  --------  ----------
Loans charged-off:
          Real estate                                  -         357         162        17          11
          Commercial and financial                   706          89          25         -           -
          Commercial lease financing                 463         637       1,072       875         949
          Consumer loans                              34          54          97        34           4
                                             -----------  ----------  ----------  --------  ----------
              Total                                1,203       1,137       1,356       926         964
                                             -----------  ----------  ----------  --------  ----------

Recoveries of loans previously charged-off:
          Real estate                                 75          22          35        29          22
          Commercial and financial                    13           6           -         -         264
          Commercial lease financing                   -          63           8        16           8
          Consumer loans                              21           2           3        19          10
                                             -----------  ----------  ----------  --------  ----------
              Total                                  109          93          46        64         304
                                             -----------  ----------  ----------  --------  ----------
Net loans charged-off                              1,094       1,044       1,310       862         660
                                             -----------  ----------  ----------  --------  ----------

Additions due to merger                            1,018           -       1,929         -

Provision for loan and lease losses                  925       1,200       1,815     1,500       1,075
                                             -----------  ----------  ----------  --------  ----------
Allowance at end of period                   $    10,646   $   9,797   $   9,641  $  7,207   $   6,569
                                             ===========  ==========  ==========  ========  ==========

Allowance to loans (end of period)                  0.96 %      1.05 %      1.21 %    1.17 %      1.13 %
Allowance to nonaccrual loans                     299.21 %    107.27 %    112.50 %  120.86 %    304.12 %
Allowance to nonaccrual loans and
  loans past due 90 days or more                  299.21 %    107.27 %    112.50 %  120.86 %    304.12 %
Ratio of net charge-offs to average
  loans (annualized)                                0.11 %      0.12 %      0.18 %    0.14 %      0.11 %
</Table>

     At  December  31,  2005,  the ratio of the ALLL to total loans was 0.96% as
compared to 1.05% at the end of the prior year. The ALLL  represented  299.2% of
nonaccrual  loans and loans past due 90 days or more at December 31, 2005,  down
from  107.3% at the end of 2004.  This  ratio  was  impacted  by a $5.6  million
decrease in nonaccrual and restructured  loans in 2005 as compared to the end of
the year in 2004. Refer to the section titled "Nonperforming Assets" and Table 9
for more detail on loan delinquencies and nonperforming assets.

     The  Company  has the same  collateral  policy for loans  whether  they are
funded immediately or based on a commitment.  A commitment to extend credit is a
legally  binding  agreement  to lend  funds to a  customer  usually  at a stated
interest  rate  and  for  a  specified  purpose.  Such  commitments  have  fixed
expiration  dates and  generally  require a fee.  The  extension of a commitment
gives rise to credit risk. The actual liquidity requirements or credit risk that
the  Company  will  experience  will be lower  than the  contractual  amount  of
commitments to extend credit because a significant  portion of those commitments
are expected to expire without being drawn upon. Certain commitments are subject
to loan agreements  containing covenants regarding the financial  performance of
the  customer  that must be met  before  the

                                       25
<PAGE>

Company is required  to fund the  commitment.  The Company  uses the same credit
policies in making commitments to extend credit as it does in funding loans.

     In addition,  the Company manages the potential  credit risk in commitments
to  extend  credit  by  limiting  the  total  amount  of  arrangements,  both by
individual customer and in the aggregate; by monitoring the size and maturity of
the  structure of these  portfolios;  and by applying the same credit  standards
maintained for all of its related credit activities.  The credit risk associated
with these off balance  sheet  commitments  is  recorded  as a liability  in the
Company's  balance  sheet and  management's  determination  of the liability for
these  amounts were $20 thousand and $40 thousand at December 31, 2005 and 2004,
respectively.

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

                                   2005                2004              2003                 2002                  2001
                           -------------------  ------------------ ------------------  ------------------ --------------------
                                    % of Loans          % of Loans         % of Loans          % of Loans          % of Loans
                                     to Total            to Total           to Total            to Total            to Total
                            Amount   Loans (1)   Amount  Loans (1)  Amount  Loans (1)   Amount  Loans (1)   Amount  Loans (1)
                           --------  ---------  -------  --------  -------  --------   -------- ---------  -------- ---------
<S>                        <C>       <C>        <C>      <C>       <C>      <C>        <C>      <C>        <C>      <C>
Real estate                 $ 5,719     78.1 %  $ 4,307    77.0 %  $ 6,743    75.5 %    $ 3,724    75.6  % $ 4,028    78.5
Commercial and financial      2,972     19.2      2,987    20.0        479    18.8        1,435    17.0      1,389    14.8
Commercial lease financing    1,142      2.2      1,000     2.5        968     3.6          720     4.3        542     2.7
Consumer loans                   43      0.5         90     0.5        186     2.1          132     3.1          5     4.0
Unallocated                     770        -      1,413       -      1,265       -        1,196       -        605       -
                           --------  ---------  -------  --------  -------  --------   -------- ---------  -------  --------
                           $ 10,646    100.0 %  $ 9,797   100.0 %  $ 9,641   100.0 %    $ 7,207   100.0 %  $ 6,569   100.0 %
                           ========  =========  =======  ========  =======  ========   ======== =========  =======  ========

</Table>

 (1) This column reflects each respective class of loans as a percent of total
loans.

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

Nonperforming Assets

     Nonperforming  assets consist of nonaccrual loans,  restructured  loans and
foreclosed assets (comprised of foreclosed real estate and repossessed  assets).
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.
The  Company has a  dedicated  Special  Asset  Management  department  that also
oversees  general  collection  efforts.  The  purpose of this  department  is to
minimize any potential  losses by remediation of credits  through  collection or
disposal  efforts.  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, 2005,  nonperforming  assets  decreased $5.6
million,  or 60.4%,  as  compared  to the end of the prior  year.  Nonperforming
assets  are   concentrated   in  three  loans  which   represent  $1.6  million.
Nonperforming  assets  increased $489 thousand,  or 5.6%, in 2004 as compared to
2003.

                                       26
<PAGE>
<Table>
<Caption>
Table 9
------------------------------------------------------------------------------------------------------
Loan Delinquencies and Nonperforming Assets
------------------------------------------------------------------------------------------------------
at December 31,
(dollars in thousands)

                                                    2005         2004        2003       2002       2001
                                                -------------  ----------  ---------- ---------  ---------
<S>                                             <C>            <C>         <C>        <C>        <C>
Loans delinquent and accruing interest
   Loans past due 30-89 days                          $1,146      $1,918      $1,265     $2,121    $1,938
   Loans past due 90 days or more                          -           -           -          -         -
                                                 ------------  ----------  ---------- ----------  --------
     Total loans delinquent and accruing interest     $1,146      $1,918      $1,265     $2,121    $1,938
                                                 ============  ==========  ========== ==========  ========

Nonaccrual loans                                      $3,558      $9,133      $8,570     $5,963    $2,160
Foreclosed and repossessed assets                        122         156         230        176       492
Restructured loans                                         -           -           -          -       150
                                                 ------------  ----------  ---------- ----------  --------
   Total nonperforming assets                         $3,680      $9,289      $8,800     $6,139    $2,802
                                                 ============  ==========  ========== ==========  ========
    Total nonperforming assets and loans
      past due 90 days or more                        $3,680      $9,289      $8,800     $6,139    $2,802
                                                 ============  ==========  ========== ==========  ========

Nonaccrual loans to total loans                         0.32 %      0.98 %      1.08 %     0.97 %    0.37 %
Nonperforming assets to total loans and
   foreclosed and repossessed assets                    0.33 %      0.99 %      1.10 %     1.00 %    0.48 %
Nonperforming assets to total assets                    0.23 %      0.63 %      0.63 %     0.66 %    0.34 %
Nonaccrual loans and loans past due 90 days
   or more to total loans                               0.32 %      0.98 %      1.08 %     0.97 %    0.37 %

</Table>

Securities Held-to-Maturity and Securities Available-for-Sale

     Debt  securities  purchased  with the  intent  and  ability  to hold  until
maturity  are  classified  as  "held-to-maturity".  The Company does not acquire
securities  for the purpose of engaging  in trading  activities  and as such all
other securities are classified as "securities  available-for-sale".  Securities
available-for-sale are used as part of the Company's asset/ liability management
strategy,  or  securities  that may be sold in response to, among other  things,
changes in interest  rates and  prepayment  risk.  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 using the  corporate
federal  tax  rate of  34%) of  "securities  held-to-maturity"  and  "securities
available-for-sale".  Historical cost was used to calculate the weighted-average
yields.

                                       27
<PAGE>
<Table>
<Caption>
Table 10
----------------------------------------------------------------------------------------------------------------------------------
Securities
----------------------------------------------------------------------------------------------------------------------------------
at December 31, 2005
(dollars in thousands)
                                                                       After 1      After 5                          Weighted
                                                          Within      But Within    But Within    After              Average
                                                          1 Year       5 Years      10 Years    10 Years   Total     Yield (1)
                                                       ------------   ----------   ----------  ---------  ---------- -------
<S>                                                    <C>            <C>          <C>         <C>        <C>        <C>
Securities held-to-maturity at amortized cost
      Government-Sponsored Enterprises:
             Mortgage-backed securities                    $ 2,407        $ 254        $ 162          -     $ 2,823    6.18 %
             Obligations of U.S. agencies                    1,920            -            -          -       1,920    3.10
      Obligations of states & political subdivisions        10,548        4,364       12,599    $ 3,460      30,971    5.40
                                                       ------------   ----------   ----------  ---------  ---------- -------
                                                            14,875        4,618       12,761      3,460      35,714    5.34
                                                       ------------   ----------   ----------  ---------  ---------- -------
Securities available-for-sale at estimated fair value
      Government-Sponsored Enterprises:
             Mortgage-backed securities                     12,362       92,754        3,662          -     108,778    4.16
             Obligations of U.S. agencies                  118,352       45,624            -          -     163,976    2.66
      Obligations of states & political subdivisions        17,054        3,932        7,259      8,946      37,191    4.72
                                                       ------------   ----------   ----------  ---------  ---------- -------
                                                           147,768      142,310       10,921      8,946     309,945    3.43
                                                       ------------   ----------   ----------  ---------  ---------- -------
        Equity securities                                        -            -            -          -      10,807       - %
                                                       ------------   ----------   ----------  ---------  ---------  -------
                                                           147,768      142,310       10,921      8,946     320,752
                                                       ------------   ----------   ----------  ---------  ----------
Total                                                    $ 162,643    $ 146,928     $ 23,682   $ 12,406   $ 356,466
                                                       ============   ==========   ==========  =========  ==========

Weighted average yield (1)                                    2.60 %       4.10 %       6.21 %     6.53 %      3.63 %

(1) Computed on a fully taxable equivalent basis using the corporate federal tax rate of 34%.

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)
                                                                 2005                    2004                     2003
                                                       -------------------------  ------------------   -----------------------
                                                          Amount          %         Amount     %           Amount        %
                                                       ------------   ----------  ---------- -------   -------------  --------
Securities held-to-maturity at amortized cost
      Government-Sponsored Enterprises:
             Mortgage-backed securities                    $ 2,823          7.9 %   $ 5,583    38.4 %       $ 9,850      51.6 %
             Obligations of U.S. agencies                    1,920          5.4           -       -               -         -
      Obligations of states & political subdivisions        30,971         86.7       8,947    61.6           9,257      48.4
                                                       ------------   ----------  ---------- -------   -------------  --------
                                                          $ 35,714        100.0 %  $ 14,530   100.0 %      $ 19,107     100.0 %
                                                       ============   ==========  ========== =======   =============  ========
Securities available-for-sale at estimated fair value
      Government-Sponsored Enterprises:
             Mortgage-backed securities                  $ 108,778         33.9 % $ 121,392    32.4 %     $ 114,187      26.4 %
             Obligations of U.S. agencies                  163,976         51.1     209,848    56.1         273,160      63.1
      Obligations of states & political subdivisions        37,191         11.6      32,719     8.8          35,038       8.1
      Obligations of U.S. Treasury                               -            -       5,982     1.6           6,035       1.4
      Equity securities                                     10,807          3.4       4,258     1.1           4,533       1.0
                                                       ------------   ----------  ---------- -------   -------------  --------
                                                         $ 320,752        100.0 % $ 374,199   100.0 %     $ 432,953     100.0 %
                                                       ============   ==========  ========== =======   =============  ========
</Table>

     The Company's total  investment  portfolio  decreased by $32.3 million,  or
8.3%, to $356.5  million at December 31, 2005 as compared to the prior year. The
decrease in the  investment  portfolio  was largely  attributed to cashflow from
principal  amortization,  maturities and security sales, which were used to fund
in part the strong growth in commercial loans.  Total gross unrealized gains and
total gross  unrealized  losses for the  investment  portfolio  amounted to $1.0
million and $4.3 million, respectively, at December 31, 2005.

     At December 31, 2005,  available-for-sale  ("AFS")  securities  amounted to
$320.8 million,  or 90.0%, of total securities,  compared to $374.2 million,  or
96.3%,  of total  securities  at year-end  2004.  The  Company's  AFS  portfolio
decreased by $53.4  million,  or 14.3%,  at December 31, 2005 as compared to the
prior year. The composition of investment securities shifted from obligations of
U.S. Agencies to municipal and equity securities mostly due to market conditions
and the Company's asset/liability management strategy.  Substantially all of the
mortgage-backed  securities  held by the  Company  are  issued or backed by U.S.
federal  agencies.  At December 31, 2005,  the Company held no  securities  of a
single issuer (except U.S. federal  agencies) with a book value that exceeds 10%
of Consolidated  Stockholders' Equity. The Company's  held-to-maturity portfolio
increased by $21.2 million,  or 145.8%, to $35.7 million at December 31, 2005 as
compared to the prior year.

                                       28
<PAGE>

Deposits

     Deposits,    which   include    non-interest-bearing    demand    deposits,
interest-bearing  demand deposits,  money market, savings and time deposits, are
an essential  and  cost-effective  funding  source for the Company.  The Company
attributes its long-term  success in growing  deposits to the emphasis it places
on building core customer relationships. The Company offers a variety of deposit
products  designed  to meet  the  financial  needs  of the  customers  based  on
identifiable "life stages".  Deposits increased $14.0 million,  or 1.1%, to $1.3
billion at  December  31, 2005 as  compared  to the prior  year.  For 2005,  the
Company's  overall  yield on deposits  increased by 66 basis points to 1.94% due
mostly to an increase in market interest rates and change in deposit mix.

     The growth in the deposit  base  occurred  mostly in  non-interest  bearing
demand and money market deposits. Non-interest bearing demand deposits increased
$25.1 million,  or 10.7%,  to $260.2 million at December 31, 2005 as compared to
the prior year.  Non-interest bearing demand deposits represented 20.6% of total
deposits at December  31, 2005 and 18.9% at  December  31,  2004.  The growth in
non-interest  bearing demand deposits  positively  impacted the overall yield on
deposit  liabilities  at December  31, 2005 as compared to year end 2004.  Money
market deposits increased $12.3 million, or 14.1%, to $100.0 million at December
31, 2005 as compared to the prior year.  Money market deposits  represented 7.9%
of total deposits at December 31, 2005 and 7.0% at December 31, 2004.

     Contributing  to the  growth  in  deposits  was a $7.7  million,  or  6.8%,
increase in savings  deposits at December 31, 2005 as compared to year-end 2004.
Savings  deposits  represented  9.6% of total  deposits at December 31, 2005 and
9.1% at December 31, 2004.

<Table>
<Caption>
Table 11
-------------------------------------------------------------------------------------------------------------------------------
Deposit Summary
-------------------------------------------------------------------------------------------------------------------------------
at December 31,
                                           2005              2004                2003               2002              2001
                                    ------------------ ------------------ ------------------ ----------------  ----------------
<S>                                 <C>                <C>                <C>                <C>               <C>
Non-interest bearing demand         $  260,151   20.7% $  235,036   18.9% $  223,745   19.3% $ 118,578  14.5%  $ 109,416  15.1%

Interest bearing demand                466,436   37.0     472,807   37.9     446,786   38.6    323,998  39.7     282,173  38.8

Money market                            99,907    7.9      87,595    7.0      84,162    7.3     55,372   6.8      47,569   6.5

Savings                                121,093    9.6     113,352    9.1     120,136   10.4     80,300   9.8      72,092   9.9

Time deposits less than $100,000       261,980   20.8     286,471   23.0     265,356   22.9    210,727  25.9     194,754  26.9

Time deposits greater than $100,000     50,541    4.0      50,877    4.1      16,613    1.5     26,697   3.3      20,479   2.8
                                    ----------  ------ ----------  ------ ----------  ------ --------- ------  --------- ------
                                    $1,260,108  100.0% $1,246,138  100.0% $1,156,798  100.0% $ 815,672 100.0%  $ 726,483 100.0%
                                    ==========  ====== ==========  ====== ==========  ====== ========= ======  ========= ======
</Table>

The following table shows the time remaining to maturity of time certificates of
deposit of $100,000 or more as of December 31, 2005: (in thousands)

Three months or less                         $ 23,501
Over three months through six months            8,828
Over six months through twelve months           3,374
Over twelve months                             14,838
                                       ---------------
                                              $50,541
                                       ===============

Operational Risk

     The  Company is exposed to a variety of  operational  risks that can affect
each of its business  activities,  particularly  those involving  processing and
servicing of loans.  Operational  risk is defined as the risk of loss  resulting
from  inadequate or failed internal  processes,  people or systems from external
events.  The risk of loss also  includes  losses  that may arise from  potential
legal actions that could result from  operational  deficiencies or noncompliance
with  contracts,  laws  or  regulations.  The

                                       29
<PAGE>

Company  monitors and  evaluates  operational  risk on an ongoing  basis through
systems of internal control, formal corporate-wide policies and procedures,  and
an internal audit function.

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 its
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, 2005, total deposits amounted to $1.3 billion,  an
increase of $14.0 million,  or 1.1%, over the prior comparable year. At December
31,  2005,  advances  from the  Federal  Home Loan Bank of New York  ("FHLBNY"),
subordinated  debentures  and  securities  sold under  agreements  to repurchase
totaled  $181.0  million and  represented  11.1% of total  assets as compared to
$59.0 million and 4.0% of total assets, at December 31, 2004.

     Loan production continued to be the Company's principal investing activity.
Net loans at December 31, 2005 amounted to $1.1  billion,  an increase of $170.9
million, or 18.5%, compared to the same period in 2004.

     The  Company's  most liquid  assets are cash and due from banks and federal
funds sold.  At December  31, 2005,  the total of such assets  amounted to $42.6
million, or 2.6%, of total assets,  compared to $33.1 million, or 2.3%, of total
assets at year-end  2004. The increase in liquid assets was driven by the growth
in deposits.

     Another  significant  liquidity source is the Company's  available-for-sale
securities.  At December 31,  2005,  available-for-sale  securities  amounted to
$320.8 million,  or 90.0%, of total securities,  compared to $374.2 million,  or
96.3%, of total securities at year-end 2004.

     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
$101.8 million line of credit available  through its membership in the FHLBNY of
which $28.8 million at December 31, 2005 was utilized.  The Company  maintains a
policy of paying regular cash dividends and anticipates  continuing that policy.
The Company could, if necessary, modify the amount or frequency, of dividends as
an additional  source of liquidity.  There are imposed dividend  restrictions on
the  Bank.  See  Note  19 of  Notes  to  Consolidated  Financial  Statement  for
additional information.

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

                                       30
<PAGE>

The following table sets forth contractual  obligations and various  commitments
representing  required  and  potential  cash flows,  including  interest,  as of
December 31, 2005.
<Table>
<Caption>
Table 12
--------------------------------------------------------------------------------------------------------------
Contractual Obligations and Commitments
at December 31, 2005
--------------------------------------------------------------------------------------------------------------
(dollars in thousands)

Contractual Obligations
-----------------------
                                                                    Payment due by Period
                                                  -----------------------------------------------------
                                                  Less than one  One to three  Four to five  After five  Total Amounts
                                                      year           years         years        years      Committed
                                                  -------------  ------------  ------------  ----------  -------------
<S>                                               <C>            <C>           <C>           <C>         <C>
Minimum annual rental under non-cancelable
 operating leases                                     $2,766        $ 5,072        $ 3,883    $ 5,840       $ 17,561
Remaining contractual maturities of time deposits    185,869        129,696          6,090         46        321,701
Securities sold under agreements to repurchase and
  short-term borrowings                               50,165              -              -          -         50,165
Long-term borrowings                                   4,279         27,197         21,669     90,304        143,449
Subordinated debentures (a)                            1,258          2,516          2,516     57,726         64,016
                                                   ----------    -----------     ----------  ---------   ------------
     Total contractual cash obligations             $244,337      $ 164,481       $ 34,158   $153,916      $ 596,892
                                                   ==========    ===========     ==========  =========   ============

(a) The interest  expense is based upon interest rates in effect at December 31,
2005. The subordinated  debentures  mature in 2035 and interest is calculated to
this maturity  date.  The first  non-penalized  call date is in 2010 and is also
when the debentures convert from fixed rate to floating rate.

Other Commitments
-----------------
                                                       Amount of Commitment Expiration By Period
                                                  ----------------------------------------------------
                                                  Less than one  One to three  Four to five  After five  Total Amounts
                                                     year           years          years         years     Committed
                                                  -------------  ------------ -------------  ----------  -------------
Loan commitments                                    $ 118,935       $ 55,503      $ 16,759    $ 85,935     $ 277,132
Standby letters of credit                               3,416              -             -           -         3,416
                                                    ---------     ----------     ---------    --------   -----------
     Total other commitments                        $ 122,351       $ 55,503      $ 16,759    $ 85,935     $ 280,548
                                                    =========     ==========     =========    ========   ===========
</Table>

Capital Adequacy

     Stockholders'  equity totaled $179.0 million,  or 11.0%, of total assets at
December  31, 2005,  compared to $150.2  million,  or 10.3%,  of total assets at
December 31, 2004.  The $28.8  million  growth was largely  attributable  to the
shares  issued as a result of the  acquisition  of  Franklin  an increase in net
income offset in part by $7.0 million of cash dividends during 2005.

     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 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, 2005,  the
Company's and the Bank's Tier 1 risk-based  capital ratio was 11.02% and 11.08%,
respectively, well in excess of minimum capital standards.

                                       31
<PAGE>

     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, 2005, the Company's and the Bank's leverage ratio
was 8.20% and 8.29%, respectively.

Stock Repurchase Program

     On June 23, 2005, the Board of Directors authorized a program to repurchase
up to  950,000  shares of the  Company's  outstanding  common  stock on the open
market or in privately  negotiated  transactions,  which supersedes the previous
Board  authorized  program As of December  31, 2005,  the company had  purchased
321,737  shares  at a  total  cost  of  approximately  $5.8  million  under  the
authorized  program.  The repurchased shares are held as treasury stock and will
be principally  used for the exercise of stock options,  restricted stock awards
under the Stock Plan and other general corporate purposes.

     On April 26,  2001,  the Board of  Directors  of  Interchange  authorized a
program to repurchase up to 450,000 shares of Interchange's  outstanding  common
stock on the open market or in privately  negotiated  transactions.  During 2004
the Company  repurchased 128,492 shares and as of December 31, 2004, the Company
had purchased 255,854 shares at a total cost of approximately $4.4 million under
the previously  authorized program.  The repurchased shares are held as treasury
stock and will be principally used for the exercise of stock options, restricted
stock awards under the Stock Plan and other general corporate purposes.

Effects of Inflation and Changing Prices

     The financial  statements and related  financial data presented herein have
been prepared in accordance with accounting principles generally accepted in the
United  States of  America  within  the  banking  industry,  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.

Off Balance Sheet Arrangements

     As noted in Note 1 of the Consolidated Financial Statements,  the Company's
policy is to  consolidate  majority-owned  subsidiaries  that it  controls.  The
Company  does not  dispose  of  troubled  loans or  problem  assets  by means of
unconsolidated  special purpose entities, use off-balance sheet entities to fund
its business  operations nor capitalize  any  off-balance  sheet entity with the
Company's stock. In the ordinary course of business,  the Company originates and
sells commercial leases and other financial  assets,  such as mortgage loans, to
the secondary market.  Exposure to loan commitments and letters of credit can be
found in Table 12 under Liquidity.

                                       32
<PAGE>

Critical Accounting Policies and Judgments

     The Company's  consolidated  financial statements are prepared based on the
application of certain  accounting  policies,  the most significant of which are
described in Note 1 Accounting  Policies in the Notes to Consolidated  Financial
Statements.  Certain of these policies require numerous  estimates and strategic
or economic  assumptions  that may prove inaccurate or subject to variations and
may significantly  affect the Company's  reported results and financial position
for the period or in future  periods.  The use of  estimates,  assumptions,  and
judgments are necessary when financial assets and liabilities are required to be
recorded at, or adjusted to reflect,  fair value. Assets and liabilities carried
at fair value inherently  result in more financial  statement  volatility.  Fair
values and the  information  used to record  valuation  adjustments  for certain
assets and  liabilities are based on either quoted market prices or are provided
by other independent third-party sources, when available.  When such information
is not available,  management estimates valuation adjustments primarily by using
internal  cash  flow  and  other  financial  modeling  techniques.   Changes  in
underlying factors, assumptions, or estimates in any of these areas could have a
material  impact on the  Company's  future  financial  condition  and results of
operations.

Allowance for Loan and Lease Losses:  The allowance for loan and lease losses is
established  through periodic 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 considers the ALLL of $10.6 million adequate to cover estimated
losses  inherent in the loan portfolio,  loan  commitments and standby and other
letters  of  credit  that  may  become   uncollectible   based  on  management's
evaluations of the size and current risk  characteristics  of the loan and lease
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.  For further discussion see the following
"Loan Quality" and "Allowance for Loan and Lease Losses"  sections below,  along
with Note 1 "Nature of Business and Summary of Significant Accounting Policies";
Note 6  "Allowance  for Loan and Lease  Losses";  and Note 20  "Commitments  And
Contingent Liabilities" of the Consolidated Financial Statements.

Business  Combinations:  Business  combinations are accounted using the purchase
method of accounting,  the assets and liabilities of the companies  acquired are
recorded at their  estimated fair value at the date of  acquisition  and include
the results of operations of the acquired business from the date of acquisition.
The excess of the purchase price over the estimated fair value of the net assets
acquired is recognized as goodwill.

Goodwill and Other Intangible Assets:  Goodwill is not amortized to expense, but
rather is tested  for  impairment  periodically.  Other  intangible  assets  are
amortized to expense using straight-line methods over their respective estimated
useful  lives.  At least  annually,  and on an  interim  basis  when  conditions
require,  management  reviews goodwill and other intangible assets and evaluates
events or changes in circumstances that may indicate  impairment in the carrying
amount of such  assets.  If the sum of the  expected  undiscounted  future  cash
flows,  excluding  interest  charges,  is less than the  carrying  amount of the
asset,  an  impairment  loss is  recognized.  An  impairment  is  measured  on a
discounted  future cash flow basis and a charge is recognized in the period that
the asset has been

                                       33
<PAGE>

deemed to be impaired. Based upon management's evaluation, no impairment loss is
required to be recognized.

Pension Plan: The Bank maintains a qualified  defined  benefit pension plan (the
"Pension   Plan"),   which  covers  all  eligible   employees  and  an  unfunded
supplemental  pension  plan which  provides  retirement  income to all  eligible
employees who would have been paid amounts in excess of the amounts  provided by
the Pension  Plan but for  limitations  under the  qualified  Pension  Plan.  In
addition,  the Company has an unfunded  retirement plan for all directors of the
Bank who are not employees of the Company or any subsidiary or affiliate.

     Our expected  long-term rate of return on plan assets is 8.0% and was based
on our  expectations of the long-term return on the balanced mutual fund that we
invest our plan assets  which has had a return for the life of the fund of 8.4%.
A 1.0%  decrease  in the  long-term  rate of return on plan  assets  would  have
increased the net periodic pension cost of the Pension Plan by approximately $28
thousand.

     The discount  rates that we utilized  for  determining  the future  pension
obligations  of the plans  ranged  between  5.25% and 5.70% and were  based upon
comparing  expected  benefit  payouts to yields on bonds available in the market
place.  A 1.0%  decrease  in the  discount  rate  would have  increased  the net
periodic pension cost by approximately $324 thousand.

     During 2005 the Company  froze all future  benefits to be accrued under the
plan.

Recently  issued  accounting  pronouncements:  In December  2003,  the  American
Institute of Certified  Public  Accountants  issued  Statement of Position 03-3,
"Accounting for Certain Loans or Debt  Securities  Acquired in a Transfer" ("SOP
03-3"). SOP 03-3 addresses  accounting for differences  between contractual cash
flows and cash flows  expected to be  collected  from an initial  investment  in
loans or debt securities  acquired in a transfer if those differences relate, at
least in  part,  to a  deterioration  of  credit  quality.  SOP  03-3  prohibits
companies from carrying over valuation  allowances in the initial accounting for
such  loans  and  limits  the  yield  that  may be  accreted  to the  excess  of
undiscounted  expected  cash  flows  over the  initial  investment  in the loan.
Decreases in expected cash flows are  recognized as impairment and increases are
recognized  prospectively  through an adjustment of the loan yield.  SOP 03-3 is
effective  for loans and debt  securities  acquired on or after January 1, 2005.
Our  adoption  of  this  guidance  did  not  have a  significant  effect  on our
consolidated financial statements.

     In December 2004, the Financial  Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised  2004),  "Share-Based  Payment."  SFAS 123R  requires that
compensation cost relating to share-based payment  transactions be recognized in
the  financial  statements,  with  measurement  based upon the fair value of the
equity or liability  instruments  issued.  The  Statement is effective as of the
beginning of the first fiscal year that begins after June 15, 2005, and replaces
SFAS No. 123,  "Accounting  for  Stock-Based  Compensation",  and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees". We currently use the
intrinsic-value  method to measure  compensation cost related to our share-based
transactions.  We will adopt SFAS 123R in 2006.  The Company does not anticipate
any material  impact to its  financial  condition or results of  operations as a
result of the adoption of SFAS No. 123R. Estimated future levels of compensation
expense  recognized  related to stock  based  awards  would be  impacted  by new
awards, modifications to awards, or cancellation of awards after the adoption of
SFAS No. 123 (revised).

     On March 3, 2005, the Financial  Accounting Standards ("FASB") Staff issued
FASB Staff Position ("FSP") FIN 46(R)-5, "Implicit Variable Interests under FASB
Interpretation  No. 46" (FIN 46R-- Revised  December  2003),  "Consolidation  of
Variable Interest Entities" ("VIE"). This FSP requires a reporting enterprise to
consider the impact of implicit  variable  interests in determining  whether the
reporting  enterprise  may absorb  variability of the VIE or potential VIE. This
staff
                                       34
<PAGE>

position  was  effective  in the third  quarter of 2005 and its adoption did not
have a material impact on our consolidated financial statements.

     In May 2005,  the FASB issued SFAS No. 154,  "Accounting  Changes and Error
Corrections- a replacement of APB Opinion No. 20 and FASB Statement No. 3". SFAS
No. 154 replaces APB Opinion No. 20,  "Accounting  Changes," and FASB  Statement
No. 3,  "Reporting  Accounting  Changes in Interim  Financial  Statements,"  and
changes the  accounting  and reporting  requirements  for a change in accounting
principle.  SFAS No. 154  applies  to all  voluntary  changes  in an  accounting
principle,  as well as to changes required by a new accounting  pronouncement in
the unusual instance that the pronouncement does not include specific transition
provisions.  SFAS  No.  154  is  effective  for  accounting  changes  and  error
corrections  made in fiscal years beginning after December 15, 2005 and requires
retrospective  application  to  prior  periods'  financial  statements  for most
voluntary changes in an accounting  principle,  unless it is impracticable to do
so.  The  Company  does not  anticipate  any  material  impact to its  financial
condition or results of operations as a result of the adoption of SFAS No. 154.

     At its  November  12-13,  2003  meeting,  the  Emerging  Issues  Task Force
("EITF")    reached   a   consensus   on   Issue   03-01,    "The   Meaning   of
Other-Than-Temporary  Impairment and Its  Application  to Certain  Investments,"
that certain  quantitative  and qualitative  disclosures  should be required for
debt and  marketable  equity  securities  classified  as  available-for-sale  or
held-to-maturity  under SFAS No. 115 and 124 that are  impaired  at the  balance
sheet  date  but for  which  an  other-than-temporary  impairment  has not  been
recognized. The Company adopted the disclosure requirements in fiscal year 2003.
At the March 17-18, 2004 meeting,  the EITF reached a consensus,  which approved
an  impairment  model for debt and equity  securities.  In FASB  Staff  Position
("FSP")  03-01-01,  issued  in  September  2004,  the  effective  date  for  the
measurement  and  recognition  guidance  contained in paragraphs  10-20 of Issue
03-01 was delayed.

     On  November  3, 2005,  FSP FAS Nos.  115-1 and FAS 124-1  "The  Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments," was
issued.  This FSP nullifies  certain  requirements  of Issue 03-1 and supersedes
EITF Topic No. D-44,  "Recognition of  Other-Than-Temporary  Impairment upon the
Planned Sale of a Security  Whose Cost  Exceeds Fair Value." This FSP  nullified
the  requirements  of  paragraphs  10-18  of Issue  03-1,  carried  forward  the
requirements  of  paragraph  8 and 9 of Issue 03-1 with  respect to  cost-method
investments  and  carries  forward  the  disclosure   requirements  included  in
paragraphs  21 and 22 of Issue 03-1 and related  examples.  The guidance in this
FSP shall be applied to reporting periods beginning after December 15, 2005. The
Company believes the adoption of this FSP in 2006 will not materially impact our
results of operations, financial condition, or related disclosures.

Item 7A.  Quantitative and Qualitative Disclosure about Market Risk

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
trading or  hedging  transactions  utilizing  derivative  financial  instruments
during 2005. 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


                                       35
<PAGE>

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
is  comprised  of the  Company's  executive  and  senior  management  and  meets
regularly,  typically  weekly.  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 and presented to the Board,  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, 2005,  the Company  simulated the
effects on net interest income given an instantaneous  and parallel shift in the
yield curve of up to a 200 basis point rising  interest rate  environment and an
200 basis point declining interest rate environment. Based on the simulation, it
was estimated that net interest income, over a twelve-month  horizon,  would not
decrease by more than 3.6%. The Company's interest rate risk management policies
provide that net interest  income should not decrease by more than 15% or 10% if
interest rates increase from current rates given an  instantaneous  and parallel
shift in the yield  curve of a 200 basis  point rise in rates or 100 basis point
decline in rates,  respectively.  Policy exceptions,  if any are reported to the
Board of Directors.  At December 31, 2005,  the Company was within policy limits
established  for changes in net  interest  income and future  economic  value of
equity.  Economic  value of equity is defined as the market  value of its assets
less the market value of its liabilities plus (or minus) the market value of any
off-balance sheet positions.

The following table sets forth the sensitivity results for the last two years.

                                       36
<PAGE>

Net Interest Income Sensitivity Simulation

                       Percentage Change in Estimated Net Interest
                           Income over a twelve month horizon
                       -------------------------------------------
                                 2005          2004
                              ----------    ----------
+200 basis points                -0.3 %        -2.3 %
+100 basis points                 0.1 %        -0.8 %
-100 basis points                -0.9 %        -3.0 %
-200 basis points                -3.6 %       *

* Not simulated due to the historically low interest rate environment.

     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 a negative 8.29% at December 31, 2005. 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 gap analysis  presented
below.  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

                                       37
<PAGE>

borrowers  to  service  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.

<Table>
<Caption>
Table 13
---------------------------------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity Analysis
---------------------------------------------------------------------------------------------------------------------------------
at December 31, 2005
(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                               $244,962  $ 61,636  $ 102,926  $ 275,081  $ 322,623   $ 93,317  $ (5,222)  $1,095,323
    Investment securities                     49,533    43,193     82,421     77,877     45,949     61,553    (4,060)     356,466
    Interest-earning deposits                      4         -          -          -          -          -         -            4
    Cash and amounts due from banks                -         -          -          -          -          -    42,620       42,620
    Other noninterest earning assets               -    17,850      9,091          -          -          -   110,032      136,973
                                            --------- --------- ---------- ---------- ---------- ---------- ---------  -----------
                Total assets                 294,499   122,679    194,438    352,958    368,572    154,870   143,370    1,631,386
                                            --------- --------- ---------- ---------- ---------- ---------- ---------  ===========

Liabilities and stockholders' equity
    Demand deposits                            6,181     6,181     12,166     25,150     18,022    192,451         -      260,151
    Savings deposits                         116,151   111,803     69,027     52,500     12,585    104,370         -      466,436
    Money market accounts                      2,668    13,048     13,048     26,096      8,799     57,434         -      121,093
    Fixed maturity certificates of deposits   25,562     7,492      7,492     14,984      6,106     38,271         -       99,907
    Securities sold under agreements to
      repurchase                              91,613    75,606    128,468     11,549      4,544        741         -      312,521
    Short-term borrowings                      3,939         -          -          -          -          -         -        3,939
    Long-term borrowings                      56,483         -          -     85,000     35,620          -         -      177,103
    Other liabilities                              -         -          -          -          -          -    11,234       11,234
    Stockholders' equity                           -         -          -          -          -          -   179,002      179,002
                                            --------- --------- ---------- ---------- ---------- ---------- ---------  -----------
          Total liabilities and
            stockholders'equity              302,597   214,130    230,201    215,279     85,676    393,267   190,236   $1,631,386
                                            --------- --------- ---------- ---------- ---------- ---------- ---------  ===========

Gap                                         $ (8,098) $(91,451) $ (35,763) $ 137,679  $ 282,896  $(238,397) $ (46,866)
                                            ========= ========= ========== ========== ========== ========== =========
Gap to total assets                           -0.50%    -5.61%     -2.19%      8.44%     17.34%    -14.61%
Cumulative Gap                              $ (8,098) $(99,549) $(135,312)   $ 2,367  $ 285,263   $ 46,866
                                            ========= ========= ========== ========== ========== ==========
Cumulative Gap to total assets                -0.50%    -6.10%     -8.29%      0.15%     17.49%      2.87%

</Table>

                                       38
<PAGE>

Item 8.  Financial Statements and Supplemental Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
_______________________________________________________________________________

To the Board of Directors and Stockholders of
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, 2005 and 2004, 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, 2005. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  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,  such consolidated  financial  statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2005
and 2004,  and the results of its  operations and its cash flows for each of the
three years in the period ended December 31, 2005, in conformity with accounting
principles generally accepted in the United States of America.

We have also  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the effectiveness of the Company's
internal control over financial  reporting as of December 31, 2005, based on the
criteria  established in Internal  Control--Integrated  Framework  issued by the
Committee of Sponsoring  Organizations of the Treadway Commission and our report
dated March 13, 2006 expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial  reporting
and an  unqualified  opinion  on the  effectiveness  of the  Company's  internal
control over financial reporting.

/s/ Deloitte & Touche LLP
-------------------------

New York, New York
March 13, 2006

                                       39
<PAGE>
<Table>
Interchange Financial Services Corporation
---------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------------------------------------------------------------------------
at December 31
(dollars in thousands)
                                                                    2005            2004
                                                                --------------  -------------
<S>                                                             <C>             <C>
Assets
Cash and due from banks                                           $    42,620    $    33,108
Interest bearing demand deposits                                            4              2
                                                                --------------  -------------
Total cash and cash equivalents                                        42,624         33,110
                                                                --------------  -------------

Securities held-to-maturity at amortized cost
    (estimated fair value of $36,199 and
    $15,276 for 2005 and 2004, respectively)                           35,714         14,530
                                                                --------------  -------------
Securities available-for-sale at estimated fair
    value (amortized cost of $324,548 and
    $375,241 for 2005 and 2004 respectively)                          320,752        374,199
                                                                --------------  -------------

Loans and leases (net of unearned income and
    deferred fees of $6,786 and $5,514
    2005 and 2004, respectively)                                    1,105,969        934,181
Less:  Allowance for loan and lease losses                             10,646          9,797
                                                                -------------  --------------

Net loans and leases                                                1,095,323        924,384
                                                                --------------  -------------

Bank owned life insurance                                              26,941         25,847
Premises and equipment, net                                            17,509         17,713
Foreclosed assets and other repossessed assets                            122            156
Goodwill                                                               68,910         55,952
Intangible assets                                                       5,469          3,660
Accrued interest receivable and other assets                           18,022         14,590
                                                                --------------  -------------
Total assets                                                      $ 1,631,386    $ 1,464,141
                                                                ==============  =============

Liabilities
Deposits
    Non-interest bearing                                          $   260,151    $   235,036
    Interest bearing                                                  999,957      1,011,102
                                                                --------------  -------------
Total deposits                                                      1,260,108      1,246,138
                                                                --------------  -------------

Securities sold under agreements to repurchase                          3,939          4,401
Short-term borrowings                                                  46,150         24,600
Long-term borrowings                                                  110,333         30,000
Subordinated debentures                                                20,620              -
Accrued interest payable and other liabilities                         11,234          8,847
                                                                --------------  -------------
Total liabilities                                                   1,452,384      1,313,986
                                                                --------------  -------------

Commitments and contingent liabilities

Stockholders' equity:
Common stock, without par value; 33,750,000 shares
    authorized; 20,138,668 and 19,119,814 shares
    issued and outstanding for 2005 and 2004, respectively              5,397          5,397
Capital surplus                                                        97,238         73,320
Retained earnings                                                      99,222         86,542
Accumulated other comprehensive loss, net of taxes of
     $1,497 and $408 for 2005 and 2004, respectively                   (2,310)          (633)
                                                                --------------  -------------
                                                                      199,547        164,626
Less:  Treasury stock                                                  20,545         14,471
                                                                --------------  -------------
Total stockholders' equity                                            179,002        150,155
                                                                --------------  -------------
Total liabilities and stockholders' equity                        $ 1,631,386    $ 1,464,141
                                                                ==============  =============
---------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
</Table>

                                       40
<PAGE>
<Table>
<Caption>
Interchange Financial Services Corporation
-----------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
-----------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands, except per share data)
                                                                     2005           2004          2003
                                                                --------------- -------------  -----------
<S>                                                             <C>             <C>            <C>
Interest income
Interest on loans and leases                                          $ 66,433      $ 54,173      $48,982
Interest on federal funds sold                                             111           151          276
Interest on interest bearing deposits                                        3             -           61
Interest and dividends on securities
  Taxable interest income                                                9,623        10,520        9,847
  Interest income exempt from federal income taxes                       2,026         1,164          914
  Dividends                                                                299            92          187
                                                                --------------- -------------  -----------
Total interest income                                                   78,495        66,100       60,267
                                                                --------------- -------------  -----------

Interest expense
Interest on deposits                                                    19,626        12,390       13,161
Interest on securities sold under agreements to repurchase                 123           145          267
Interest on short-term borrowings                                        1,030           214           18
Interest on long-term borrowings and subordinated debentures             2,583           905          428
                                                                --------------- -------------  -----------
Total interest expense                                                  23,362        13,654       13,874
                                                                --------------- -------------  -----------

Net interest income                                                     55,133        52,446       46,393
Provision for loan and lease losses                                        925         1,200        1,815
                                                                --------------- -------------  -----------
Net interest income after provision for loan and lease losses           54,208        51,246       44,578
                                                                --------------- -------------  -----------

Non-interest income
Service fees on deposit accounts                                         3,587         3,753        3,485
Net gain on sale of securities                                             394         1,444          793
Net gain on sale of loans and leases                                     1,294         1,317          769
Bank owned life insurance                                                1,094           993        2,019
Commissions on sale of annuities and mutual funds                          743           913          883
Other                                                                    3,269         3,037        2,696
                                                                --------------- -------------  -----------
Total non-interest income                                               10,381        11,457       10,645
                                                                --------------- -------------  -----------

Non-interest expense
Salaries and benefits                                                   19,325        19,463       16,994
Occupancy                                                                5,583         5,283        4,577
Furniture and equipment                                                  1,267         1,309        1,327
Advertising and promotion                                                1,347         1,456        1,412
Amortization of intangible assets                                          571           504          360
Other                                                                    7,607         7,993        6,569
                                                                --------------- -------------  -----------
Total non-interest expense                                              35,700        36,008       31,239
                                                                --------------- -------------  -----------

Income before income taxes                                              28,889        26,695       23,984
Income taxes                                                             9,184         8,481        7,618
                                                                --------------- -------------  -----------
Net income                                                            $ 19,705      $ 18,214     $ 16,366
                                                                =============== =============  ===========

Basic earnings per common share                                         $1.01         $0.95        $0.92
                                                                        =====         =====        =====

Diluted earnings per common share                                       $0.99         $0.94        $0.91
                                                                        =====         =====        =====
-----------------------------------------------------------------------------------------------------------
See notes to  consolidated financial statements.
</Table>
All share data was restated to reflect a 3-for-2 stock split declared on January
18, 2005 and paid on February 18, 2005.

                                       41
<PAGE>
<Table>
<Caption>
Interchange Financial Services Corporation
-----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31
(dollars in thousands)
                                                                             Accumulated
                                                                               Other
                                                     Comprehensive Retained Comprehensive  Common   Capital    Treasury
                                                        Income     Earnings Income(Loss)   Stock    Surplus     Stock      Total
                                                     ------------- -------- ------------- -------- ---------- ----------- ---------
<S>                                                  <C>           <C>      <C>           <C>      <C>        <C>         <C>
Balance at January 1, 2003                                         $63,314      $ 3,596   $ 5,397  $ 21,097   $ (12,724)  $ 80,680
Comprehensive income
     Net Income                                        $ 16,366     16,366                                                  16,366
     Other comprehensive losses, net of taxes
        Unrealized net gains on AFS debt securities        (474)
        Less: net gains on disposition of securities       (820)
        Unrealized gains on equity securities               137
        Minimum pension liability                            (5)
                                                      ----------
     Other comprehensive income net of taxes             (1,162)                 (1,162)                                    (1,162)
                                                      ----------
Comprehensive income                                   $ 15,204
                                                      ==========

Dividends on common stock                                           (4,970)                                                 (4,970)
Issued 31,325 shares of common stock in connection
     with Executive Compensation Plan                                                                   109         245        354
Exercised 89,543 option shares                                                                         (155)        593        438
Issued 4,424,579 shares of common stock in connection
     with the acquisition of Bridge View Bancorp                                                     52,180                 52,180
Reacquired 53,939 shares in lieu of non-performing asset                                                           (693)      (693)
                                                                 ----------  ----------- --------- --------- ----------- ----------
Balance at December 31, 2003                                        74,710        2,434     5,397    73,231     (12,579)   143,193

Comprehensive income
     Net Income                                        $ 18,214     18,214                                                  18,214
     Other comprehensive losses, net of taxes
        Less: unealized losses on AFS debt securities    (2,012)
        Less: net gains on disposition of securities     (1,060)
        Minimum pension liability adjustment                  5
                                                      ----------
      Other comprehensive losses, net of taxes           (3,067)                 (3,067)                                   (3,067)
                                                      ----------
Comprehensive income                                   $ 15,147
                                                      ==========

Issued 11,690 shares of common stock in connection
     with Executive Compensation Plan                                                                   103         102        205
Dividends on common stock                                           (6,382)                                                 (6,382)
Exercised 22,065 option shares                                                                          (14)        160        146
Purchased 128,492 shares of common stock                                                                         (2,154)    (2,154)
                                                                 ----------  ----------- --------- --------- ----------- ----------
Balance at December 31, 2004                                        86,542         (633)    5,397    73,320     (14,471)   150,155
Comprehensive income
     Net Income                                        $ 19,705     19,705                                                  19,705
     Other comprehensive losses, net of taxes
        Less: unealized losses on AFS debt securities    (1,431)
        Less: net gains on disposition of securities       (236)
        Minimum pension liability adjustment                (10)
                                                      ----------
     Other comprehensive losses, net of taxes            (1,677)                 (1,677)                                    (1,677)
                                                      ----------
Comprehensive income                                   $ 18,028
                                                      ==========

Dividends on common stock                                           (7,013)                                                 (7,013)
Issued 18,772 shares of common stock in connection
     with Executive Compensation Plan                                                                   174         162        336
Issued 1,323,181 shares of common stock in connection
     with the acquisition of Franklin Bank                                                           23,738                 23,738
Exercised 45,022 option shares                                                                            6         383        389
Payout of fractional shares resulting from the
     three-for-two stock split declared
     January 18, 2005 and paid on February 18, 2005                     (7)                                                     (7)
Payout of fractional shares in connection with
     the acquisition of Franklin Bank                                   (5)                                                     (5)
Purchased 328,192 shares of common stock                                                                         (5,903)    (5,903)
Reacquired 39,228 shares in settlement of litigation                                                               (716)      (716)
                                                                 ----------  ----------- --------- --------- ----------- ----------
Balance at December 31, 2005                                      $ 99,222     $ (2,310)  $ 5,397  $ 97,238   $ (20,545) $ 179,002
                                                                 ==========  =========== ========= ========= =========== ==========
-----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated  financial statements.
All share data was restated to reflect a 3-for-2 stock split declared on January 18, 2005 and paid on February 18, 2005.
</Table>

                                       42
<PAGE>
<Table>
<Caption>
INTERCHANGE FINANCIAL SERVICES CORPORATION
----------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands)
                                                                  2005       2004       2003
                                                              ----------- --------- ----------
<S>                                                           <C>         <C>       <C>
Cash flows from operating activities
Net income                                                      $ 19,705  $ 18,214   $ 16,366
Adjustments to reconcile net income to net cash
    provided by operating activities
  Depreciation and amortization                                    2,002     1,914      1,752
  Amortization of securities premiums                              4,002     5,237      4,643
  Accretion of securities discounts                                 (251)     (269)      (315)
  Amortization of loan premiums                                       87        61          -
  Amortization of premiums in connection with acquisition            645     1,023      1,033
  Provision for loan and lease losses                                925     1,200      1,815
  Charge-off of foreclosed assets and other repossessed assets         -        62          -
  Increase in cash surrender value of Bank Owned Life Insurance   (1,094)     (993)      (579)
  Net gain on sale of securities                                    (394)   (1,444)    (1,208)
  Origination of loans held for sale                             (36,975)  (14,860)   (18,089)
  Sale of loans held for sale                                     36,719    15,110     18,679
  Acceleration of premium amortization on certain collateralized
         mortgage obligations                                          -         -        415
  Net gain on sale of  loans and leases                           (1,294)   (1,317)      (769)
  Net gain on sale of fixed assets                                     -       (16)        10
  Write off of foreclosed and repossessed assets                      47         -          -
  Net gain on sale of foreclosed and repossessed assets                -       (17)        (7)
Decrease (increase) in operating assets
  Accrued interest receivable                                     (1,160)      534     (1,225)
  Deferred taxes                                                             1,187      1,672
  Other Assets                                                    (1,212)   (1,282)    (4,080)
 Increase (decrease) in operating liabilities
 Accrued interest payable                                            410        (2)      (322)
  Other                                                              358    (4,923)      (115)
                                                               ---------- ----------- ----------
Cash provided by operating activities                             22,520    19,419     19,676
                                                               ---------- ----------- ----------

Cash flows from investing activities
(Payments for) proceeds from
  Net originations of loans and leases                           (90,980) (112,057)      (904)
  Purchase of loans and leases                                    (4,678)  (42,531)       (53)
  Sale of loans and leases                                         2,018    16,302      3,176
  Purchase of securities available-for-sale                      (95,069) (109,564)  (341,335)
  Maturities of securities available-for-sale                     68,264    90,420    122,581
  Sale of securities available-for-sale                           78,661    69,114     44,361
  Maturities of securities held-to-maturity                        3,205    11,212      8,900
  Sale of securities held-to-maturity                                270         -          -
  Purchase of securities held-to-maturity                        (25,023)   (6,820)         -
  Sale of foreclosed and other repossessed assets                      -       108        141
  Purchase of fixed assets                                        (1,150)   (1,840)    (1,242)
  Premium in connection with acquisition                              75        75        (90)
  Net cash proceeds from acquisition of Bridge View Bancorp            -         -     19,439
  Net cash proceeds from acquisition of Franklin Bank              3,504         -          -
  Purchase of Bank Owned Life Insurance                                -    (3,000)         -
  Sale of fixed assets                                             1,171     2,766          -
                                                               ---------- ----------- ----------
Cash used in investing activities                                (59,732)  (85,815)  (145,026)
                                                               ---------- ----------- ----------

Cash flows from financing activities
Proceeds from (payments for)
  Net change in deposits                                         (62,062)   89,359     82,332
  Securities sold under agreements to repurchase and
     other borrowings                                          1,020,585    20,000    147,734
  Retirement of securities sold under agreement to
     repurchase and other borrowings                            (919,498)  (33,108)  (103,014)
  Issuance of long term subordinated debentures                   20,620         -          -
  Minimum pension liability, net of taxes                              -         5         (5)
  Dividends                                                       (7,013)   (6,382)    (4,970)
  Common stock issued                                                336       205        354
  Payout of fractional shares resulting from 3-for-2
     stock split                                                      (7)        -          -
  Payout of fractional shares resulting from Franklin
     Bank acquisition                                                 (5)        -          -
  Treasury stock                                                  (6,619)   (2,154)         -
  Exercise of option shares                                          389       146        438
                                                               ---------- ----------- ----------
Cash provided by financing activities                             46,726    68,071    122,869
                                                               ---------- ----------- ----------

Increase  in cash and cash equivalents                             9,514     1,675     (2,481)
Cash and cash equivalents, beginning of period                    33,110    31,435     33,916
                                                               ---------- ----------- ----------
Cash and cash equivalents, end of period                        $ 42,624  $ 33,110   $ 31,435
                                                               ========== =========== ==========

Supplemental disclosure of cash flow information:
Cash paid for:
  Interest                                                      $ 22,294   $13,463    $14,052
  Income taxes                                                     9,469    12,053      9,003
Supplemental disclosure of non-cash investing and
     financing activities:
  Loans transferred to loans available for sale                        -    13,340          -
  Loans transferred to foreclosed real estate and other
     repossessed assets                                               13        79        188
  Stock issued related to acquisition                             23,738         -     52,180
------------------------------------------------------------------------------------------------
</Table>
See notes to consolidated financial statements.

                                       43
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Business and Summary of Significant Accounting Policies

     The following is a  description  of the business of  Interchange  Financial
Services  Corporation  ("Interchange")  and  subsidiaries   (collectively,   the
"Company") and its  significant  accounting  and reporting  policies used in the
preparation of the consolidated financial statements:

Nature of Business

     Interchange,  a New  Jersey  business  corporation,  is a  registered  bank
holding  company under the Bank Holding  Company Act of 1956, as amended,  whose
principal  subsidiary is Interchange Bank (the "Bank"),  a New Jersey state bank
and member of the Federal Reserve System. 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  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 engaged in providing its
customers a broad range of financial  products and  services,  such as equipment
leasing, mutual funds and annuities, brokerage services, conventional insurance,
internet banking and title insurance.

Summary of Significant Accounting Policies

Principles of Consolidation:  The accompanying consolidated financial statements
include  the  accounts  of the  Company,  including  certain  of its  direct and
indirect  wholly-owned  subsidiaries  and its indirect  subsidiary,  Clover Leaf
Management  Realty  Corporation,  which is 99.0% owned by Clover Leaf Investment
Company,  which is a wholly  owned  subsidiary  of the  Bank.  The  consolidated
financial statements have been prepared in accordance with accounting principles
and  practices  generally  accepted  in the United  States of America  ("GAAP").
Significant  intercompany  accounts and  transactions  have been  eliminated  in
consolidation.   In  accordance  with  Financial   Accounting   Standards  Board
Interpretation No. 46 (Revised),  "Consolidation of Variable Interest Entities,"
("FIN No. 46" (revised)),  the Company has two wholly owned trusts which are not
consolidated.  See  Note  12  "Subordinated  Debentures"  for  a  more  detailed
discussion of these subsidiaries.

Use of  estimates:  The  preparation  of  consolidated  financial  statements in
conformity with GAAP 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. Such estimates include the allowance for loan and lease losses, the fair
value of financial instruments,  goodwill, intangibles, and retirement benefits.
Actual results could differ from those estimates.

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 and federal funds sold, with original maturities of three
months or less.

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  ("HTM") and are carried at cost,  adjusted for the
amortization  of premiums and  accretion  of  discounts.  Management  determines
whether the security will be classified as HTM at the time of purchase.

     All other  securities,  including  equity  securities,  are  classified  as
securities  available-for-sale ("AFS"). Securities classified as AFS 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

                                       44
<PAGE>

taxes,  in  accumulated  other  comprehensive  income  (loss)  included  in  the
consolidated  statement of  stockholders'  equity.  The estimated fair value for
securities are based on quoted market prices, where available.  If quoted market
prices are not  available,  estimated  fair  values  are based on quoted  market
prices  of  comparable  instruments.  Gains  and  losses  from the sale of these
securities  are  determined  using the  specific  identification  method and are
reported in non-interest income. The Company does not acquire securities for the
purpose of engaging in trading activities.

     Interest  and  dividends  are  accrued  and  credited  to income as earned.
Purchase  premiums and  discounts are  recognized  in interest  income using the
effective interest method over the term of the securities.

     On a quarterly basis, the Company makes an assessment to determine  whether
there have been any events or economic circumstances to indicate that a security
on which there is an  unrealized  loss is  impaired  on an  other-than-temporary
basis. The Company considers many factors including the severity and duration of
the impairment; the intent and ability of the Company to hold the security for a
period of time sufficient for a recovery in value; recent events specific to the
issuer or industry; and for debt securities,  external credit ratings and recent
downgrades. Securities on which there is an unrealized loss that is deemed to be
other-than-temporary are written down to fair value with the write-down recorded
as a realized loss in securities gains (losses).

Loans and Leases:  Loans and leases (herein  referred to  collectively as loans)
are carried at the principal amounts  outstanding,  net of unearned discount and
deferred  loan  origination  fees and  costs.  Interest  income is  accrued  and
recognized  as income when  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 noninterest 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.
Income from leases syndicated are included in non-interest income.

     The equipment  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 principal or interest  payments
are in arrears 90 days or more  and/or in the opinion of  management  the future
collection  of interest  or  principal  according  to  contractual  terms may be
doubtful.  Amounts  previously  accrued are evaluated for  collectibility and if
necessary  previously   recognized  income  is  reversed.   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
the  obligation  is brought  current and has  performed in  accordance  with the
contractual terms for a reasonable period of time and, in management's judgment,
collection of the contractual principal and interest is no longer doubtful.

     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 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 commercial  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

                                       45
<PAGE>

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. 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  ("SFAS") No. 114  "Accounting by Creditors for
Impairment of a Loan."

     A loan is  categorized  as a troubled  debt  restructure  if a  significant
concession to contractual  terms is granted to the borrower due to deterioration
in the financial condition of the borrower. Generally, a nonaccrual loan that is
restructured  remains on nonaccrual  until the obligation is brought current and
has performed for a period of time to demonstrate that the borrower can meet the
restructured  terms.  If the  borrower's  ability  to meet the  revised  payment
schedule is uncertain, the loan remains classified as a nonaccrual loan.

Allowance  for loan and lease  losses:  The  allowance for loan and lease losses
("ALLL") is  established  through  periodic  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.
Management's  determination  of the  adequacy  of the  allowances  is  based  on
periodic  evaluations of the loan portfolio and other relevant factors including
valuations on  non-performing  loans in accordance with SFAS No. 114 "Accounting
by  Creditors  for  Impairment  of  a  Loan."  The  evaluations  are  inherently
subjective as it requires material estimates including such factors as potential
loss factors,  changes in trend of nonperforming  loans,  current state of local
and national economy, value of collateral, changes in the composition and volume
of the loan  portfolio,  review  of  specific  problem  loans  and  management's
assessment of the inherent risk and overall quality of the loan  portfolio.  All
of these factors may be susceptible to significant change.  Also, the allocation
of the allowance for credit losses to specific loan pools is based on historical
loss trends and management's  judgment  concerning  those trends.  The allowance
contains a portion which represents  management's evaluation of inherent risk in
the  portfolio   based  on  changes  in  the   composition   of  performing  and
nonperforming  loans,   concentrations  of  credit,  economic  conditions,   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.
The total allowance is available for all loan losses,  although  allocations are
made to specific loans and pools of loans, and represents management's estimates
of losses in accordance with SFAS No. 5 and SFAS No. 114.

     The primary risks inherent in the loan portfolio are possible  increases in
interest rates, a decline in the economy,  and a possible decline in real estate
market values. Any one or a combination of these events may adversely affect our
loan portfolio  resulting in increased  delinquencies,  loan losses,  and future
levels of  provisions.  To the extent  actual  outcomes  differ from  management
estimates,  additional  provision  for credit  losses may be required that would
adversely impact earnings in future periods.

     In addition to the allowance for credit  losses,  the Company  maintains an
allowance for unfunded loan  commitments  and letters of credit.  This amount is
reported as a liability on the Consolidated Balance Sheet.

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 20 to 40
years for premises and 3 to 10 years for  furniture and  equipment.  Maintenance
and  repairs  are charged to expenses  as  incurred,  while  renewals  and major
improvements are capitalized.

Long-Lived  Assets.  The carrying value of long-lived assets to be held and used
is  evaluated  for  impairment  whenever  indications  of  impairment  exist  in
accordance with the requirements of SFAS

                                       46
<PAGE>

No. 144,  "Accounting for the Impairment or Disposal of Long-Lived Assets".  The
carrying  value of long-lived  assets is considered  impaired when the projected
undiscounted  cash flows are less than the carrying value. In that event, a loss
would be recognized  based on the amount by which the carrying value exceeds the
fair value.  Fair value is determined  primarily by available market  valuations
or, if applicable, discounted cash flows.

Foreclosed   assets:   Foreclosed  assets  consist  of  real  estate  and  other
repossessed assets and are carried at the lower of cost or estimated fair value,
less estimated  selling costs, at time of foreclosure or  repossession.  When an
asset 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  asset expense to reflect
any  subsequent  declines  in the  estimated  fair value.  As a result,  further
declines in the asset values may result in increased  foreclosed  asset expense.
Routine holding costs are charged to foreclosed asset expense as incurred.

Business Combinations: In business combinations accounted for using the purchase
method of accounting,  the assets and liabilities of the companies  acquired are
recorded at their  estimated fair value at the date of  acquisition  and include
the results of operations of the acquired business from the date of acquisition.
The excess of the purchase price over the estimated fair value of the net assets
acquired is recognized as goodwill.

Goodwill and Other Intangible Assets:  Goodwill is not amortized to expense, but
rather is tested  for  impairment  periodically.  Other  intangible  assets  are
amortized to expense using straight-line methods over their respective estimated
useful lives. At least annually as of December 31 and June 30,  depending on the
original date of acquisitions,  and on an interim basis when conditions require,
management  reviews goodwill and other intangible assets and evaluates events or
changes in circumstances that may indicate  impairment in the carrying amount of
such  assets.  If the  sum of  the  expected  undiscounted  future  cash  flows,
excluding  interest  charges,  is less than the carrying amount of the asset, an
impairment loss is recognized.  An impairment is measured on a discounted future
cash flow basis and a charge is recognized in the period that the asset has been
deemed to be impaired.

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 enacted tax rates
expected to apply in the  period(s) in which the deferred tax asset or liability
is expected to be settled or realized.  The effect on deferred taxes of a change
in tax rates is recognized  in income in the period in which 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.

Comprehensive Income(loss):  Comprehensive income is comprised of net income and
other comprehensive  income.  Other comprehensive  income includes items such as
unrealized  gains and losses on  securities  available-for-sale,  net of tax and
minimum pension liability. Comprehensive income is presented in the consolidated
statements of changes in stockholders' equity.

Earnings per common share:  Basic  earnings per common share  represents  income
available  to common  stockholders  divided  by the  weighted-average  number of
common shares outstanding  during the period.  Diluted earnings per common share
reflects  additional  common shares that would have been outstanding if dilutive
potential  common  shares had been issued,  as well as any  adjustment to income
that would result from the assumed issuance. Potential common shares that may be
issued by the

                                       47
<PAGE>

Company relate solely to outstanding stock options, and are determined using the
treasury stock method.  All earnings per share data has been adjusted to reflect
a 3-for-2  stock split  declared  on January  18, 2005 and paid on February  18,
2005.

Stock Based Compensation:  The Company accounts for stock option plans under the
recognition  and  measurement  principles  of  "Accounting  for Stock  Issued to
Employees"  (APB No. 25) and related  interpretations.  No stock-based  employee
compensation  costs are  reflected in net income,  as all options  granted under
those plans had an exercise  price equal to the market  value of the  underlying
common stock on the date of grant.  In December 2004, the FASB issued  Statement
of Financial  Accounting Standard ("SFAS") No. 123 (revised 2004),  "Share-Based
Payment,"  ("SFAS No.  123(R)").  SFAS No. 123(R)  addresses the  accounting for
share-based  payment  transactions  in which  an  enterprise  receives  employee
services  in  exchange  for (a)  equity  instruments  of the  enterprise  or (b)
liabilities  that  are  based  on the  fair  value  of the  enterprise's  equity
instruments  or that may be settled by the issuance of such equity  instruments.
SFAS No.  123(R)  requires an entity to recognize the  grant-date  fair value of
stock options and other equity-based compensation issued to employees within the
income  statement  using a  fair-value-based  method,  eliminating the intrinsic
value method of accounting  previously  permissible under APB No. 25 and related
interpretations.

     Prior to the required adoption of SFAS No. 123(R),  the Company has elected
to account for its stock-based  incentive plans and awards under APB No. 25, and
has  adopted  the  disclosure  requirements  of SFAS No.  123,  "Accounting  for
Stock-Based   Compensation,"  as  amended  by  SFAS  No.  148,  "Accounting  for
Stock-Based Compensation - Transition and Disclosure."

     The fair value of each  option  granted is  estimated  on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2005, 2004 and 2003, respectively: dividend yield
of 2.00%,  2.21%,  2.14%;  expected  volatility of 23.07%,  24.83%,  and 24.69%;
risk-free  interest  rate of 3.87%,  3.39% and 3.39%;  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 the 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)

                                       48
<PAGE>

<Table>
<Caption>
                                                  2005          2004         2003
                                               -----------   -----------  ---------
<S>                                            <C>           <C>          <C>
Net Income
      As reported                                 $19,705       $18,214    $16,366
      Less: Total stock-based compensation
      expense determined under the fair
      value method for all rewards, net of
      related tax effects                           2,268           834        521
                                               -----------   -----------  ---------
      Pro-forma                                   $17,437       $17,380    $15,845
                                               ===========   ===========  =========

Earnings per share:
Basic:
      As reported                                  $ 1.01        $ 0.95     $ 0.92
      Pro-forma                                    $ 0.90        $ 0.91     $ 0.89
Diluted:
      As reported                                  $ 0.99        $ 0.94     $ 0.91
      Pro-forma                                    $ 0.88        $ 0.89     $ 0.88

      Basic shares                                 19,418        19,124     17,724
      Diluted shares                               19,835        19,476     17,987
</Table>

All per share data and average shares were restated to reflect all stock splits.
The effective tax rate used for the  Non-qualified  option  expense was 35%. The
increase in the total  stock-based  compensation  expense in 2005 is a result of
the  acceleration  of the unvested stock options.  See Note 14, Stock Option and
Incentive Plan.

Segment  Reporting:  SFAS No. 131,  "Disclosures About Segments of an Enterprise
and  Related  Information"  ("SFAS  No.  131"),  requires  disclosures  for each
reportable  operating segment. As a  community-oriented  financial  institution,
substantially  all of the Company's  operations  entail the delivery of loan and
deposit  products  and various  other  financial  services to  customers  in its
primary  market  area,  which  is  Bergen  County,  New  Jersey.  The  Company's
community-banking operation constitutes the Company's only operating segment for
financial reporting purposes under SFAS No. 131.

Treasury Stock: The Company records common stock purchased for treasury at cost.
At the date of subsequent reissue,  the treasury stock account is reduced by the
average cost of such stock.

Recently  issued  accounting  pronouncements:  In December  2003,  the  American
Institute of Certified  Public  Accountants  issued  Statement of Position 03-3,
"Accounting for Certain Loans or Debt  Securities  Acquired in a Transfer" ("SOP
03-3"). SOP 03-3 addresses  accounting for differences  between contractual cash
flows and cash flows  expected to be  collected  from an initial  investment  in
loans or debt securities  acquired in a transfer if those differences relate, at
least in  part,  to a  deterioration  of  credit  quality.  SOP  03-3  prohibits
companies from carrying over valuation  allowances in the initial accounting for
such  loans  and  limits  the  yield  that  may be  accreted  to the  excess  of
undiscounted  expected  cash  flows  over the  initial  investment  in the loan.
Decreases in expected cash flows are  recognized as impairment and increases are
recognized prospectively

                                       49
<PAGE>

through an  adjustment  of the loan yield.  SOP 03-3 is effective  for loans and
debt  securities  acquired  on or after  January 1, 2005.  Our  adoption of this
guidance  did  not  have a  significant  effect  on our  consolidated  financial
statements.

     In December 2004, the Financial  Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised  2004),  "Share-Based  Payment."  SFAS 123R  requires that
compensation cost relating to share-based payment  transactions be recognized in
the  financial  statements,  with  measurement  based upon the fair value of the
equity or liability  instruments  issued.  The  Statement is effective as of the
beginning  of the first fiscal year that begins  after  December  15, 2005,  and
replaces SFAS No. 123, "Accounting for Stock-Based Compensation", and supersedes
APB Opinion No. 25, "Accounting for Stock Issued to Employees". We currently use
the  intrinsic-value   method  to  measure  compensation  cost  related  to  our
share-based transactions.  We will adopt SFAS 123R in 2006. The Company does not
anticipate  any  material  impact  to its  financial  condition  or  results  of
operations as a result of the adoption of SFAS No. 123R. Estimated future levels
of  compensation  expense  recognized  related to stock  based  awards  would be
impacted by new awards, modifications to awards, or cancellation of awards after
the adoption of SFAS No. 123 (revised).

     On March 3, 2005, the Financial  Accounting Standards ("FASB") Staff issued
FASB Staff Position ("FSP") FIN 46(R)-5, "Implicit Variable Interests under FASB
Interpretation  No. 46" (FIN 46R-- Revised  December  2003),  "Consolidation  of
Variable Interest Entities" ("VIE"). This FSP requires a reporting enterprise to
consider the impact of implicit  variable  interests in determining  whether the
reporting  enterprise  may absorb  variability of the VIE or potential VIE. This
staff  position was  effective in the third quarter of 2005 and its adoption did
not have a material impact on our consolidated financial statements.

     In May 2005,  the FASB issued SFAS No. 154,  "Accounting  Changes and Error
Corrections- a replacement of APB Opinion No. 20 and FASB Statement No. 3". SFAS
No. 154 replaces APB Opinion No. 20,  "Accounting  Changes," and FASB  Statement
No. 3,  "Reporting  Accounting  Changes in Interim  Financial  Statements,"  and
changes the  accounting  and reporting  requirements  for a change in accounting
principle.  SFAS No. 154  applies  to all  voluntary  changes  in an  accounting
principle,  as well as to changes required by a new accounting  pronouncement in
the unusual instance that the pronouncement does not include specific transition
provisions.  SFAS  No.  154  is  effective  for  accounting  changes  and  error
corrections  made in fiscal years beginning after December 15, 2005 and requires
retrospective  application  to  prior  periods'  financial  statements  for most
voluntary changes in an accounting  principle,  unless it is impracticable to do
so.  The  Company  does not  anticipate  any  material  impact to its  financial
condition or results of operations as a result of the adoption of SFAS No. 154.

     At its  November  12-13,  2003  meeting,  the  Emerging  Issues  Task Force
("EITF")    reached   a   consensus   on   Issue   03-01,    "The   Meaning   of
Other-Than-Temporary  Impairment and Its  Application  to Certain  Investments,"
that certain  quantitative  and qualitative  disclosures  should be required for
debt and  marketable  equity  securities  classified  as  available-for-sale  or
held-to-maturity  under SFAS No. 115 and 124 that are  impaired  at the  balance
sheet  date  but for  which  an  other-than-temporary  impairment  has not  been
recognized. The Company adopted the disclosure requirements in fiscal year 2003.
At the March 17-18, 2004 meeting,  the EITF reached a consensus,  which approved
an  impairment  model for debt and equity  securities.  In FASB  Staff  Position
("FSP")  03-01-01,  issued  in  September  2004,  the  effective  date  for  the
measurement  and  recognition  guidance  contained in paragraphs  10-20 of Issue
03-01 was delayed.

     On  November  3, 2005,  FSP FAS Nos.  115-1 and FAS 124-1  "The  Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments," was
issued.  This FSP nullifies  certain  requirements  of Issue 03-1 and supersedes
EITF Topic No. D-44,  "Recognition of  Other-Than-Temporary  Impairment upon the
________________________________________________________________________________
Planned Sale of a Security  Whose Cost  Exceeds Fair Value." This FSP  nullified
__________________________________________________________
the  requirements  of  paragraphs  10-18  of Issue  03-1,  carried  forward  the
requirements  of  paragraph  8 and 9 of Issue 03-1 with  respect to  cost-method
investments  and  carries

                                       50
<PAGE>

forward the  disclosure  requirements  included in paragraphs 21 and 22 of Issue
03-1 and  related  examples.  The  guidance  in this FSP  shall  be  applied  to
reporting  periods  beginning after December 15, 2005. The Company  believes the
adoption  of this  FSP in  2006  will  not  materially  impact  our  results  of
operations, financial condition, or related disclosures.

2. Acquisitions

     On October 13, 2005 the Company  completed its acquisition of Franklin Bank
("Franklin"),  a one branch bank operating in Nutley,  Essex County, New Jersey.
At October 13, 2005 Franklin had  approximately,  $87.0 million in total assets,
$77.2 million in net loans and $76.0 million in deposits.

     Under the terms of the agreement, the total consideration to be received by
Franklin  shareholders in the merger is fixed at 1,323,575  shares of the common
stock of the Company. Based upon the Company's average closing stock price three
days  prior to and  after  the date of  announcement  of the  acquisition  which
occurred  on  June  23,  2005  of  $17.94,  the  transaction   represents  total
consideration  of  approximately  $24.9 million,  including  approximately  $1.2
million for the cash payment for option holders. Under the definitive agreement,
each Franklin shareholder received 1.2264 Company shares for each Franklin share
held immediately prior to the merger.

     The  acquisition  was accounted for as a purchase and the cost in excess of
the fair value of net assets  acquired will be allocated first to net identified
intangibles and then to goodwill.  The goodwill is not tax deductible.

     The Company's  acquisition  of Franklin is intended to further  enhance the
Company's  presence in northern New Jersey. As a result of the acquisition,  the
Bank  now  operates  30  banking  offices.   The  acquisition  of  Franklin  was
accomplished through a merger of Franklin with and into the Bank, a wholly-owned
subsidiary of the Company.  The results of the  acquisition  are included in the
financial statements of the Company from October 13, 2005.

     The following is a reconciliation of the purchase price paid by the Company
for Franklin Bank: (in thousands)

Cash and due from Banks                                $ 3,178
Federal funds sold                                         326
Investments                                              4,156
Loans - net                                             76,955
Premisies and equipment - net                            1,542
Intangible assets                                        2,379
Accounts receivable and other assets                       232
Non-interest bearing accounts                          (17,673)
Interest bearing deposits                              (58,379)
Borrowed funds                                            (334)
Accounts payable and other liabilities                  (1,602)
                                                 --------------
Fair value of net assets acquired                       10,780
Purchase price                                          23,738
                                                 --------------
Goodwill                                              $ 12,958
                                                 ==============

3.  Restrictions on Cash and Due from Banks

     The 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 2005 and 2004 was approximately $2.1 million.

                                       51
<PAGE>

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, 2005
                                                       -----------------------------------------------------------------
                                                                             Gross            Gross          Estimated
                                                         Amortized         Unrealized       Unrealized          Fair
                                                            Cost              Gains           Losses           Value
                                                       --------------    --------------   --------------   -------------
<S>                                                    <C>               <C>              <C>              <C>
Securities held-to-maturity
      Government-Sponsored Enterprises:
           Mortgage-backed securities                       $  2,823            $   15           $    2       $  2,836
           Other debt                                          1,920                 -                -          1,920
      Obligations of states & political subdivisions          30,971               481                9         31,443
                                                       --------------    --------------   --------------   -------------
                                                            $ 35,714            $  496           $   11       $ 36,199
                                                       ==============    ==============   ==============   =============

Securities available-for-sale
      Government-Sponsored Enterprises:
           Mortgage-backed securities                       $110,408            $   79           $1,709        $108,778
           Other debt                                        166,510                 6            2,540         163,976
      Obligations of states & political subdivisions          36,823               428               60          37,191
      Equity securities                                       10,807                 -                -          10,807
                                                       --------------    --------------   --------------   -------------
                                                             324,548               513            4,309         320,752
                                                       --------------    --------------   --------------   -------------
          Total securities                                  $360,262            $1,009           $4,320        $356,951
                                                       ==============    ==============   ==============   =============

                                                       -----------------------------------------------------------------
                                                                               December 31, 2004
                                                       -----------------------------------------------------------------
                                                                             Gross            Gross        Estimated
                                                         Amortized         Unrealized       Unrealized         Fair
                                                            Cost              Gains           Losses          Value
                                                       --------------    --------------   --------------   -------------
Securities held-to-maturity
      Government-Sponsored Enterprises:
           Mortgage-backed securities                       $  5,583           $   128          $     -        $  5,711
      Obligations of states & political subdivisions           8,947               618                -           9,565
                                                       --------------    --------------   --------------   -------------
                                                            $ 14,530           $   746          $     -        $ 15,276
                                                       ==============    ==============   ==============   =============

Securities available-for-sale
      Obligations of U.S. Treasury                          $  5,981           $     1          $     -        $  5,982
      Government-Sponsored Enterprises:
           Mortgage-backed securities                        121,198               792              599         121,391
           Other debt                                        211,856               345            2,352         209,849
      Obligations of states & political subdivisions          31,948               815               44          32,719
      Equity securities                                        4,258                 -                -           4,258
                                                       --------------    --------------   --------------   -------------
                                                             375,241             1,953            2,995         374,199
                                                       --------------    --------------   --------------   -------------
          Total securities                                  $389,771           $ 2,699          $ 2,995        $389,475
                                                       ==============    ==============   ==============   =============
</Table>

                                       52
<PAGE>

At December 31, 2005, the contractual maturities of securities  held-to-maturity
and securities available-for-sale are as follows: (in thousands)

<Table>
<Caption>
                                            Securities                            Securities
                                          Held-to-Maturity                       Available-for-Sale
                                 ------------------------------------   --------------------------------
                                                       Estimated                           Estimated
                                    Amortized              Fair           Amortized           Fair
                                       Cost               Value              Cost             Value
                                 -----------------    ---------------   ---------------   --------------
<S>                              <C>                  <C>               <C>
Within 1 year                           $ 14,875           $ 14,886         $ 149,230        $ 147,768
After 1 but within 5 years                 4,618              4,790           144,968          142,310
After 5 but within 10 years               12,761             12,999            10,822           10,921
After 10 years                             3,460              3,524             8,721            8,946
Equity securities                              -                  -            10,807           10,807
                                 ----------------    ---------------   ---------------   --------------
                         Total          $ 35,714           $ 36,199         $ 324,548        $ 320,752
                                 ================    ===============   ===============   ==============
</Table>

     Proceeds from the sale of securities  available-for-sale  amounted to $78.7
million,  $69.1 million and $44.4 million for the years ended December 31, 2005,
2004 and 2003,  respectively,  which  resulted in gross  realized  gains of $747
thousand, $1.5 million and $1.3 million for those periods,  respectively.  Gross
realized losses from the sale of securities  available-for-sale amounted to $361
thousand,  $94 thousand and $71 thousand in 2005,  2004 and 2003,  respectively.
These amounts are included in net gain on sale of securities in the Consolidated
Statements of Income.

     Proceeds from the sale or call of securities  held-to- maturity amounted to
$270 thousand for the year ended December 31, 2005. These security  transactions
resulted in $8 thousand in gains for 2005 and no gains for 2004.  The securities
had significantly  paid down to less than 85% of the original  purchased balance
through normal principal amortization and prepayments.

     The  investment  portfolio is evaluated at least  quarterly to determine if
there  are any  securities  with  losses  that are  other-than-temporary.  As of
December 31, 2005,  the Company has  concluded  that the  unrealized  losses are
temporary in nature since they are primarily  related to market  interest  rates
and are not  related to the  underlying  credit  quality  of the  issuers of our
investment   portfolio.   None   of  the   investments   are   believed   to  be
other-than-temporarily  impaired. The Company has the ability and intent to hold
the securities until maturity to recover the entire value.

     The following table  summarizes all securities that have an unrealized loss
and the duration of the unrealized loss at December 31, 2005: (in thousands)

                                       53
<PAGE>

<Table>
<Caption>
                                                  --------------------------- ------------------------ ------------------------
                                                       12 months or less         2 months or longer         Totals
                                                  --------------------------- ------------------------ ------------------------
                                                     Fair         Unrealized     Fair     Unrealized      Fair      Unrealized
                                                     Value          Losses       Value      Losses        Value       Losses
                                                  ------------  ------------- ----------- ------------ ----------  ------------
<S>                                               <C>           <C>           <C>         <C>          <C>         <C>
Securities available-for-sale
Government-Sponsored Enterprises:
     Mortgage-backed securities                     $  42,556      $     561   $  53,118   $    1,148   $  95,674  $   1,709
     Other debt                                         6,058             89     153,227        2,451     159,285      2,540
Obligations of states & political subdivisions          3,423             33       2,512           27       5,935         60
                                                  ------------  ------------- ----------- ------------ ----------- ----------
                                                    $  52,037      $     683   $ 208,857   $    3,626   $ 260,894  $   4,309
                                                  ============  ============= =========== ============ =========== ==========

Securities held-to-maturity
Government-Sponsored Enterprises:
     Mortgage-backed securities                     $     273      $       2   $      24   $        -   $     297  $       2
Obligations of states & political subdivisions          2,577              9           -            -       2,577          9
                                                  ------------  ------------- ----------- ------------ ----------- ----------
                                                    $   2,850      $      11   $      24   $        -   $   2,874  $      11
                                                  ============  ============= =========== ============ =========== ==========
</Table>


                                       54
<PAGE>

     The following table  summarizes all securities that have an unrealized loss
and the duration of the unrealized loss at December 31, 2004: (in thousands)

<Table>
<Caption>
                                                 --------------------------  --------------------------- ----------------------
                                                      12 months or less          12 months or longer           Totals
                                                 --------------------------  --------------------------- ----------------------
                                                   Fair        Unrealized        Fair      Unrealized       Fair    Unrealized
                                                   Value        Losses           Value        Losses        Value     Losses
                                                 ----------- --------------  ------------ -------------- ---------- -----------
<S>                                              <C>         <C>             <C>          <C>            <C>        <C>
Securities available-for-sale
Government-Sponsored Enterprises:
     Mortgage-backed securities                     $ 54,616        $  555      $ 13,966         $   44    $ 68,582     $  599
     Other debt                                       91,582           840       104,493          1,512     196,075      2,352
Obligations of states & political subdivisions           479             7         3,138             37       3,617         44
                                                 ------------ -------------  ------------ -------------- ----------------------
                                                    $146,677        $1,402      $121,597         $1,593    $268,274     $2,995
                                                 ============ =============  ============ ============== ======================
</Table>

     The  Company  did not have any  unrealized  losses in the  held-to-maturity
portfolio.

     Securities  with  carrying  amounts of $76.1  million and $62.2  million at
December  31, 2005 and 2004,  respectively,  were  pledged for public  deposits,
Federal Home Loan Bank of New York  ("FHLBNY")  advances,  securities sold under
repurchase  agreements and other purposes  required by law. Equity securities at
December 31, 2005 and 2004 consisted primarily of FHLBNY stock.

                                       55
<PAGE>

5.  Loans

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

                                        -------------     -------------
                                        December 31,      December 31,
                                            2005              2004
                                        -------------     -------------
Real estate
  Residential                             $  292,247          $292,406
  Commercial                                 479,120           375,985
  Construction                                92,390            51,162

Commercial
  Commercial and financial                   212,392           186,386
  Lease financing                             24,584            23,535

Consumer
  Lease financing                                 94               680
  Installment                                  5,142             4,027
                                        -------------     -------------
                                           1,105,969           934,181
Allowance for loan and lease losses          (10,646)           (9,797)
                                        -------------     -------------
Net loans and leases                      $1,095,323          $924,384
                                        =============     =============

Loans are net of  unearned  income and  deferred  fees of $7.1  million and $5.6
million for 2005 and 2004, respectively.

Nonperforming  loans include loans which are accounted for on a nonaccrual basis
and  troubled  debt  restructurings.

Nonperforming loans are as follows: (in thousands)

                                        -------------     -------------
                                        December 31,      December 31,
                                            2005              2004
                                        -------------     -------------
Nonaccrual loans
  Residential real estate                     $  822            $1,660
  Commercial real estate                         363             2,320
  Commercial and financial                       997             2,981
  Commercial lease financing                   1,290             1,836
  Consumer                                        86               336
                                        -------------     -------------
                                              $3,558            $9,133
                                        -------------     -------------
Troubled debt restructurings                       -                 -
                                        -------------     -------------
Total nonperforming loans                     $3,558            $9,133
                                        =============     =============

     At December 31, 2005, 2004 and 2003, 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.  Interest income that
would have been recorded during the year on

                                       56
<PAGE>

nonaccrual  loans  outstanding  at year end in accordance  with  original  terms
amounted to $290  thousand,  $852 thousand and $773 thousand for the years ended
December 31, 2005, 2004 and 2003, respectively.  Interest income included in net
income  during  the year on  loans  currently  classified  as  nonaccrual  loans
outstanding  at year end  amounted  to $104  thousand,  $304  thousand  and $353
thousand for the years ended December 31, 2005, 2004 and 2003, respectively.  At
December 31, 2005 and 2004 the Company had  approximately  $1.5 million of loans
held for sale which are carried at lower of cost or market.

     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 10% of its total loans
and unfunded commitments.

     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  nonaffiliated  borrowers and suppliers.  Interest income
recognized  with respect to these loans was  approximately  $1.1  million,  $671
thousand and $501 thousand for the years ended December 31, 2005, 2004 and 2003,
respectively.

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

                                       -------------------------------
                                          Years Ended December 31,
                                       -------------------------------
                                            2005              2004
                                       -------------     -------------
Balance at beginning of year                $ 9,944           $ 4,092
Additions                                    10,778             6,524
Reductions                                   (6,959)             (672)
                                       -------------     -------------
Balance at end of year                      $13,763           $ 9,944
                                       =============     =============

     The  Company  also  services  residential   mortgages  and  Small  Business
Administration  ("SBA") loans for others.  The Company is  compensated  for loan
administrative  services  performed  for  residential  mortgages  and SBA  loans
originated and sold to third-party investors. The approximate aggregate balances
of residential  mortgages and SBA loans serviced for others at December 31, 2005
and 2004 were $29.1  million  and $31.8  million,  and $20.2  million  and $14.6
million,  respectively.  These  outstanding  balances  were not  included in the
consolidated  balance  sheets  of  the  Company.  The  Company  recognized  loan
servicing fee income of $367  thousand,  $343 thousand and $180 thousand for the
years ended December 31, 2005, 2004, and 2003, respectively.

     Loan servicing rights totaled $622 thousand,  and $456 thousand at December
31,  2005,  and 2004,  respectively,  and are  included  in other  assets in the
consolidated  balance  sheets.  Loan servicing  rights,  which are classified in
other  assets,  are  periodically  evaluated  for  impairment.  Based  upon  the
Company's evaluation no impairment was required to be recognized for the periods
ended December 31, 2005, 2004 and 2003.

6.  Allowance for Loan and Lease Losses

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

                                       57
<PAGE>
<Table>
<Caption>
                                                        ----------------------------------------------
                                                                           December 31,
                                                        ----------------------------------------------
                                                                 2005                   2004
                                                        ----------------------- ----------------------
                                                        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                      $ 997      $ 281        $2,981     $420
                Commercial real estate                          380          4         2,320       98
                Residential real estate                         594         88           822      123
         Without a related allowance for loan losses              -          -             -        -
                                                        ------------ ---------- ------------- --------
                                                             $1,971      $ 374        $6,123     $641
                                                        ============ ========== ============= ========

------------------------------------------------------------------------------------------------------
The impairment of the above loans was measured based on the fair value of collateral.
</Table>

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

                                                ------------------------
                                                Years Ended December 31,
                                                ------------------------
                                                   2005        2004
                                                -----------  ----------
Average recorded investment                         $ 2,362     $ 6,315
                                                ===========  ==========

Interest income recognized during time period
   that loans were impaired, using cash-basis
   method of accounting                             $    70     $   122
                                                ===========  ==========

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

                                            ----------------------------------
                                                       December 31,
                                            ----------------------------------
                                               2005        2004        2003
                                            -----------  ----------  ---------

Balance at beginning of year                    $ 9,797      $9,641     $7,207
Additions (deductions)
     Provision charged to operations                925       1,200      1,815
     Allowance acquired through acquisition       1,018           -      1,929
     Recoveries on loans previously
        charged-off                                 109          93         46
     Loans charged-off                           (1,203)     (1,137)    (1,356)
                                            -----------   ---------   --------
Balance at end of year                          $10,646      $9,797     $9,641
                                            ===========   =========   ========

7.  Premises and Equipment, net

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


                                       58
<PAGE>

                                                -----------------------
                                                     December 31,
                                                -----------------------
                                                   2005        2004
                                                ------------ ----------
Land                                               $  3,992    $ 4,573
Buildings                                             6,169      6,441
Furniture, fixtures and equipment                    10,109      9,121
Leasehold improvements                               13,543     11,830
                                                ------------ ----------
                                                   $ 33,813    $31,965
Less: accumulated depreciation and amortization      16,304     14,252
                                                ------------ ----------
     Net book value                                $ 17,509    $17,713
                                                ============ ==========

     During 2005, the Company sold a building for approximately  $1.2 million in
a sale leaseback  transaction in which no gain was recorded on the  transaction.
Depreciation  and  amortization  expense  amounted to $1.7 million for the years
ended  December 31, 2005 and 2004 and $1.6  million for the year ended  December
31, 2003.

8. Goodwill and Other Intangibles

     At December  31,  2005 and 2004 gross  intangible  assets  amounted to $7.0
million and $4.6 million, respectively,  while accumulated amortization amounted
to $1.5 million and $935  thousand,  respectively.  Amortization  of  intangible
assets as a result of acquisitions,  which is included in non-interest  expense,
amounted to $571 thousand,  $504 thousand, and $360 thousand for the years ended
December 31, 2005,  2004 and 2003,  respectively.  During the fourth  quarter of
2005,  the  Company  recorded  a  core-deposit  intangible  of $2.4  million  in
connection  with the Franklin  merger.  During the second  quarter of 2003,  the
Company  recorded a core deposit  intangible of $4.3 million in connection  with
the Bridge View merger.  The core deposit  intangibles have an estimated life of
between 8 and 10 years and the Company  amortized $496  thousand,  $430 thousand
and $286  thousand  for the  years  ended  December  31,  2005,  2004 and  2003,
respectively. Intangibles are periodically reviewed for impairment and estimated
useful life.  In addition,  the Company  recorded  goodwill of $13.0 million and
$54.4  million  in  connection  with  the  Franklin  and  Bridge  View  mergers,
respectively,  which is not deductible for tax purposes.  The goodwill is tested
for impairment at least annually in accordance  with the provisions of Statement
of  Financial  Accounting  Standards  No.  142  "Goodwill  and Other  Intangible
Assets."

At December 31, 2005 the scheduled amortization of intangible assets is
as follows: (in thousands)


2006                                             $   753
2007                                                 747
2008                                                 747
2009                                                 747
2010                                                 747
Thereafter                                         1,728
                                                 -------
Total                                            $ 5,469
                                                 =======

                                       59
<PAGE>

9.  Deposits

     Deposits are summarized as follows: (in thousands)


                                    -------------------------------------
                                                 December 31,
                                     -------------------------------------
                                          2005                  2004
                                     ---------------         ------------
Non-interest bearing demand deposits    $   260,151          $   235,036
Interest bearing demand deposits            466,436              472,807
Savings deposits                            121,093              113,352
Money market deposits                        99,907               87,595
Time deposits                               312,521              337,348
                                     ---------------         ------------
Total                                   $ 1,260,108          $ 1,246,138
                                     ===============         ============

     At December 31, 2005 and 2004,  the  carrying  amounts of  certificates  of
deposit that  individually  exceed $100,000  amounted to $50.5 million and $50.9
million, respectively. Interest expense relating to certificates of deposit that
individually exceed $100,000 was approximately $1.1 million, $701 thousand,  and
$850 thousand in 2005, 2004 and 2003, respectively.

     At December 31, 2005,  the  scheduled  maturities  of time  deposits are as
follows: (in thousands)

2006                        $ 184,008
2007                          121,418
2008                            1,883
2009                              933
2010                            4,248
Thereafter                         31
                           -----------
     Total                  $ 312,521
                           ===========

The  following  table  presents by various rate  categories,  the amount and the
periods to  maturity  of the  certificate  of deposit  accounts  outstanding  at
December 31, 2005:
<Table>
<Caption>
                                     Over six    Over one    Over two
                                      months       year       years
                       Six months    through     through      through        Over
                        and less     one year    two years  three years   three years    Total
                       ----------   ----------  ----------  -----------   ----------   ---------
<S>                    <C>          <C>         <C>         <C>           <C>          <C>
0.00% to 0.99%           $  9,303      $ 2,873    $      6            -       $    4    $ 12,186
1.00% to 1.99%              7,519          270         202       $    2            -       7,993
2.00% to 2.99%             47,768        7,552         614          451          199      56,584
3.00% to 3.99%             66,186       33,572     115,017        1,430        1,901     218,106
4.00% to 4.99%              6,567          335       5,528            -        3,100      15,530
5.00% to 5.99%                818            3           -            -            -         821
6.00% to 6.99%              1,241            1          51            -            8       1,301
                       ----------   ----------  ----------  -----------   ----------   ---------
                         $139,402      $44,606    $121,418       $1,883       $5,212    $312,521
                       ==========   ==========  ==========  ===========   ==========   =========
</Table>

                                       60
<PAGE>

10.  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,
                                               ----------------------------
                                                    2005           2004
                                               ---------------- -----------
Securities sold under agreements to repurchase         $ 3,939     $ 4,401
Federal Home Loan Bank overnight advances               46,150      24,600
                                               ---------------- -----------
                                                       $50,089     $29,001
                                               ================ ===========

Average balance during year                            $44,990     $29,080
Average interest rate during the year                    2.56%       1.23%
Maximum amount borrowed at any month end               $78,341     $63,232

     Securities sold under  agreements to repurchase  mature within one year. In
addition,  the Bank has an additional  $73 million  available  under its line of
credit agreement through its membership in the FHLBNY.

11.  Long-term Borrowings

     The Bank has long-term borrowings,  which have maturities of over one year,
of  $110.0  million  and  $30.0  million  as of  December  31,  2005  and  2004,
respectively.  The long-term  borrowings  consisted of $10 million of fixed rate
FHLBNY  advances  at  December  31,  2005,  $90  million  of FHLBNY  Convertible
Repurchase  Advances at December 31, 2005 that are callable after a fixed period
and $10  million of a callable  FHLBNY  Convertible  Repurchase  Advance  with a
Customized  Strike Price at December 31, 2005 and 2004. This advance has a fixed
rate of 4.22%,  matures in January  2007 and is  collateralized  by U.S.  agency
securities. The FHLBNY has an option to call the advance on a quarterly basis if
the 3-month  LIBOR resets above 7.50%.  At December 31, 2005,  3-month LIBOR was
4.54%.  The $90 million in long-term  callable FHLB advances with  maturities of
five to ten years and which can be called after the initial term of two to three
years at interest rates between 3.66% to 3.99%. The long-term borrowings may not
be repaid by the Bank prior to the  scheduled/repurchase  payment  dates without
penalty.

12.  Subordinated Debentures

     During June 2005,  Interchange  Statutory Trust I and Interchange Statutory
Trust II  (together  the  "Trusts")  each  issued $10  million  of pooled  trust
preferred  securities.  In conjunction  with the issuance of the trust preferred
securities the Company  issued  subordinated  debentures to the Trusts  totaling
$20.6 million. The rates of interest paid on the securities issued by the Trusts
and the Company have been fixed for 5 years, at an average rate of 6.10%,  after
which time the rates will float at the 3-month LIBOR plus 1.71%. The Company has
the right to call the notes after 5 years on any of the interest  payment dates.
The final maturity date on the pool trust preferred securities and debentures is
2035.

     The  Company  does not meet the  criteria  as primary  beneficiary  for the
Trusts  in  accordance   with  Financial   Accounting   Standards  Board  (FASB)
Interpretation  No. 46 (FIN 46) and FIN No.  46(R),  "Consolidation  of Variable
Interest Entities." As a result,  these trusts are not consolidated.  The Trusts
have no  independent  operations.  The  obligations  of the Trusts are fully and
unconditionally guaranteed by the Company. The debentures are unsecured and rank
subordinate and junior in right of payment to all indebtedness,  liabilities and
obligations of the Company. Interest on the debentures is cumulative and payable
in arrears.  Proceeds from any redemption of debentures  would cause a mandatory
redemption

                                       61
<PAGE>


of pooled trust  preferred  securities  having an aggregate  liquidation  amount
equal to the principal amount of debentures redeemed.

13.  Benefit Plans

Defined Benefit Plans
---------------------

     On  October  27,  2005,  the  Board of  Directors  of the  Bank,  adopted a
resolution to "freeze" all future benefit  accruals  under the  non-contributory
defined  benefit  pension plan  covering all eligible  employees  (the  "Pension
Plan")  effective  December 31, 2005.  The purpose of the "freeze" was to afford
flexibility  in  the  retirement   benefits  that  the  Company  provides  while
preserving  all retirement  plan  participants'  earned and vested  benefits and
managing the increasing  costs  associated with the retirement plan. The Company
recognized  one-time  gain on  curtailment  of  approximately  $1.2  million  in
connection  with the freezing of the retirement  plan  primarily  based upon the
difference between the projected benefit obligation and the accumulated  benefit
obligation.

     The Board also  authorized the "freeze" of all future  benefit  accruals of
the  retirement  plan for all  directors  of the Bank who are not  employees  of
Interchange or of any subsidiary or affiliate of  Interchange  (the  "Directors'
Plan") and the  defined  benefit  portion the  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.

     The Pension Plan was  established  in 1993 by the Bank . The funding policy
is to  contribute  an amount that is at least the minimum  required by law.  The
plan assets are invested through an unaffiliated trust company in a fixed income
and equity  (balanced) fund. The investment  strategy of the fund is to hold 60%
to 70% in stocks and the rest in fixed income  securities.  The fund performance
is reviewed periodically by an administrative  committee comprised of the Bank's
President,  Chief  Financial  Officer and Human Resources  Director.  Retirement
income is based on years of  service  under the  Pension  Plan and,  subject  to
certain limits, on final average  compensation at the time of the curtailment of
the  Pension  Plan.   Effective  January  1,  1994,  the  Bank  established  the
Supplemental  Plan. For all of the plans,  the discount rate for determining the
pension benefit  obligation and service cost at December 31, 2005 ranged between
4.50% and 5.90%,  while the expected long-term return on Pension Plan assets was
8.00%.  The expected return on plan assets is based primarily upon the long-term
rate of return of the fund.

     Effective August 1, 1994, the Company established the "Directors' Plan". As
a part of this  Directors'  Plan,  the  Company  contributed  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  Company  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 at the director's  retirement date by the director's  years
of service.

                                       62
<PAGE>

     Pursuant to the  Directors'  Plan, as amended from time to time, a director
who has been on the  board at least  five  years is  entitled  to  receive  upon
retirement an amount equal to the standard annual retainer  (currently  $10,000)
being paid to directors  multiplied  by the  director's  years of service on the
board,  multiplied by the director's  vested  percentage.  Vesting occurs in 20%
increments  commencing  in year  six and  ending  in year  ten at  which  time a
director  becomes  fully vested.  The former  directors of Bridge View have been
credited for their prior years of service for vesting purposes and Bridge View's
director  plan was frozen and the future  obligations  have been included in the
Director's Plan.

     Notwithstanding  the foregoing,  the benefits  payable to a participant who
was a  participant  on January 1, 2002 shall not be less than the greater of (i)
or (ii) below:  (i) the benefits  such  participant  had accrued as of such date
under the terms and  provision  of the  Directors'  Plan in effect  prior to the
January 1, 2002 amendment,  or (ii) the cash value of any life insurance  policy
that was purchased and owned by the Company or one of its subsidiaries  prior to
the plan  amendment.  The  benefit may be paid in a lump sum or paid out in five
annual installment payments at the election of the participant.

     Net pension cost of each plan consists of the following: (in thousands)

<Table>
<Caption>
                                            Pension Plan             Supplemental Plan          Directors' Plan
                                    ---------------------------  ------------------------ -------------------------
                                      2005      2004      2003     2005   2004      2003     2005     2004    2003
                                    ---------- -------- -------- ------- -------- ------- --------  -------- ------
<S>                                 <C>        <C>      <C>      <C>     <C>      <C>     <C>       <C>      <C>
Service cost                          $  710    $ 565    $ 490     $ -      $32     $29       $107    $116    $ 85
Interest cost                            291      223      181      20       26      21         94     126     114
Expected return on plan assets          (223)    (179)    (124)      -        -       -          -       -       -
Amortization of prior service cost         2        2        2       -        3       2          -       -       -
Recognized net actuarial gain             20        -        1       -        3       -          -      (4)      -
Settlement gain                            -        -        -       -        -       -        (26)      -       -
Curtailment gain                      (1,217)       -        -      (3)       -       -          -       -       -
                                    ---------  -------  -------  ------  -------  ------ ----------  -----   ------
Net periodic (benefit) cost           $ (417)   $ 611    $ 550     $17      $64     $52       $175    $238    $199
                                    =========  =======  =======  ======  =======  ====== ==========  =====   ======
</Table>


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)

                                       63
<PAGE>
<Table>
<Caption>
                                               Pension Plan                Supplemental Plan           Directors' Plan
                                       ------------------------------   -----------------------   -------------------------
                                           2005             2004          2005          2004          2005          2004
                                       --------------   -------------   ----------    ---------   -------------   ---------
<S>                                    <C>              <C>             <C>           <C>         <C>             <C>
Change in pension obligation
Pension obligation at beginning of year      $ 4,692         $ 3,626        $ 466        $ 381         $ 2,321     $ 2,101
Service cost                                     710             565            -           32             107         116
Interest cost                                    291             223           20           26              94         126
Acquisition of Bridge View Plan                                    -            -            -               -           -
Actuarial (gain) loss                            528             303           32           27             (88)          6
Benefits paid                                    (49)            (25)           -            -            (336)        (28)
Curtailment                                   (2,275)              -         (118)           -               -           -
                                       --------------   -------------   ----------    ---------   -------------   ---------
Pension obligation at end of year              3,897           4,692          400          466           2,098       2,321
                                       --------------   -------------   ----------    ---------   -------------   ---------

Change in plan assets
Fair value of plan assets at
   beginning of year                           2,797           1,980            -            -               -           -
Actual gain on plan assets                       189             278            -            -               -           -
Employer contribution                             43             564            -            -               -           -
Benefits paid                                    (49)            (25)           -            -               -           -
                                       --------------   -------------   ----------    ---------   -------------   ---------
Fair value of plan assets at end of year       2,980           2,797            -            -               -           -
                                       --------------   -------------   ----------    ---------   -------------   ---------

Funded Status                                   (917)         (1,894)        (400)        (466)         (2,098)     (2,321)
Unrecognized net actuarial (gain) loss             -             493          (13)          56            (189)       (110)
Unrecognized amortized prior service cost          -              26            -           13               -           -
Adjustment for additional liability                -               -            -            -               -           -
                                       --------------   -------------   ----------    ---------   -------------   ---------
Accrued pension cost                         $  (917)        $(1,375)       $(413)       $(397)        $(2,287)    $(2,431)
                                       ==============   =============   ==========    =========   =============   =========


Weighted-average assumptions (1)
Discount rate for net periodic benefit cost     5.90  %         6.25  %      5.00  %      6.25  %         4.50  %     6.25  %
Discount rate for benefit obligations           5.70            5.90         5.50         5.00            5.25        5.00
Expected return on plan assets                  8.00            8.00          N/A          N/A             N/A         N/A
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>

                                       64
<PAGE>
Other Balance Sheet Amounts

The  following  amounts are  included  in the  Consolidated  Balance  Sheets for
December 31,: (in thousands)

                                           2005             2004
                                       --------------   -------------
Accrued benefit cost                        $ (3,617)       $ (4,203)
Accumulated other comprehensive income            17               -
                                       --------------   -------------
Net amount recognized                       $ (3,600)       $ (4,203)
                                       ==============   =============

The  accumulated  benefit  obligation for all defined  benefit pension plans was
$6.4 million and $5.7 million at December 31, 2005 and 2004, respectively.

Information for pension plans with an accumulated  benefit  obligation in excess
of plan assets: (in thousands)

                                             2005             2004
                                         ------------     -----------
Projected benefit obligation                 $ 6,395         $ 7,479
Accumulated benefit obligation               $ 6,395         $ 5,744
Fair value of plan assets                    $ 2,980         $ 2,797

     During 2006 the Company anticipates  contributing $796 thousand to fund all
of the plans.

     The  following   payments,   which  reflect   expected  future  service  as
appropriate, are expected to be paid:

                                    Supplemental    Directors'
                     Pension Plan     Plan            Plan          Total
                    -------------   ------------  -------------  ------------

2006                      $ 45         $  3          $ 334            $382
2007                        55            4            334             393
2008                        59            4            334             397
2009                        66            5            336             407
2010                       108          230             30             368
2011 and thereafter        643          132            218             993

Defined Contribution Pension Plan
_________________________________

     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% of base compensation. 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.  Employees become eligible to
participate  in the  Investment  Plan upon  attainment of age twenty-one and the
completion  of 1,000 hours of service.  Vesting  occurs after the  completion of
three years of service with regards to the Company match.  The  Investment  Plan
offers  employees a choice of 10 investment  funds ranging from  conservative to
aggressive.  Both employee and bank matching contributions are invested in these
funds  according  to  the  employees'  elections.  The  investment  choices  are
administered  by an  unaffiliated  trust company.

                                       65
<PAGE>

The fund  options  are  reviewed  periodically  by an  administrative  committee
comprised of the Bank's  President,  Chief Financial Officer and Human Resources
Director.  In  addition,  the  Bank  makes a  fixed  contribution,  which  vests
immediately,  on behalf of each  participant  equal to 1% of such  participant's
base compensation,  which is in the form of Interchange common stock. The Bank's
contribution to the Investment Plan amounted to $427,000,  $382,000 and $347,000
in 2005, 2004 and 2003, respectively.

14.  Stock Option and Incentive Plan

     The Company maintains two stock option and incentive plans the Stock Option
and Incentive Plan of 1997, as amended, and the 2005 Omnibus Stock and Incentive
Plan  (together  "the Plans"),  that covers  certain key  employees.  A total of
2,076,470  shares of common stock were made  available  for option and incentive
awards under the Stock Option and  Incentive  Plan of 1997.  Options to purchase
1,768,724  shares (net of  forfeitures)  and 264,586  shares of  restricted  and
discount stock have been granted to date. A total of 1,500,000  shares of common
stock were made available for option and incentive awards under the 2005 Omnibus
Stock and Incentive Plan. The  Compensation/Stock  Option Committee  administers
the plans,  reviews the awards and submits  recommendations to the full board of
directors for action.  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 plans  incentive stock options
or  non-qualified  stock options may be granted to employees.  In addition,  the
2005  Omnibus  Stock and  Incentive  Plan  allows for other types of stock based
awards to be issued including stock appreciation rights and phantom stock during
2005 no such awards were granted under the plan.

     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, options to purchase a maximum of
225,000 shares of  Interchange  common stock may be granted at fair market value
at the date of grant.  Options to purchase  157,000 shares (net of  forfeitures)
have been granted to date.  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.

     During  2005 the Board of  Directors  elected to  accelerate  all  unvested
options under the Plans and Director's  Stock Plan. As a result there will be no
expense associated with these stock options in 2006.

     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:

                                       66
<PAGE>
<Table>
<Caption>
                                                    ----------------------------------------------------------------------------
                                                             2005                       2004                     2003
                                                    --------------------------- ------------------------- ----------------------
                                                                      Weighted                  Weighted                Weighted
                                                                      Average                   Average                 Average
                                                                      Exercise                  Exercise                Exercise
                                                       Options         Price       Options       Price      Options       Price
                                                    -------------  ------------ -----------  ------------ ----------  ----------
<S>                                                 <C>            <C>          <C>          <C>          <C>         <C>
Incentive Stock Options
Outstanding at January 1                               1,061,689       $11.19      834,330      $ 9.15      673,524      $ 7.83
Granted                                                  264,377        16.69      262,725       17.50      258,750       11.33
Exercised                                                (29,272)        8.21      (19,065)       7.44      (97,944)       5.89
Forfeited                                                (14,125)       16.38      (16,301)      13.00            -           -
                                                    -------------  ------------ -----------  ------------ ----------  ----------
Outstanding at December 31                             1,282,669       $12.33    1,061,689      $11.19      834,330      $ 9.15
                                                    =============  ============ ===========  ============ ==========  ==========

Options exercisable at December 31                     1,282,669       $12.33      573,212      $ 8.46      400,455      $ 7.74

Weighted-average fair value of options granted
  during the year ended December 31 (per option)                       $ 4.01                   $ 4.67                   $ 2.74


                                                    ----------------------------------------------------------------------------
                                                              2005                      2004                     2003
                                                    --------------------------- ------------------------------------------------
                                                                       Weighted                  Weighted              Weighted
                                                                       Average                   Average               Average
                                                                       Exercise                  Exercise              Exercise
 Non-Qualified Stock Options                           Options          Price        Options       Price    Options     Price
                                                   -------------- ------------- ------------- -----------  ---------  --------
Outstanding at January 1                                 111,750       $11.52       87,750      $10.02       67,500      $ 9.03
Granted                                                   29,250        17.64       33,750       15.75       27,000       11.80
Exercised                                                (15,750)        9.42       (3,000)       8.63       (6,750)       7.29
Forfeited                                                      -            -       (6,750)      14.48            -           -
                                                    -------------  -------------------------- -----------  ---------  ----------
Outstanding at December 31                               125,250       $13.21      111,750      $11.52       87,750      $10.02
                                                    =============  ============ ============= ===========  =========  ==========

Options exercisable at December 31                       125,250       $13.21       58,500      $ 9.22       36,000      $ 8.12

Weighted-average fair value of options granted
  during the year ended December 31 (per option)                       $ 4.49                   $ 4.01                   $ 3.07

</Table>

All per share data and average  shares were  restated to reflect a 3-for-2 stock
split declared January 18, 2005 and paid on February 18, 2005.

     The following table summarizes  information about options outstanding under
the Stock Plan and Director's Stock Plan at December 31, 2005:

                                       67
<PAGE>
<Table>
<Caption>
                                         Options Outstanding                                      Options Exercisable
----------------------------------------------------------------------------------------------  ----------------------------------
                                                         Weighted-Average    Weighted-Average                     Weighted-Average
                                           Number            Remaining            Exercise                            Exercise
  Range of Exercise Prices               Outstanding     Contractual Life          Price           Exercisable         Price
----------------------------------------------------------------------------------------------  --------------------------------
<S>                                     <C>              <C>                <C>                 <C>                <C>
Incentive Stock Options
                       $ 0.00   $ 5.00        6,615             0.28                 $ 3.72             6,615            $ 3.72
                       $ 5.00   $10.00      521,138             4.65                   8.28           521,138              8.28
                       $10.00   $15.00      246,941             7.08                  11.33           246,941             11.33
                       $15.00   $25.00      507,975             8.57                  17.09           507,975             17.09
                                       -------------------------------------------------------  ----------------------------------
                                          1,282,669             6.65                  12.33         1,282,669             12.33
                                       -------------------------------------------------------  ----------------------------------

Non-Qualified Stock Options
                       $ 0.00   $10.00       25,500             4.94                  13.84            25,500             13.84
                       $10.00   $15.00       42,000             6.87                  14.79            42,000             14.79
                       $15.00   $20.00       57,750             8.83                  18.14            57,750             18.14
                                       -------------------------------------------------------  ----------------------------------
                                            125,250             7.38                  16.14           125,250             16.14
                                       -------------------------------------------------------  ----------------------------------
                              Totals      1,407,919             6.71                 $12.67         1,407,919            $12.67
                                       =======================================================  ==================================
</Table>

All per share data and averages shares were restated to reflect a 3-for-2 stock
split declared on January 18, 2005 and paid on February 18, 2005.

Stock-based compensation

     Pursuant to the Stock Plan, key employees may be awarded  restricted shares
of Interchange  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, 2005, 2004 and 2003.

Restricted Stock Awards                  2005        2004         2003
                                       --------  -----------  -----------
Outstanding at beginning of year        66,330       88,692       83,234
Granted                                 18,773       11,690       31,325
Vested                                 (32,321)     (34,052)     (25,867)
                                      ---------  -----------  -----------
Outstanding at year end                 52,782       66,330       88,692
                                      =========  ===========  ===========

All per share data and average  shares were  restated to reflect a 3-for-2 stock
split declared on January 18, 2005 and paid on February 18, 2005.

     The amount of compensation cost related to restricted stock awards included
in  salary  expense  in 2005,  2004 and 2003  amounted  to $203  thousand,  $298
thousand and $237 thousand, respectively.

                                       68
<PAGE>

15.  Stockholders' Equity and Regulatory Capital

     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  that the Company and the Bank met as of December 31, 2005,
all capital adequacy requirements to which they are subject.

     As of  December  31,  2005,  the Bank has met the Federal  Reserve  capital
calculation  standards  to  be  categorized  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  that  management  believes  have  changed  the  Company'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, 2005:
  Total Capital (to Risk Weighted Assets):
   The Company                                    $139,560        11.93 %        $93,595       8.00 %         N/A          N/A
   The Bank                                        140,863        11.98 %         94,042       8.00 %    $117,553        10.00 %
  Tier 1 Capital (to Risk Weighted Assets):
   The Company                                     128,894        11.02 %         46,797       4.00 %         N/A          N/A
   The Bank                                        130,197        11.08 %         47,021       4.00 %      70,532         6.00 %
  Tier 1 Capital (to Average Assets):
   The Company                                     128,894         8.20 %         47,158       3.00 %         N/A          N/A
   The Bank                                        130,197         8.29 %         47,110       3.00 %      78,516         5.00 %

As of December 31, 2004:
  Total Capital (to Risk Weighted Assets):
   The Company                                    $102,175        10.35 %        $78,959       8.00 %         N/A          N/A
   The Bank                                        101,442        10.27 %         79,007       8.00 %    $ 98,759        10.00 %
  Tier 1 Capital (to Risk Weighted Assets):
   The Company                                      92,338         9.36 %         39,480       4.00 %         N/A          N/A
   The Bank                                         91,605         9.28 %         39,504       4.00 %      59,256         6.00 %
  Tier 1 Capital (to Average Assets):
   The Company                                      92,338         6.49 %         42,692       3.00 %         N/A          N/A
   The Bank                                         91,605         6.43 %         42,735       3.00 %      71,225         5.00 %

</Table>

Shares of common stock

     In 2001 and 2005, the Board of Directors of Interchange authorized programs
to  repurchase  up to  450,000  shares  and  950,000  shares,  respectively,  of
Interchange's  outstanding  common  stock on the  open  market  or in  privately
negotiated  transactions.  During 2005 and 2004 the Company  repurchased 321,737
and 128,492  shares for  approximately  $5.8 million and $2.2 million  under the
authorized  repurchase  programs.  As of  December  31,  2005  the  Company  had
purchased 321,737

                                       69
<PAGE>


shares and 255,854 shares at a total cost of approximately $5.8 million and $4.4
million  under  the   authorized   2005  and  2001share   repurchase   programs,
respectively.  The  repurchased  shares are held as  treasury  stock and will be
principally  used for the  exercise of stock  options,  restricted  stock awards
under the Stock Plan and other general corporate purposes.

The following table summarizes the activity in common shares: (in thousands)


                                                Shares         Shares in
                                                 Issued        Treasury
                                              -------------   ------------
Balance at December 31, 2003                        19,214          1,578
   Reacquired shares in lieu of
     non-performing asset                             (129)           129
   Issuance of stock from treasury                      35            (35)
                                              -------------   ------------
Balance at December 31, 2004                        19,120          1,672
   Reacquired shares in lieu of
     non-performing assets                             (39)            39
    Issuance of stock from treasury                     63            (63)
    Purchase of treasury stock                        (328)           328
    Issuance of stock for Franklin Bank              1,323              -
                                              -------------   ------------
Balance at December 31, 2005                        20,139          1,976
                                              =============   ============

All per share data and average shares were restated to reflect a 3-for-2 stock
split declared on January 18, 2005 and paid on February 18, 2005.

16.  Earnings Per Common 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>
                                                   2005                                 2004                    2003
                                      ------------------------------------ -------------------------- --------------------------
                                                     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
Net income available to common
   shareholders                            $19,705      19,418      $1.01  $18,214    19,124    $0.95  $16,366    17,724   $0.92
                                                                ==========                   =========                   ========

Effect of Dilutive Shares
Weighted average shares if converted                       417                           352                         263
                                                    -----------                     ---------                   ---------

Diluted Earnings per Common Share
Net income available to common
   shareholders                            $19,705      19,835      $0.99  $18,214    19,476    $0.94  $16,366    17,987   $0.91
                                      ============= =========== ========== ======== ========= =======  ======== ========= =======

</Table>

All per share data and average  shares were  restated to reflect a 3-for-2 stock
split declared on January 18, 2005 and paid on February 18, 2005.

At December 31, 2004,  257,100 stock options were excluded from the  calculation
of earnings  per common  share as they were  antidilutive.  There were no shares
that were antidilutive at December 31, 2005 and 2003.

                                       70
<PAGE>

17.  Other Non-interest Expense

     Expenses included in other non-interest expense 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)

                                            2005          2004      2003
                                         ------------   --------- ---------

Professional fees                             $2,227      $2,609    $1,568
Data processing                                1,164         978       933
Directors' fees, travel and reimbursement        702         848       690
All other                                      3,514       3,558     3,378
                                         ------------   --------- ---------
                                              $7,607      $7,993    $6,569
                                         ============   ========= =========

18.   Income Taxes

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

                                  2005            2004         2003
                              -------------    ------------  ---------
  Federal:  current                 $8,059          $8,998     $5,711
            deferred                   752            (942)     1,461
  State:    current                    659             688         34
            deferred                  (286)           (263)       412
                              -------------    ------------  ---------
                                    $9,184          $8,481     $7,618
                              =============    ============  =========

     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)

                                                            2005        2004
                                                         ----------  ---------
  Deferred tax assets
       Excess of book over tax allowance
         for loan and lease losses                          $4,349     $4,311
       Excess of book over tax depreciation                     13         21
       Excess of book over tax provision for benefit
         plan expense                                        1,549      1,909
       Core deposit premium                                    149        211
       Unrealized losses- securities available-for-sale      1,496        408
       Other                                                   615        641
                                                         ----------  ---------
            Total deferred tax assets                        8,171      7,501
                                                         ----------  ---------

  Deferred tax liabilities
       Dividend on REIT                                          -      1,228
       Excess of tax over book for leasing originations        429        587
       Premium related to acquisitions                       2,196      1,726
       State tax                                               223        503
       Other                                                 1,225        912
                                                         ----------  ---------
            Total deferred tax liabilities                   4,073      4,956
                                                         ----------  ---------
            Net deferred tax assets                         $4,098     $2,545
                                                         ==========  =========

     The  provision  for  income  taxes  differs  from  the  expected  statutory
provision as follows:
                                       71
<PAGE>


                                              ---------------------------------
                                                         December 31,
                                              ---------------------------------
                                                 2005        2004       2003
                                              -----------  ----------  -------
Expected provision at statutory rate                35 %       35 %       35 %
Difference resulting from:
     State income tax, net of federal benefit        1          2          2
     Interest income exempt from federal taxes      (3)        (2)        (2)
     Bank owned life insurance                      (1)        (2)        (3)
     Other                                           -         (1)         -
                                              -----------  ----------  -------
                                                    32 %       32 %       32 %
                                              ===========  ==========  =======

19.  Restrictions of Subsidiary Bank Dividends

     Under New  Jersey  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, 2005,  undistributed net assets
of the Bank were $200.3  million of which $125.9  million 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.

20.   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 consolidated 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.  At December 31, 2005
and 2004 the Company had a  liability  of $20  thousand  and $40  thousand,  for
potential losses associated with off balance sheet arrangements.

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

                                    2005          2004
                                ------------  -----------
Home equity loans                 $ 105,070    $ 103,625
Other loans                         172,062      171,517
Standby letters of credit             3,416        3,193
                                ------------  -----------
                                  $ 280,548    $ 278,335
                                ============  ===========


     The  following  table   illustrates  the  Company's   accounting  for,  and
disclosure  of, the issuance of certain types of  guarantees  as required  under
FASB Interpretation No. 45, "Guarantor's  Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others".

                                       72
<PAGE>

                             Maximum potential     Carrying
                             amount of future     amount of the
Nature of the guarantee          Payments          liability
---------------------------------------------------------------
Standby letters of credit         $3,416            $      -

Standby letters of credit are typically  underwritten for terms of less than one
year and are fully collateralized by either cash or indirectly secured by a line
of credit,  which is collateralized by real estate,  receivables or other liquid
collateral.


     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)

Lease commitments

2006                               $ 2,766
2007                                 2,719
2008                                 2,353
2009                                 2,092
2010                                 1,791
thereafter                           5,840
                                -----------
Total minimum lease payments       $17,561
                                ===========

     Rent expense for all leases amounted to  approximately  $2.7 million,  $2.6
million and $2.3 million in 2005, 2004, and 2003, 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.

21.   Related Party Transactions

     The Company leases its operations  facilities from an affiliated company of
a  director.  The lease  expires in October  2007 and  provides  that the annual
minimum rent is approximately $84 thousand.  Rent expense paid was approximately
$84  thousand,  $76  thousand,  and  $62  thousand  in  2005,  2004,  and  2003,
respectively.  Most  of the  Company's  operating  leases  are  for  its  branch
locations which contain one to four renewal  options.  Each option allows for an
extension of the lease for a period of five years.

     Two directors of the Company  provided  legal services  through  affiliated
firms.  Fees paid for these services  amounted to  approximately  $473 thousand,
$493  thousand,  and $356 thousand in 2005,  2004,  and 2003,  respectively.  In
addition,  a director provided certain real estate appraisal services through an
affiliated  firm;  fees paid for these services  amounted to  approximately  $10
thousand  and $41  thousand  in 2005 and 2004,  respectively.  In 2004 this same
director  found a tenant for space the bank had available for lease and received
a $101 thousand commission fee; this fee was paid through the listing broker.

     The Company  believes that all of the services  obtained from directors are
at arms length. In addition,  Board approval is required to obtain services from
an affiliated party.

22.   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

                                       73
<PAGE>

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,
                                   ------------------------------------------------------------------
                                                2005                                2004
                                   ------------------------------------ -----------------------------
                                      Carrying              Fair          Carrying         Fair
                                        Amount              Value           Amount         Value
                                   ----------------  ------------------ -------------- --------------
<S>                                <C>               <C>                <C>            <C>
 Cash and cash equivalents              $   42,624          $   42,624     $   33,110     $   33,110
 Securities held to maturity                35,714              36,199         14,530         15,276
 Securities available for sale             320,752             320,752        374,199        374,199
 Loans, net                              1,095,323           1,089,034        924,384        929,492
                                   ----------------  ------------------ -------------- --------------
                                        $1,494,413          $1,488,609     $1,346,223     $1,352,077
                                   ================  ================== ============== ==============

 Deposits                               $1,260,108          $1,242,178     $1,246,138     $1,127,185
 Short-term borrowings                      50,089              50,089         29,001         29,001
 Long-term borrowings                      130,953             127,998         30,000         29,631
                                   ----------------  ------------------ -------------- --------------
                                        $1,441,150          $1,420,265     $1,305,139     $1,185,817
                                   ================  ================== ============== ==============
</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 value 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 adequacy of 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

                                       74
<PAGE>

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, 2005 and 2004, the estimated fair values of these off-balance sheet
financial instruments were immaterial.

                                       75
<PAGE>


23. Parent Company Only Information (in thousands)

                                                ---------------------------
                                                      December 31,
                                                ---------------------------
Condensed balance sheets                             2005           2004
                                                -------------- -----------
Assets
  Cash                                               $ 5,233     $ 1,630
  Investment in subsidiaries
   Bank                                               200,295     149,422
   Other                                                  763         142
                                                -------------- -----------
   Total assets                                      $206,291    $151,194
                                                ============== ===========

Liabilities
  Loans from subsidiaries                            $  4,500           -
  Subordinated debentures                              20,620           -
  Other liabilities                                     2,161    $  1,040
                                                -------------- -----------
                                                       27,289       1,040
                                                -------------- -----------

Stockholders' equity
  Common stock                                          5,397       5,396
  Capital Surplus                                      97,238      73,320
  Retained earnings                                    99,222      86,542
  Accumulated other comprehensive income               (2,310)       (633)
                                                -------------- -----------
                                                      199,547     164,625
  Less:  Treasury stock                                20,545      14,471
                                                -------------- -----------
   Total stockholders' equity                         179,002     150,154
                                                -------------- -----------
   Total liabilities and stockholders' equity        $206,291    $151,194
                                                ============== ===========
-----------------------------------------------------------------------------

<Table>
<Caption>
                                                     ----------------------------------------
                                                            Years Ended December 31,
                                                     ----------------------------------------
Condensed statements of income                            2005           2004        2003
                                                     ---------------- ----------- -----------
<S>                                                  <C>              <C>         <C>
Dividends from subsidiary bank                              $ 11,900    $ 11,710    $ 20,320
Net gain on sale of securities                                     -         304           -
Other income                                                      95           -           -
                                                     ---------------- ----------- -----------
   Total revenues                                             11,995      12,014      20,320
                                                     ---------------- ----------- -----------

Interest on borrowings and subordinated debentures               673          12           -
Operating expenses                                               428         303         225
                                                     ---------------- ----------- -----------

Income before equity in undistributed earnings
  of subsidiaries                                             10,894      11,700      20,095
Equity in undistributed earnings of subsidiaries               8,812       6,514      (3,729)
                                                     ---------------- ----------- -----------
   Net income                                               $ 19,705    $ 18,214    $ 16,366
                                                     ================ =========== ===========
---------------------------------------------------------------------------------------------
</Table>

                                       76
<PAGE>

<Table>
<Caption>
                                                     ------------------------------------
                                                            Years Ended December 31,
                                                     ------------------------------------
Condensed statements of cash flows                       2005           2004      2003
                                                     ------------ ----------- -----------
<S>                                                  <C>          <C>         <C>
Cash flows from operating activities:
  Net income                                             $19,705     $18,214     $16,366
  Adjustments to reconcile net income
   to net cash provided by operating activities
   Net gain on sale of securities available-for-sale           -        (304)          -
   Decrease in other assets                                    -           8       1,588
   Decrease (increase) in dividends payable                    -           -      (1,372)
   Decrease in other liabilities and other                 1,130      (3,344)       (198)
  Equity in undistributed income of subsidiaries          (8,812)     (6,514)      3,729
                                                     ------------ ----------- -----------
   Net cash provided by operating activities              12,023       8,060      20,113
                                                     ------------ ----------- -----------

Cash flows from investing activities:
  Investments in subsidiaries                            (20,620)          -           -
  Sale of securities available-for-sale                        -         651           -
                                                     ------------ ----------- -----------
   Net cash provided by investing activities             (20,620)        651           -
                                                     ------------ ----------- -----------

Cash flows from financing activities:
  Cash dividends paid                                     (7,013)     (6,382)     (4,970)
  Loan from subsidiary                                     4,500           -           -
  Issuance of subordinated debuntures                     20,620
  Repayment of loan from subsidiary                            -           -           -
  Treasury stock                                          (6,619)     (2,154)       (693)
  Common stock issued                                        335         205         354
  Exercise of option shares                                  389         146         438
  Payout of fractional shares                                (12)          -           -
  Net cash payments for the acquisition of
    Bridge View Bancorp                                        -           -     (15,768)
                                                     ------------ ----------- -----------
   Net cash used in financing activities                  12,200      (8,185)    (20,639)
                                                     ------------ ----------- -----------

Net increase/(decrease) in cash                            3,603         526        (526)
Cash at beginning of year                                  1,630       1,104       1,630
                                                     ------------ ----------- -----------
Cash at end of year                                      $ 5,233     $ 1,630     $ 1,104
                                                     ============ =========== ===========

Supplemental disclosure of non-cash investing
   and financing activities:
   Stock issued related to acquisitions                  $23,738           -     $52,180
</Table>

                                       77
<PAGE>

24. Quarterly Financial Data (unaudited) (in thousands, except per share data)

<Table>
<Caption>
                                                                   First         Second        Third         Fourth
                            2005                                  Quarter       Quarter       Quarter        Quarter
----------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>            <C>          <C>            <C>
 Interest income                                                    $18,005       $18,852       $20,060       $21,578
 Interest expense                                                     4,441         5,367         6,356         7,198
 Net Interest income                                                 13,564        13,485        13,704        14,380
 Provision for loan losses                                              175           225           300           225
 Net gain on sale of securities                                          67           250            77             -
 Non-interest income, excluding net gain on sale of securities        2,127         2,226         2,600         3,034
 Non-interest expenses                                                9,154         9,180         9,247         8,119
 Income before income taxes                                           6,429         6,556         6,834         9,070
 Net income                                                           4,420         4,515         4,676         6,094

 Basic earnings per common share                                    $  0.23       $  0.24       $  0.24       $  0.30
 Diluted earnings per common share                                  $  0.23       $  0.23       $  0.24       $  0.30

----------------------------------------------------------------------------------------------------------------------
                                                                   First         Second        Third        Fourth
                            2004                                  Quarter       Quarter       Quarter       Quarter
----------------------------------------------------------------------------------------------------------------------

 Interest income                                                    $15,671       $15,998       $16,876       $17,555
 Interest expense                                                     3,137         3,062         3,416         4,039
 Net Interest income                                                 12,534        12,636        13,460        13,516
 Provision for loan losses                                              375           300           300           225
 Net gain on sale of securities                                         514           305           163           462
 Non-interest income, excluding net gain on sale of securities        2,001         2,387         2,714         2,911
 Non-interest expenses                                                8,917         8,798         9,267         9,026
 Income before income taxes                                           5,757         6,530         6,770         7,638
 Net income                                                           3,986         4,355         4,661         5,212

 Basic earnings per common share                                    $  0.21       $  0.23       $  0.25       $  0.27
 Diluted earnings per common share                                  $  0.21       $  0.23       $  0.24       $  0.27

All per share data has been restated to reflect a 3-for-2  stock split  declared
on January 18, 2005 and paid on February 18, 2005.
</Table>

Item 9.  Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

     There were no changes in or  disagreements  with  accountants on accounting
and financial disclosure as defined by item 304 of Regulation S-K.

Item 9A.  Controls and Procedures

     Evaluation of Disclosure Controls and Procedures.

     We maintain  disclosure  controls  and  procedures  designed to ensure that
information  required  to be  disclosed  in our  filings  under  the  Securities
Exchange  Act of  1934  is (i)  recorded,  processed,  summarized  and  reported
accurately  within the time  periods  specified in the  Securities  and Exchange
Commission's  (SEC) rules and forms and (ii) accumulated and communicated to our
management,  including our principal  executive officer and principal  financial
officer, as appropriate to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report,  an evaluation was performed
under the supervision and with the  participation  of management,  including the
Chief  Executive  Officer  (CEO)  and  Chief  Financial  Officer  (CFO),  of the
effectiveness  of the  design  and  operation  of our  disclosure  controls  and
procedures  (pursuant to Exchange Act Rule 13a-15).  Based upon this evaluation,
the CEO and CFO  concluded  that our  disclosure  controls  and  procedures  are

                                       78
<PAGE>

effective.  The  conclusions  of the CEO  and  CFO  from  this  evaluation  were
communicated to the Audit Committee.

     Changes in Internal Control over Financial Reporting.

     There were no changes in our internal control over financial reporting that
occurred  during the three months ended  December 31, 2005 that have  materially
affected,  or are reasonably likely to materially  affect,  our internal control
over financial reporting.

     Report on Internal Control Over Financial Reporting.

     The  management  of  Interchange   Financial   Services   Corporation  (the
"Company"),  is responsible for establishing and maintaining  adequate  internal
control over financial  reporting.  Internal control over financial reporting is
defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange
Act of 1934 as a process designed by, or under the supervision of, the Company's
principal  executive  and  principal  financial  officers  and  effected  by the
Company's  board of  directors,  management  and  other  personnel,  to  provide
reasonable  assurance  regarding the reliability of financial  reporting and the
preparation  of financial  statements for external  purposes in accordance  with
generally  accepted  accounting  principles  and  includes  those  policies  and
procedures that:

o    Pertain to the maintenance of records that in reasonable  detail accurately
     and fairly reflect the  transactions  and dispositions of the assets of the
     Company;

o    Provide reasonable assurance that transactions are recorded as necessary to
     permit  preparation  of financial  statements in accordance  with generally
     accepted accounting  principles,  and that receipts and expenditures of the
     Company are being made only in accordance with authorizations of management
     and directors of the Company;

o    Provide reasonable  assurance  regarding  prevention or timely detection of
     unauthorized  acquisition,  use or disposition of the Company's assets that
     could have a material effect on the financial statements.

Because of its inherent  limitations,  internal control over financial reporting
may not prevent or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions,  or that the degree of compliance
with the policies or procedures may change.

The Company's  management  assessed the effectiveness of the Company's  internal
control  over  financial  reporting  as of  December  31,  2005.  In making this
assessment,  the  Company's  management  used  the  criteria  set  forth  by the
Committee  of  Sponsoring  Organizations  of the Treadway  Commission  (COSO) in
Internal Control-Integrated Framework.

Based on our assessment,  management  determined  that, as of December 31, 2005,
the Company's  internal control over financial  reporting was effective based on
those criteria.

Management's  assessment of the effectiveness of the Company's  internal control
over financial  reporting as of December 31, 2005 has been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as stated in their
report which appears herein:


                                       79
<PAGE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Interchange Financial Services Corporation
Saddle Brook, New Jersey

We  have  audited   management's   assessment,   included  in  the  accompanying
management's  report  on  internal  control  over  financial   reporting,   that
Interchange  Financial  Services  Corporation and subsidiaries  (the "Company"),
maintained  effective  internal control over financial  reporting as of December
31,  2005,  based  on  criteria  established  in  Internal   Control--Integrated
Framework  issued by the Committee of Sponsoring  Organizations  of the Treadway
Commission.  The Company's  management is responsible for maintaining  effective
internal  control  over  financial  reporting  and  for  its  assessment  of the
effectiveness of internal control over financial  reporting.  Our responsibility
is to  express  an  opinion  on  management's  assessment  and an opinion on the
effectiveness of the Company's  internal control over financial  reporting based
on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain  reasonable  assurance  about whether  effective
internal  control  over  financial  reporting  was  maintained  in all  material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing, and evaluating
the design and operating  effectiveness of internal control, and performing such
other  procedures as we considered  necessary in the  circumstances.  We believe
that our audit provides a reasonable basis for our opinions.

A company's internal control over financial  reporting is a process designed by,
or under the  supervision  of, the company's  principal  executive and principal
financial officers, or persons performing similar functions, and effected by the
company's  board of  directors,  management,  and  other  personnel  to  provide
reasonable  assurance  regarding the reliability of financial  reporting and the
preparation  of financial  statements for external  purposes in accordance  with
accounting  principles  generally  accepted  in the  United  States  America.  A
company's internal control over financial  reporting includes those policies and
procedures  that (1) pertain to the  maintenance  of records that, in reasonable
detail,  accurately and fairly reflect the  transactions and dispositions of the
assets of the company;  (2) provide  reasonable  assurance that transactions are
recorded  as  necessary  to  permit  preparation  of  financial   statements  in
accordance with generally accepted accounting principles,  and that receipts and
expenditures   of  the   company  are  being  made  only  in   accordance   with
authorizations  of  management  and  directors of the  company;  and (3) provide
reasonable  assurance  regarding  prevention or timely detection of unauthorized
acquisition,  use,  or  disposition  of the  company's  assets that could have a
material effect on the financial statements.

Because  of  the  inherent   limitations  of  internal  control  over  financial
reporting,  including  the  possibility  of  collusion  or  improper  management
override of controls,  material  misstatements  due to error or fraud may not be
prevented or detected on a timely basis. Also,  projections of any evaluation of
the  effectiveness  of the internal  control over financial  reporting to future
periods are subject to the risk that the controls may become inadequate  because
of changes in conditions,  or that the degree of compliance with the policies or
procedures may deteriorate.

In our opinion,  management's  assessment that the Company maintained  effective
internal  control over  financial  reporting as of December 31, 2005,  is fairly
stated, in all material respects,  based on the criteria established in Internal
Control--Integrated   Framework   issued   by  the   Committee   of   Sponsoring
Organizations  of the Treadway  Commission.  Also,  in our opinion,  the Company
maintained, in all material respects,  effective internal control over financial
reporting as of December 31, 2005, based on the criteria established in Internal
Control--Integrated   Framework   issued   by  the   Committee   of   Sponsoring
Organizations of the Treadway Commission.

We have also  audited,  in accordance  with the standards of the Public  Company
Accounting   Oversight  Board  (United  States),   the  consolidated   financial
statements as of and for the year ended December 31, 2005 of the Company and our
report dated March 13, 2006 expressed an unqualified  opinion on those financial
statements.

/s/ Deloitte & Touche LLP
-------------------------

New York, New York
March 13, 2006
                                       80
<PAGE>


Item 9B.  Other Information.

     On January  17,  2006,  the Board of  Directors  of  Interchange  Financial
Services  Corporation and  Interchange  Bank  implemented  the Interchange  Bank
Deferred  Compensation  Plan (the "DCP") as a  replacement  to the  Supplemental
Executives'  Retirement Plan (the "SERP") which had been previously  maintained.
The DCP was implemented to: (i) preserve benefits  previously  accrued under the
SERP,  (ii) provide the ability for select  executives to defer the receipt of a
portion of their  income in a manner  that defers the  taxation of such  income,
(iii)  provide  restorative  payments  to  executives  who  are  prevented  from
receiving the full benefits  contemplated by the 401(k) plan's benefit  formula,
(iv) provide a pre-retirement  death benefit to the Chief Executive Officer, and
(v)  comply  with  section  409A  of the  Internal  Revenue  Code  of  1986  and
regulations  or  other  guidance  of  the  Internal  Revenue  Service  published
thereunder  (collectively,  "Section  409A").  Section 409A requires certain IRS
restrictions  on  payment  timing  to   participants   under  the  DCP  and  the
circumstances   under  which   elections  to  defer   compensation   or  receive
distributions  of deferred  compensation  may be made.  The DCP is an  unfunded,
non-qualified  plan that provides for  distribution  of the amounts  deferred to
participants or their  designated  beneficiaries  upon the occurrence of certain
events such as death, retirement,  or termination of service (as those terms are
defined in the DCP as required by Section 409A).  The DCP is attached  hereto as
Exhibit 10(g).


                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

          a.  Directors

               The information  contained in the section  entitled  "INTERCHANGE
          PROPOSAL NO. 1 - ELECTION OF DIRECTORS - Nominees  and  Directors"  in
          the  Company's  2006 Annual  Meeting Proxy  Statement is  incorporated
          herein by reference in response to this item.

          b.  Executive Officers

               The  following  table  sets forth the names,  ages,  and  present
          positions  of  the  Company's  and  the  Bank's  principal   executive
          officers:

<Table>
<Caption>

          Name                   Age  Positions Held with the Company and the Bank
          ----                   ---  --------------------------------------------
          <S>                    <C>  <C>
          ANTHONY S. ABBATE.......66  President & Chief Executive Officer
          ANTHONY J. LABOZZETTA...42  Executive Vice President & Chief Operating Officer
          PATRICIA D. ARNOLD......47  Senior Vice President & Chief Lending Officer
          CHARLES T. FIELD........41  Senior Vice President & Chief Financial Officer
          CHARLES P. FROST........54  Senior Vice President & Chief Credit Officer
          FRANK R. GIANCOLA.......52  Senior Vice President & Compliance Officer
</Table>

          Business Experience

               ANTHONY S. ABBATE,  President and Chief Executive  Officer of the
          Company since 1984 and of the Bank since 1981;  Senior Vice  President
          and  Controller  from  October  1980 to 1981.  Engaged in the  banking
          industry since 1959.

               ANTHONY  J.  LABOZZETTA,   Executive  Vice  President  and  Chief
          Operating  Officer since February  2003;  Executive Vice President and
          Chief Financial  Officer from September 1997 to February 2003;  Senior
          Vice President and Treasurer from 1995 to 1997. Engaged in the banking
          industry since 1989.  Formerly a senior manager with an  international
          accounting firm, specializing in the financial services industry.

                                       81
<PAGE>

               PATRICIA D.  ARNOLD,  Senior  Vice  President  and Chief  Lending
          Officer  since August 1997;  First Vice  President  from 1995 to 1997;
          Department  Head  Vice  President  from 1986 to 1995;  Assistant  Vice
          President  from  1985  to  1986;  Commercial  Loan   Officer-Assistant
          Treasurer  from 1983 to 1985.  Engaged in the banking  industry  since
          1981.

               CHARLES T.  FIELD,  Senior  Vice  President  and Chief  Financial
          Officer  since  February  2003.  Formerly Vice  President  Finance and
          Treasurer of Viatel, Inc. from 1999 to 2002 and Treasurer from 1998 to
          1999, Corporate Controller of Horsehead Industries,  Inc. from 1995 to
          1998  and a  manager  specializing  in  financial  institutions  at an
          international accounting firm from 1987 to 1995.

               CHARLES P. FROST,  Senior Vice President and Chief Credit Officer
          since July 2004 and  Director of  Interchange  Capital  Company  since
          January  2005.  He  served  in a  similar  capacity  for  9  years  at
          Trustcompany Bank in Jersey City. His background  includes 28 years in
          commercial  lending/credit  with  various New Jersey  banks.  He is an
          active member of the RMA (Risk Management Association),  having served
          on the Board of Governors for 8 years and as President of the Northern
          New Jersey Chapter from 2000-2001.

               FRANK R. GIANCOLA,  Senior Vice President and Compliance  Officer
          since September 1997; Senior Vice  President-Retail  Banking from 1993
          to 1997;  Senior  Vice  President-Operations  of the Bank from 1984 to
          1993;   Senior   Operations   Officer   from   1982  to   1984;   Vice
          President/Branch  Administrator  from  1981 to  1982.  Engaged  in the
          banking industry since 1971.

               Officers are elected annually by the Board of Directors and serve
          at the  discretion of the Board of Directors.  Management is not aware
          of any family relationship  between any director or executive officer.
          No executive  officer was selected to his or her position  pursuant to
          any arrangement or understanding with any other person.

          c. Compliance with Section 16(a)

               Information   contained  in  the  section   entitled   "PRINCIPAL
          SHAREHOLDERS AND HOLDINGS OF MANAGEMENT OF INTERCHANGE - Section 16(a)
          Beneficial  Ownership  Reporting  Compliance"  in the  Company's  2006
          Annual Meeting Proxy Statement is incorporated  herein by reference in
          response to this item.

          d. Code of Ethics

               We have adopted  Codes of Ethics for our Board of  Directors  and
          employees.  The  Code  of  Ethics  is  available  free  of  charge  by
          contacting  the Company at Park 80 West,  Plaza II, Saddle  Brook,  NJ
          07663.

Item 11.  Executive Compensation

     Information  contained  in  the  section  entitled  "INTERCHANGE  EXECUTIVE
COMPENSATION AND OTHER INTERCHANGE  INFORMATION - Executive Compensation" in the
Company's  2006  Annual  Meeting  Proxy  Statement  is  incorporated  herein  by
reference in response to this item.

                                       82
<PAGE>

Item 12.  Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters

     The information  contained in the section entitled "Principal  Shareholders
and Holdings of Management of  Interchange" in the Company's 2006 Annual Meeting
Proxy Statement incorporated herein by reference in response to this item.

Equity Compensation Plan Information

The table below summarizes information about our common stock that may be issued
upon the  exercise of options,  warrants  and rights  under all of our  existing
equity compensation plans as of December 31, 2005.

<Table>
<Caption>
----------------------------------------------------------------------------------------------------------------------------------
Plan category
                                      Number of securities to be        Weighted-average        Number of securities remaining
                                        issued upon exercise of         exercise price of      available for future issuance under
                                         outstanding options,          outstanding options,    equity compensation plans (excluding
                                         warrants and rights           warrants and rights     securities reflected in column (a))
----------------------------------------------------------------------------------------------------------------------------------
                                                 (a)                      (b)                                   (c)
----------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>                        <C>                          <C>
Equity compensation plans approved
  by security holders                             1,407,919                        $12.67                             1,610,660
Equity compensation plans not approved
  by security holders                                     -                             -                                     -
                                         -------------------       -----------------------       -------------------------------
Total                                             1,407,919                        $12.67                             1,610,660
                                         ===================       =======================       ===============================

</Table>

The Outside Director Incentive Compensation Plan

     The Outside  Director  Incentive  Compensation  Plan is designed to attract
qualified  personnel to accept positions of  responsibility as outside directors
with Interchange and to provide incentives for persons to remain on the board as
outside  directors.  The  Compensation/Stock  Option  Committee  administers the
Outside Director  Incentive  Compensation  Plan,  reviews the awards and submits
recommendations  to the full board of directors  for action.  Options to acquire
2,250 shares of Interchange common stock are granted to each outside director of
Interchange each year on the anniversary date of the initial grant.  Each option
represents the right to purchase, upon exercise, one share of Interchange common
stock at an  exercise  price equal to the price of a share of stock at the close
of business on the date of the grant as reported by the NASDAQ National  Market.
Stock  options  may be  exercisable  between  one and ten  years  from  the date
granted.  All options granted under the Outside Director Incentive  Compensation
Plan are  non-qualified  stock  options  and are not  entitled  to  special  tax
treatment under the Internal  Revenue Code of 1986, as amended.  During 2005 the
Board of  Directors  accelerated  the vesting of all  options  under the Outside
Director Incentive Compensation Plan and froze future grants.

Stock Option and Incentive Plan

     The Company maintains two stock option and incentive plans the Stock Option
and Incentive Plan of 1997, as amended, and the 2005 Omnibus Stock and Incentive
Plan (collectively the "Plans"),  which were designed to align shareholders' and
executive  officers'   interests.   The   Compensation/Stock   Option  Committee
administers the plan, reviews the awards and submits recommendations to the full
board of  directors  for action.  Stock  options are granted on a  discretionary
basis with an exercise price equal to the price of a share of stock at the close
of business on the date of the grant as reported by the NASDAQ National  Market.
Stock  options  may be  exercisable  between  one and ten  years  from  the date
granted.  Such stock options  provide a retention and  motivational  program for
executives  and an  incentive  for the  creation of  shareholder  value over the
long-term  since their full benefit cannot be realized unless an appreciation in
the price of the common stock occurs over a specified number of years.

     The Plans also  provide  for the  issuance  of  incentive  stock  awards as
determined by the board of directors of Interchange.  Certain key executives may
be awarded incentive  compensation in the form of 3-year restricted stock, which
is  forfeitable  upon  termination  of employment  during that time period.  Key
employees may also use their cash bonus to purchase two-year restricted stock at
a twenty-five percent discount. All amounts in excess of the discounted purchase
price of this stock are

                                       83
<PAGE>

forfeitable should the employee's  employment terminate during that time period.
Incentive stock awards are an important  factor in attracting and motivating key
executives who will dedicate their maximum efforts toward the advancement of the
Company.

Item 13.  Certain Relationships and Related Transactions

     The information  contained in the section entitled  "Certain  Relationships
and Related Party  Transactions  of  Interchange"  in the Company's  2006 Annual
Meeting Proxy Statement is incorporated  herein by reference in response to this
item.

Item 14.  Principal Accounting Fees and Services

     The  items  required  by Part  III,  Item  14 are  incorporated  herein  by
reference from the Company's 2006 Annual Meeting Proxy Statement.

                                       84

<PAGE>

                                     PART IV

Item 15.  Exhibits, Financial Statement Schedules

          (a) The following documents are filed as part of this Report:

               1.   Financial Statements:  The Financial Statements listed under
                    Item 8 to this  Report are set forth at pages 31 through 34,
                    and the Notes to Consolidated  Financial  Statements are set
                    forth at pages 35 through 51, of the 2005  Annual  Report to
                    Shareholders  (See Exhibit 13 under  paragraph  (a)3 of this
                    Item 14).

               2.   Financial  Statement  Schedules:  All required schedules for
                    the Company and its  subsidiaries  have been included in the
                    Consolidated Financial Statements or related Notes thereto.

               3.   Exhibits: Exhibits followed by a parenthetical reference are
                    incorporated by reference herein from the document described
                    in such parenthetical reference.

                    Exhibit 2.1  Agreement  and  Plan  of  Merger,  dated  as of
                                 November 18, 2002, by and between Registrant
                                 and Bridge View Bancorp  (Incorporated by
                                 reference to Exhibit 2.1 to  Registrant's Form
                                 S-4,  filed  February  14, 2003,
                                 Registration Statement No. 333-103256)

                    Exhibit 3(a) Amended   and   Restated   Certificate   of
                                 Incorporation  of Registrant  (Incorporated
                                 by reference to Exhibit  3.1 to  Registrant's
                                 Form 8-K/A,  filed  August 3, 2005.)

                    Exhibit 3(b) Amended and Restated Bylaws of Registrant,
                                 dated October 24, 2002 (Incorporated by
                                 reference to Exhibit 4(b) to the Registrant's
                                 Quarterly Report on Form 10-Q for the quarter
                                 ended September 30, 2002)

                    Exhibit 10(a) Agreement for legal services between Andora
                                 and Romano and Registrant, dated April 28,
                                 2005.

                    Exhibit 10(b) Outside Director Incentive Compensation
                                 Plan (Incorporated by reference to Exhibit 4(a)
                                 to Registrant's Form S-8, filed June 26, 2000,
                                 Registration Statement No. 33-40098)

                    Exhibit 10(c) Stock Option and Incentive Plan of 1997,
                                 as Amended (Incorporated by reference to
                                 Exhibit 4(a) to Registrant's Form S-8, filed
                                 August 26, 2002, Registration Statement No.
                                 33-98705)

                    Exhibit 10(d) Directors' Retirement Plan, as Amended 2003
                                 (Incorporated by reference to Exhibit 10(d)
                                 to Annual Report on Form 10-K for fiscal
                                 year ended December 31, 2003)

                    Exhibit 10(e) Executives' Supplemental Pension Plan
                                 (Incorporated by reference to Exhibit 10(i) (4)
                                 to Annual Report on Form 10-K for fiscal year
                                 ended December 31, 1994)

                    Exhibit 10(f) Change-in-Control Agreements for the
                                 Registrant's principal executive officers, and
                                 Amendment dated June 14, 2001 (Incorporated by
                                 reference to Exhibit 10(f) to Annual Report on
                                 Form 10-K for fiscal year ended December 31,
                                 2001)

                    Exhibit 10(f)(1) Change-in-Control Agreement for the
                                 Registrant's principal financial officer, dated
                                 April 12, 2004. (Incorporated by reference to
                                 Exhibit 10(f)(1) to Annual Report on Form 10-K
                                 for fiscal year ended December 31, 2004)

                                       85
<PAGE>


                    Exhibit  10(f)(2)   Change-in-Control   Agreement   for  the
                                 Registrant's chief credit officer, dated July
                                 22, 2004.

                    Exhibit 10(g)Interchange Bank Deferred Compensation Plan

                    Exhibit 11   Statement regarding computation of per share
                                 earnings

                    Exhibit 21   Subsidiaries of Registrant

                    Exhibit 31.1 Certification  of  Chief  Executive  Officer
                                 Pursuant  to Section 302 of the  Sarbanes-Oxley
                                 Act of 2002

                    Exhibit 31.2 Certification  of  Chief  Financial  Officer
                                 Pursuant  to Section 302 of the  Sarbanes-Oxley
                                 Act of 2002

                    Exhibit 32   Certification  Pursuant  to  Section  906 of
                                 the Sarbanes- Oxley Act of 2002

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

                                       86
<PAGE>

SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange  Act of 1934,  the  Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.

                                 Interchange Financial Services Corporation

By:/s/ Anthony S. Abbate               By:/s/ Charles T. Field
   -------------------------------     -----------------------------------------
   Anthony S. Abbate                   Charles T. Field
   President and Chief Executive       Senior Vice President and Chief
   Officer                             Financial Officer
   (principal executive officer)       (principal financial and accounting
                                       officer)

March 16, 2006

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated:

/s/ Anthony S. Abbate                      /s/ Charles T. Field
----------------------------------------   -------------------------------------
Anthony S. Abbate         March 16, 2006   Charles T. Field       March 16, 2006
   Director                                   Senior Vice President and
   President and Chief Executive Officer      Chief Financial Officer

/s/ Anthony D. Andora                      /s/ James E. Healey
----------------------------------------   -------------------------------------
Anthony D. Andora         March 16, 2006   James E. Healey        March 16, 2006
   Director                                   Director
   Chairman of the Board

/s/ Gerald A. Calabrese, Jr.               /s/ Nicholas R. Marcalus
---------------------------------------    -------------------------------------
Gerald A. Calabrese, Jr.  March 16, 2006   Nicholas R. Marcalus   March 16, 2006
   Director                                   Director

/s/ Donald L. Correll                      /s/ Eleanore S. Nissley
----------------------------------------   -------------------------------------
Donald L. Correll         March 16, 2006   Eleanore S. Nissley    March 16, 2006
   Director                                   Director

/s/ Anthony R. Coscia                      /s/ Jeremiah F. O'Connor
----------------------------------------   -------------------------------------
Anthony R. Coscia         March 16, 2006   Jeremiah F. O'Connor   March 16, 2006
   Director                                   Director

/s/ John J. Eccleston                      /s/ Robert P. Rittereiser
----------------------------------------   -------------------------------------
John J. Eccleston         March 16, 2006   Robert P. Rittereiser  March 16, 2006
   Director                                   Director

/s/ David R. Ficca                         /s/ John A. Schepisi
----------------------------------------   -------------------------------------
David R. Ficca            March 16, 2006   John A. Schepisi        March 16,2006
   Director                                   Director


                                       87