August 4, 1997






Ms. Patricia Arnold
35 Manor Road
Wyckoff, NJ  

Dear Ms. Arnold:

Interchange  Financial Services  Corporation,  a New Jersey Bank Holding Company
(the  "Company"),  considers the maintenance of a sound and vital executive team
to be essential to protecting  and  enhancing the best  interests of the Company
and its  stockholders.  In this  connection,  the  Company  recognizes  that the
possibility of a change in control presently exists and may exist in the future,
and that such possibility,  and the uncertainty and questions which it may raise
among  management,  may result in the departure or  distraction of executives to
the  detriment of the Company and its  stockholders.  Accordingly,  the Board of
Directors of the Company (the "Board") has  determined  that  appropriate  steps
should  be  taken  to  reinforce  and  encourage  the  continued  attention  and
dedication of members of the Company's executive team.

This letter agreement sets forth the severance benefits which the Company agrees
will be  provided  to you in the  event  your  employment  with the  Company  is
terminated  subsequent  to a "change in control of the  Company"  (as defined in
Section 2 hereof) under the circumstances described below.



1.       COMPANY'S RIGHT TO TERMINATE

          During  the  term of this  Agreement,  you  agree  that  you  will not
          voluntarily leave the employ of the Company except as may be permitted
          hereunder,  and will continue to perform your regular duties as Senior
          Vice  President of the Company.  Notwithstanding  the  foregoing,  the
          Company  may  terminate  your  employment  at  any  time,  subject  to
          providing the benefits  hereinafter  specified in accordance  with the
          terms hereof.

2.       CHANGE IN CONTROL

         No benefits shall be payable  hereunder  unless there shall have been a
         change  in  control  of the  Company,  as set  forth  below,  and  your
         employment  by the Company  shall  thereafter  have been  terminated in
         accordance  with  Section 3 below.  For purposes of this  Agreement,  a
         "change  in  control  of the  Company"  shall  mean,  unless  the Board
         otherwise directs  resolution  approved by unanimous vote of the entire
         membership  thereof  adopted  prior  thereto,  a change in control of a
         nature  that would be  required to be reported in response to Item 5(f)
         of Schedule 14A of  Regulation  14A  promulgated  under the  Securities
         Exchange  Act of 1934,  as amended  ("Exchange  Act");  provided  that,
         without  limitation,  such a change in control  shall be deemed to have
         occurred if (i) any  "person"  (as such term is used in Sections  13(d)
         and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
         defined in Rule 13d-3 under the Exchange Act),  directly or indirectly,
         of securities of the Company  representing more than 25% control of the
         combined voting power of the Company's then outstanding securities;  or
         (ii) during any period of two consecutive years, individuals who at the
         beginning of such period  constitute  the Board cease for any reason to
         constitute  at least a majority  thereof  unless the  election,  or the
         nomination  for  election by the  Company's  stockholders,  of each new
         director was approved by a vote of at least two-thirds of the directors
         then still in office who were directors at the beginning of the period.

3.       TERMINATION FOLLOWING CHANGE IN CONTROL

          If any of the  events  described  in Section 2 hereof  constituting  a
          change in control of the  Company  shall have  occurred,  you shall be
          entitled  to the  benefits  provided  in  Section  4 hereof  upon your
          subsequent termination,  so long as such termination occurs within two
          (2) years  after a change  in  control  of the  Company,  unless  such
          termination  is (A)  because of your death or  Retirement,  (B) by the
          Company  for Cause or  Disability  or (c) by you  other  than for Good
          Reason. 

          (i) Disability; Retirement

               (A)  Termination  by the  Company  of your  employment  based  on
                    "Disability" shall mean termination  because of your absence
                    from your duties  with the Company on a full-time  basis for
                    130   consecutive   business  days,  as  a  result  of  your
                    incapacity due to physical or mental illness,  unless within
                    thirty (30) days after Notice of Termination (as hereinafter
                    defined) is given  following  such  absence,  you shall have
                    returned to the full time performance of your duties; or

               (B)  Termination by the Company or you of your  employment  based
                    on  "Retirement"  shall mean your  voluntary  termination in
                    accordance with the Company's  retirement policy,  including
                    early  retirement,  generally  applicable  to  its  salaried
                    employees.

         (ii)     Cause

                  Termination by the Company of your  employment for Cause shall
                  mean  your   termination  on  account  of:  

                    (A)  Your  willful  commission  of an act that  causes or is
                         reasonably  likely to cause  substantial  damage to the
                         Company;

                    (B)  Your  commission of an act of fraud in the  performance
                         of your duties on behalf of the Company;

                    (C)  Your  conviction  for  commission  of a felony or other
                         crime  punishable by confinement for a period in excess
                         of one (1) year in connection  with the  performance of
                         your duties on behalf of the Company; or

                    (D)  The order of a federal or state bank regulatory  agency
                         or a court  of  competent  jurisdiction  requiring  the
                         termination of your employment.

         (iii)    Good Reason

               Termination  by you of your  employment  for "Good  Reason" shall
               mean termination based on:

                    (A)  Subsequent  to a change in control of the Company,  and
                         without your express written consent, the assignment to
                         you of any  duties  inconsistent  with your  positions,
                         duties,  responsibilities  and status  with the Company
                         immediately  prior to a change in control,  or a change
                         in your reporting  responsibilities,  titles or offices
                         as in effect  immediately prior to a change in control,
                         or any  removal of you from or any  failure to re-elect
                         you to any of such positions, except in connection with
                         the   termination   of  your   employment   for  Cause,
                         Disability  or  Retirement or as a result of your death
                         or by you other than for Good Reason;

                    (B)  Subsequent  to a change in  control of the  Company,  a
                         reduction  by the  Company  in your  base  salary as in
                         effect  on  the  date  hereof  or as  the  same  may be
                         increased from time to time;

                    (C)  Subsequent  to a change in  control of the  Company,  a
                         failure by the Company to  continue  any bonus plans in
                         which you are presently  entitled to  participate  (the
                         "Bonus Plans") as the same may be modified from time to
                         time  but  substantially  in  the  forms  currently  in
                         effect,  or a failure by the Company to continue you as
                         a  participant  in the Bonus Plans on at least the same
                         basis as you presently  participate in accordance  with
                         the Bonus Plans;

                    (D)  Subsequent  to a change in control of the  Company  and
                         without your express  written  consent,  the  Company's
                         requiring  you to be based  anywhere  other than within
                         thirty  (30)  miles of your  present  office  location,
                         except for required travel on the Company's business to
                         an extent  substantially  consistent  with your present
                         business travel obligations;

                    (E)  Subsequent  to change in  control of the  Company,  the
                         failure  by the  Company  to  continue  in  effect  any
                         benefit or  compensation  plan,  stock  ownership plan,
                         stock purchase plan,  stock option plan, life insurance
                         plan,  health-and-accident  plan or disability  plan in
                         which you are  participating at the time of a change in
                         control of the  Company  (or plans  providing  you with
                         substantially  similar  benefits),  the  taking  of any
                         action by the Company which would adversely affect your
                         participation  in or  materially  reduce your  benefits
                         under any of such plans or deprive you of any  material
                         fringe benefit enjoyed by you at the time of the change
                         in  control,  or the  failure by the Company to provide
                         you with the number of paid  vacation days to which you
                         are then  entitled  in  accordance  with the  company's
                         normal vacation policy in effect on the date hereof;

                    (F)  Subsequent  to a change in control of the Company,  the
                         failure by the Company to obtain the  assumption of the
                         agreement to perform this Agreement by any successor as
                         contemplated in Section 6 hereof; or

                    (G)  Subsequent  to a change in control of the Company,  any
                         purported  termination of your employment  which is not
                         effected pursuant to a Notice of Termination satisfying
                         the  requirements  of  paragraph  (iv) below  (and,  if
                         applicable,  paragraph (ii) above); and for purposes of
                         this Agreement,  no such purported termination shall be
                         effective.

         (iv)     Notice of Termination

               Any purported  termination  by the Company  pursuant to paragraph
               (i) or (ii)  above  or by you  pursuant  to  subparagraph  (B) of
               paragraph (i) or paragraph  (iii) above shall be  communicated by
               written  Notice of  Termination  to the other party  hereto.  For
               purposes of this Agreement,  a "Notice of Termination" shall mean
               a notice which shall indicate the specific termination  provision
               in this  Agreement  relied upon and shall set forth in reasonable
               detail the facts and circumstances claimed to provide a basis for
               termination of your employment under the provision so indicated.

         (v)      Date of Termination

                  "Date of  Termination"  shall mean (A) if your  employment  is
                  terminated  for  Disability,  thirty (30) days after Notice of
                  Termination  is  given  (provided  that  you  shall  not  have
                  returned  to the  performance  of your  duties on a  full-time
                  basis  during  such  thirty  (30)  day  period),  (B) if  your
                  employment is terminated pursuant to paragraph (ii) above, the
                  date specified in the Notice of  Termination,  and (C) if your
                  employment  is terminated  for any other  reason,  the date on
                  which a Notice  of  Termination  is  given;  provided  that if
                  within  thirty  (30) days after any Notice of  Termination  is
                  given the party receiving such Notice of Termination  notifies
                  the  other  party  that  a  dispute   exists   concerning  the
                  termination,  the  Date of  Termination  shall  be the date on
                  which the  dispute  is  finally  determined,  either by mutual
                  written  agreement  of the  parties,  by a  binding  and final
                  arbitration award or by a final judgment, order or decree of a
                  court of competent  jurisdiction entered upon such arbitration
                  award  (the time of appeal  therefrom  having  expired  and no
                  appeal having been perfected).

4.       Certain Benefits Upon Termination

          If, after a change in control of the Company shall have  occurred,  as
          defined in Section 2 above,  your  employment  by the Company shall be
          terminated  (A) by the  Company  other than for Cause,  Disability  or
          Retirement  or (B) by you for Good Reason,  then you shall be entitled
          to the benefits  provided  below:  

          (i)  The Company shall pay you your full base salary  through the Date
               of  Termination  at the  rate in  effect  at the time  Notice  of
               Termination is given plus credit for any vacation  earned but not
               taken and the amount, if any, of any bonus for a past fiscal year
               and the portion of the current  fiscal year ending on the Date of
               Termination  which has not yet been  awarded or paid to you under
               the Bonus Plans;

          (ii) In  lieu  of any  further  salary  payments  to you  for  periods
               subsequent to the Date of  Termination,  the Company shall pay as
               severance  pay to you on the  fifth  day  following  the  Date of
               Termination  a lump sum amount equal to two (2) times your annual
               base salary at the highest rate in effect  during the twelve (12)
               months immediately preceding the Date of Termination;

          (iii)The  Company  shall also pay to you all legal  fees and  expenses
               incurred by you as a result of such  termination  (including  all
               such  fees  and  expenses,  if any,  incurred  in  contesting  or
               disputing any such termination or in seeking to obtain or enforce
               any right or benefit provided by this Agreement);

          (iv) The Company  shall  maintain  in full force and effect,  for your
               continued  benefit  until the  earlier of (A) two (2) years after
               the Date of  Termination  or (B) your  commencement  of full time
               employment  with a new  employer,  all life  insurance,  medical,
               health  and  accident,   and   disability   plans,   programs  or
               arrangements   in  which  you  were   entitled   to   participate
               immediately prior to the Date of Termination,  provided that your
               continued  participation  is possible under the general terms and
               provisions  of such  plans and  programs.  In the event that your
               participation in any such plan or program is barred,  the Company
               shall arrange to provide you with benefits  substantially similar
               to those which you are  entitled to receive  under such plans and
               programs.  In  addition,  the  Company  shall  pay you a lump sum
               amount of equivalent  actuarial  value to the additional  pension
               benefit you would have earned under the Company's Pension Plan as
               in  effect  on  the  date  the  change  of  control  occurs,  but
               disregarding any Internal Revenue Code limitations  pertaining to
               qualified  plans,  if you  were  granted  at  the  time  of  your
               termination of employment  two (2)  additional  years of Credited
               Service and deemed 2 years older under the Plan.  In  determining
               the equivalent  actuarial value of the additional pension granted
               under this  Section 4, an interest  rate of 5% and the  mortality
               table under the Company's Pension Plan shall be used to determine
               the lump sum amount.

         You  shall not be  required  to  mitigate  the  amount  of any  payment
         provided  for  in  this  Section  4  by  seeking  other  employment  or
         otherwise,  nor shall the amount of any  payment  provided  for in this
         Section 4 be reduced by any compensation earned by you as the result of
         employment  by  another  employer  after  the  Date of  Termination  or
         otherwise.

5.       CERTAIN FURTHER PAYMENTS BY THE CORPORATION

          In the event  that any amount or benefit  paid or  distributed  to you
          pursuant  to this  Agreement,  taken  with  any  amounts  or  benefits
          otherwise  paid or distributed to you by the Company or any affiliated
          company  (collectively the "Covered Payments"),  are or become subject
          to the tax (the "Excise  Tax")  imposed under Section 4999 of the Code
          or any similar tax that may  hereafter be imposed,  the Company  shall
          pay to you at the time specified below an additional  amount (the "Tax
          Reimbursement  Payment") such that the net amount retained by you with
          respect to such Covered Payments, after deduction of any Excise Tax on
          the Covered  Payments and any Federal,  state and local income tax and
          Excise  Tax on the  Tax  Reimbursement  Payment  provided  for by this
          Section 5, but before deduction for any Federal, state or local income
          or employment tax withholding on such Covered Payments, shall be equal
          to the amount of the Covered Payments. 

     (i)  For purposes of determining  whether any of the Covered  Payments will
          be subject to the Excise Tax and the amount of such Excise Tax,

               (A)  Such  Covered   Payments   will  be  treated  as  "parachute
                    payments"  within the  meaning of Section  280G of the Code,
                    and all "parachute  payments" in excess of the "base amount"
                    (as defined under  Section  280G(b)(3) of the Code) shall be
                    treated as subject to the Excise Tax, unless,  and except to
                    the extent that, in the opinion of the Company's independent
                    certified public accountants appointed prior to the date the
                    Change of Control  occurs or tax  counsel  selected  by such
                    accountants (the  "Accountants"),  such Covered Payments (in
                    whole  or  in  part)  either  do  not  constitute  parachute
                    payments or represent  reasonable  compensation for services
                    actually rendered (within the meaning of Section  280G(b)(4)
                    of the  Code)  in  excess  of the  "base  amount",  or  such
                    parachute  payments are otherwise not subject to such Excise
                    Tax, and

               (B)  The value of any non-cash  benefits or any deferred  payment
                    or  benefit  shall  be  determined  by  the  Accountants  in
                    accordance with the principles of Section 280G of the Code.

          (ii) For purposes of determining  the amount of the Tax  Reimbursement
               Payment,  you shall be deemed to pay: 

               (A)  Federal income taxes at the highest applicable marginal rate
                    of Federal  income  taxation for the calendar  year in which
                    the Tax Reimbursement Payment is to be made,

                           and

               (B)  Any  applicable  state and local income taxes at the highest
                    applicable  marginal  rate of taxation for the calendar year
                    in which the Tax Reimbursement Payment is to be made, net of
                    the maximum reduction in Federal income taxes which could be
                    obtained  from the deduction of such state or local taxes if
                    paid in such year.

          (iii)In the event that the Excise Tax is subsequently determined to be
               less than the amount taken into account  hereunder in calculating
               the Tax  Reimbursement  Payment  made,  you  shall  repay  to the
               Company,  at the time that the  amount of such  reduction  in the
               Excise Tax is finally  determined,  the portion of such prior Tax
               Reimbursement  Payment  that  would  not have  been  paid if such
               Excise Tax had been  applied in  initially  calculating  such Tax
               Reimbursement  Payment,  plus  interest  on the  amount  of  such
               repayment at the rate  provided in Section  1274(b)(2)(B)  of the
               Code.

               In the event that the Excise  Tax is later  determined  to exceed
               the  amount  taken  into  account  hereunder  at the time the Tax
               Reimbursement Payment is made (including,  but not limited to, by
               reason of any payment the  existence or amount of which cannot be
               determined  at the time of the Tax  Reimbursement  Payment),  the
               Company shall make an  additional  Tax  Reimbursement  Payment in
               respect of such excess (plus any interest or penalty payment with
               respect  to such  excess)  at the time  that the  amount  of such
               excess is finally determined.

          (iv) The Tax  Reimbursement  Payment (or portion thereof) provided for
               in this  Section 5 shall be paid to you not  later  than ten (10)
               business  days  following  the payment of the  Covered  Payments;
               provided,  however,  that if the amount of such Tax Reimbursement
               Payment (or portion  thereof) cannot be finally  determined on or
               before the date on which payment is due, the Company shall pay to
               you by such  date  an  amount  estimated  in  good  faith  by the
               Accountants  to be the minimum  amount of such Tax  Reimbursement
               Payment  and shall pay the  remainder  of such Tax  Reimbursement
               Payment  (together  with interest at the rate provided in Section
               1274(b)(2)(B)  of the Code) as soon as the amount  thereof can be
               determined,  but in no event  later than 45  calendar  days after
               payment of the  related  Covered  Payment.  In the event that the
               amount of the estimated  Tax  Reimbursement  Payment  exceeds the
               amount  subsequently  determined  to have been due,  such  excess
               shall constitute a loan by the Corporation to you, payable on the
               fifth  business  day  after  written  demand by the  Company  for
               payment  (together  with interest at the rate provided in Section
               1274(b)(2)(B) of the Code).

6.       TERM OF AGREEMENT

         This Agreement  shall continue in effect so long as you are employed by
         the Company  provided  that, if a change of control of the Company,  as
         defined in Section 2 hereof,  shall  have  occurred  during the term of
         this Agreement, this Agreement shall continue in effect for a period of
         thirty-six (36) months beyond the month in which such change in control
         occurred.

7.       SUCCESSOR; BINDING AGREEMENT

          (i)  The  Company  will  require  any  successor  (whether  direct  or
               indirect, by purchase, merger, consolidation or otherwise) to all
               or  substantially  all  of  the  business  and/or  assets  of the
               Company, by agreement in form and substance  satisfactory to you,
               to expressly  assume and agree to perform  this  Agreement in the
               same  manner and to the same  extent  that the  Company  would be
               required  to perform it if no such  succession  had taken  place.
               Failure of the  Company  to obtain  such  agreement  prior to the
               effectiveness  of any such  succession  shall be a breach of this
               Agreement and shall entitle you to compensation  from the Company
               in the same amount and on the same terms as you would be entitled
               hereunder  if you  terminated  your  employment  for Good Reason,
               except that for purposes of implementing the foregoing,  the date
               on which any such  succession  becomes  effective shall be deemed
               the Date of  Termination.  As used in this  Agreement,  "Company"
               shall mean the Company as hereinbefore  defined and any successor
               to its business  and/or  assets as aforesaid  which  executes and
               delivers  the  agreement  provided for in this Section 7 or which
               otherwise  becomes bound by all the terms and  provisions of this
               Agreement by operation of law.

          (ii) This  Agreement  shall inure to the benefit of and be enforceable
               by   your   personal   or   legal   representatives,   executors,
               administrators,  successors,  heirs,  distributees,  devisees and
               legatees.  If you  should  die while any  amount  would  still be
               payable to you hereunder if you had  continued to live,  all such
               amounts,  unless  otherwise  provided  herein,  shall  be paid in
               accordance  with the  terms of this  Agreement  to your  devisee,
               legatee or other  designee or, if there be no such  designee,  to
               your estate.

8.       NOTICE

         For the purpose of this Agreement, notices and all other communications
         provided for in this Agreement  shall be in writing and shall be deemed
         to have been duly  given  when  delivered  or  mailed by  certified  or
         registered mail, return receipt requested,  postage prepaid,  addressed
         to the  respective  addresses  set  forth  on the  first  page  of this
         Agreement,  provided  that all notices to the Company shall be directed
         to the  attention  of the  President  of the Company with a copy to the
         Secretary of the Company,  or to such other address as either party may
         have furnished to the other in writing in accordance  herewith,  except
         that notice of change of address shall be effective only upon receipt.

9.       MISCELLANEOUS

          No provision of this  Agreement may be modified,  waived or discharged
          unless such waiver,  modification or discharge is agreed to in writing
          signed by you and such officer as may be  specifically  designated  by
          the Board of  Directors  of the  Company.  No  waiver by either  party
          hereto  at any time of any  breach by the other  party  hereto  of, or
          compliance  with,  any condition or provision of this  Agreement to be
          performed  by such other  party shall be deemed a waiver of similar or
          dissimilar  provisions  or  conditions  at the same or at any prior or
          subsequent time. No agreements or representations,  oral or otherwise,
          expressed or implied,  with respect to the subject  matter hereof have
          been made by either  party which are not  expressly  set forth in this
          Agreement;  provided, however, that this Agreement shall not supersede
          or in any way limit the  rights,  duties or  obligations  you may have
          under any other  written  agreement  with the Company.  The  validity,
          interpretation,  construction  and performance of this Agreement shall
          be governed by the laws of the State of New Jersey.

10.      VALIDITY

         The invalidity or  unenforceability  of any provision of this Agreement
         shall not affect the validity or  enforceability of any other provision
         of this Agreement, which shall remain in full force and effect.

11.      TAX WITHHOLDING

         The Company may withhold from any amounts  payable under this Agreement
         such federal,  state or local taxes as shall be required to be withheld
         pursuant to any applicable law or regulation.

12.      COUNTERPARTS

         This  Agreement  may be executed in one or more  counterparts,  each of
         which shall be deemed to be an original but all of which  together will
         constitute one and the same instrument.


13.      ARBITRATION

         Any dispute or  controversy  arising under or in  connection  with this
         Agreement  shall be settled  exclusively  by  arbitration in accordance
         with the rules of the American Arbitration  Association then in effect.
         Judgment may be entered on the  arbitrator's  award in any court having
         jurisdiction.

If this letter  correctly sets forth our agreement on the subject matter hereof,
kindly  sign and return to the Company the  enclosed  copy of this letter  which
will then constitute our agreement on this subject.

                                       Sincerely,

                                       THE COMPANY

                                       By /S/ ANTHONY D. ANDORA
                                       ------------------------
                                       Name:  Anthony D. Andora
                                       Title:  Chairman of the Board

Agreed to this     4TH       day
of       AUGUST       , 1997.

/S/PATRICIA ARNOLD
------------------
Patricia Arnold
Senior Vice President

Attest by:  /S/ BENJAMIN ROSENZWEIG
------------------------------------
              Benjamin Rosenzweig