UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                -----------------
                                    FORM 10-Q
                               ------------------


[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005

                                       or

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE ACT OF 1934
                   FOR THE TRANSITION PERIOD FROM____ TO ____

                         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                        (I.R.S. Employer
   incorporation or organization)                       Identification No.)

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

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

                                      None
-------------------------------------------------------------------------------
              (Former name, former address and former fiscal year,
                         if changed since last report)

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  report)  and (2) has been  subject  to such  filing
requirements for the past 90 days. Yes X No ___

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Act). Yes X No ___

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 number of outstanding shares of the Registrant's common stock, no
par value per share, as of September 30, 2005, was 19,162,015 shares.

<PAGE>
                   INTERCHANGE FINANCIAL SERVICES CORPORATION

INDEX

PART I            FINANCIAL INFORMATION
                                                                       Page No.
   Item 1   Financial Statements

            Unaudited Condensed Consolidated Balance Sheets as of
            September 30, 2005 and December 31, 2004..........................1

            Unaudited Condensed Consolidated Statements of Income for the
            three and nine-month periods ended September 30, 2005 and 2004....2

            Unaudited Condensed Consolidated Statements of
            Changes in Stockholders' Equity for the nine months
            ended September 30, 2005 and 2004.................................3

            Unaudited Condensed Consolidated Statements of Cash Flows for
            the nine months ended September 30, 2005 and 2004.................4

            Notes to Unaudited Condensed Consolidated Financial Statements....5

   Item 2   Management's Discussion and Analysis of Financial
            Condition and Results of Operations..............................19

   Item 3   Quantitative and Qualitative Disclosures About Market Risk.......34

   Item 4   Controls and Procedures..........................................38

PART II   OTHER INFORMATION

   Item 1   Legal Proceedings................................................40

   Item 2   Unregistered Sales of Equity Securities and Use of Proceeds......40

   Item 3   Defaults upon Senior Securities..................................40

   Item 4   Submission of Matters to a Vote of Security Holders..............40

   Item 5   Other Information................................................40

   Item 6   Exhibits.........................................................40

              Signatures.....................................................41

<PAGE>
                         PART I - FINANCIAL INFORMATION
<Table>
<Caption>
Item 1:  FINANCIAL STATEMENTS
Interchange Financial Services Corporation
-------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------
(dollars in thousands, except share data)
(unaudited)                                                                September 30, December 31,
                                                                                2005        2004
                                                                           ------------- ------------
<S>                                                                        <C>           <C>
Assets
Cash and due from banks                                                         $ 34,643     $ 33,108
Interest bearing demand deposits                                                       4            2
                                                                          -------------- ------------
Total cash and cash equivalents                                                   34,647       33,110
                                                                          -------------- ------------

Securities held-to-maturity at amortized cost (estimated fair value
     of $34,827 and $15,276 for September 30, 2005 and December 31, 2004,
     respectively)                                                                34,183       14,530
                                                                          -------------- ------------
Securities available-for-sale at estimated fair value (amortized cost of
     $327,095 and $375,241 for September 30, 2005 and
     December 31, 2004 respectively)                                             323,376      374,199
                                                                          -------------- ------------

Loans and leases (net of unearned income and deferred fees of $6,421 and
     $5,514 for September 30, 2005 and December 31, 2004, respectively)        1,049,332      934,181
Less:  Allowance for loan and lease losses                                        10,159        9,797
                                                                          -------------- ------------
Net loans and leases                                                           1,039,173      924,384
                                                                          -------------- ------------

Bank owned life insurance                                                         26,666       25,847
Premises and equipment, net                                                       16,301       17,713
Foreclosed assets and other repossessed assets                                       156          156
Goodwill                                                                          55,952       55,952
Intangible assets                                                                  3,282        3,660
Accrued interest receivable and other assets                                      18,204       14,590
                                                                          -------------- ------------
Total assets                                                                  $1,551,940   $1,464,141
                                                                          ============== ============

Liabilities
Deposits
    Non-interest bearing                                                        $239,796     $235,036
    Interest bearing                                                           1,026,332    1,011,102
                                                                          -------------- ------------
Total deposits                                                                 1,266,128    1,246,138
                                                                          -------------- ------------

Securities sold under agreements to repurchase                                     4,408        4,401
Short-term borrowings                                                             58,047       24,600
Long-term borrowings                                                              35,000       30,000
Subordinated debentures                                                           20,620            -
Accrued interest payable and other liabilities                                    10,260        8,847
                                                                          -------------- ------------
Total liabilities                                                              1,394,463    1,313,986
                                                                          -------------- ------------

Commitments and contingent liabilities

Stockholders' equity:
Common stock, without par value; 33,750,000 shares authorized;
     19,162,015 and 19,119,814 shares issued and outstanding for
     September 30, 2005 and December 31, 2004, respectively                        5,397        5,397
Capital surplus                                                                   73,531       73,320
Retained earnings                                                                 94,976       86,542
Accumulated other comprehensive loss, net of taxes of $1,472 and
     $408 for September 30, 2005 and December 31, 2004, respectively              (2,247)        (633)
                                                                          -------------- ------------
                                                                                 171,657      164,626
Less:  Treasury stock                                                             14,180       14,471
                                                                          -------------- ------------
Total stockholders' equity                                                       157,477      150,155
                                                                          -------------- ------------
Total liabilities and stockholders' equity                                    $1,551,940   $1,464,141
                                                                          ============== ============
-----------------------------------------------------------------------------------------------------
See notes to condensed 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>
                                      -1-
<PAGE>
<Table>
<Caption>
Interchange Financial Services Corporation
-----------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-----------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
(unaudited)                                                          Three Months Ended               Nine Months Ended
                                                                       September 30,                     September 30,
                                                              -------------------------------  ------------------------------
                                                                  2005             2004             2005            2004
                                                              --------------   --------------  ---------------- -------------
<S>                                                           <C>              <C>             <C>              <C>
Interest income
Interest on loans and leases                                       $ 17,097         $ 13,877          $ 47,907      $ 39,709
Interest on federal funds sold                                           17               33                18            70
Interest and dividends on securities
  Taxable interest income                                             2,342            2,630             7,464         7,841
  Interest income exempt from federal income taxes                      545              303             1,332           851
  Dividends                                                              59               33               196            74
                                                              --------------   --------------  ---------------- -------------
Total interest income                                                20,060           16,876            56,917        48,545
                                                              --------------   --------------  ---------------- -------------

Interest expense
Interest on deposits                                                  5,265            3,085            13,782         8,672
Interest on securities sold under agreements to repurchase               35               34                91           112
Interest on short-term borrowings                                       370               60               900           171
Interest on long-term borrowings and subordinated debentures            686              237             1,391           660
                                                              --------------   --------------  ---------------- -------------
Total interest expense                                                6,356            3,416            16,164         9,615
                                                              --------------   --------------  ---------------- -------------

Net interest income                                                  13,704           13,460            40,753        38,930
Provision for loan and lease losses                                     300              300               700           975
                                                              --------------   --------------  ---------------- -------------
Net interest income after provision for loan and lease losses        13,404           13,160            40,053        37,955
                                                              --------------   --------------  ---------------- -------------

Non-interest income
Service fees on deposit accounts                                        910            1,001             2,682         2,778
Net gain on sale of securities                                           77              163               394           982
Net gain on sale of loans and leases                                    498              273               877           406
Bank owned life insurance                                               270              245               819           732
Commissions on sale of annuities and mutual funds                       237              266               567           734
Other                                                                   685              929             2,008         2,452
                                                              --------------   --------------  ---------------- -------------
Total non-interest income                                             2,677            2,877             7,347         8,084
                                                              --------------   --------------  ---------------- -------------

Non-interest expense
Salaries and benefits                                                 5,236            5,029            15,145        14,541
Occupancy                                                             1,382            1,325             4,188         3,977
Furniture and equipment                                                 309              327               940           987
Advertising and promotion                                               242              346             1,060         1,209
Amortization of intangible assets                                       126              126               378           378
Other                                                                 1,952            2,114             5,870         5,890
                                                              --------------   --------------  ---------------- -------------
Total non-interest expense                                            9,247            9,267            27,581        26,982
                                                              --------------   --------------  ---------------- -------------

Income before income taxes                                            6,834            6,770            19,819        19,057
Income taxes                                                          2,158            2,109             6,208         6,055
                                                              --------------   --------------  ---------------- -------------
Net income                                                          $ 4,676          $ 4,661          $ 13,611      $ 13,002
                                                              ==============   ==============  ================ =============

Basic earnings per common share                                       $0.24            $0.24             $0.71         $0.68
                                                                      =====            =====             =====         =====
Diluted earnings per common share                                     $0.24            $0.24             $0.69         $0.67
                                                                      =====            =====             =====         =====
------------------------------------------------------------------------------------------------------------------------------
See notes to condensed consolidated financial statements.

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.
</Table>
                                      -2-
<PAGE>
<Table>
<Caption>
Interchange Financial Services Corporation
----------------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30
----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
(unaudited)
                                                                           Accumulated
                                                                             Other
                                                   Comprehensive Retained Comprehensive  Common   Capital   Treasury
                                                      Income     Earnings     Income      Stock   Surplus    Stock      Total
                                                   ------------- -------- ------------- -------- --------- ---------- ----------
<S>                                                <C>           <C>      <C>           <C>      <C>       <C>        <C>
Balance at January 1, 2004                                       $ 74,710       $ 2,434  $ 5,397  $ 73,231  $ (12,579) $ 143,193
Comprehensive income
     Net Income                                         $ 13,002   13,002                                                 13,002
     Other comprehensive income, net of taxes
        Unrealized net losses on AFS debt securities      (1,087)
        Less: net gains on disposition of securities        (729)
                                                   -------------
     Other comprehensive income, net of taxes             (1,816)                (1,816)                                  (1,816)
                                                   -------------
Comprehensive income                                    $ 11,186
                                                   =============

Dividends on common stock                                          (4,788)                                                (4,788)
Issued 11,690 shares of common stock in
     connection with Executive Compensation Plan                                                       103        102        205
Exercised 20,115 option shares                                                                          (8)       143        135
Purchased 127,179 shares of common stock                                                                       (2,154)    (2,154)
                                                                 -------- ------------- -------- --------- ---------- ----------
 Balance at September 30, 2004                                     82,924           618    5,397    73,326    (14,488)   147,777
Comprehensive income
     Net Income                                          $ 5,212    5,212                                                  5,212
     Other comprehensive losses, net of taxes
        Unrealized net losses on AFS debt securities        (925)
        Less: net gains on disposition of securities        (331)
        Minimum pension liability                              5
                                                   -------------
     Other comprehensive losses, net of taxes             (1,251)                 (1,251)                                 (1,251)
                                                   -------------
Comprehensive income                                     $ 3,961
                                                   =============

Dividends on common stock                                          (1,594)                                                (1,594)
Exercised 1,950 option shares                                                                           (6)        17         11
                                                                 -------- ------------- -------- --------- ---------- -----------
Balance at December 31, 2004                                       86,542          (633)   5,397    73,320    (14,471)   150,155

Comprehensive income
     Net Income                                         $ 13,611   13,611                                                 13,611
     Other comprehensive losses, net of taxes
        Unealized losses on AFS debt securities           (1,378)
        Less: net gains on disposition of securities        (236)
                                                   -------------
    Other comprehensive losses, net of taxes              (1,614)                (1,614)                                  (1,614)
                                                   -------------
Comprehensive income                                    $ 11,997
                                                   =============

Dividends on common stock                                          (5,170)                                                (5,170)
Issued 18,772 shares of common stock in connection
     with Executive Compensation Plan                                                                  173        162        335
Exercised 30,585 option shares                                                                          38        241        279
Purchased 6,455 shares of common stock                                                                           (112)      (112)
Payout of fractional shares resulting from the
     three-for-two stock split declared
     January 18, 2005 and paid on February 18, 2005                    (7)                                                    (7)

                                                                 -------- ------------- -------- --------- ---------- ----------
Balance at September 30, 2005                                    $ 94,976      $ (2,247) $ 5,397  $ 73,531  $ (14,180) $ 157,477
                                                                 ======== ============= ======== ========= ========== ==========
----------------------------------------------------------------------------------------------------------------------------------
See notes to condensed 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>
                                      -3-
<PAGE>
<Table>
<Caption>
INTERCHANGE FINANCIAL SERVICES CORPORATION
--------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30,
--------------------------------------------------------------------------------------
(in thousands)
(unaudited)
                                                                                    2005        2004
                                                                                ------------- ----------
<S>                                                                             <C>           <C>
Cash flows from operating activities
Net income                                                                          $ 13,611   $ 13,002
Adjustments to reconcile net income to net cash provided by operating activities
  Depreciation and amortization                                                        1,495      1,438
  Amortization of securities premiums                                                  3,043      4,121
  Accretion of securities discounts                                                     (175)      (200)
  Amortization of loan premiums                                                           67         36
  Amortization of premiums in connection with acquisition                                518        877
  Provision for loan and lease losses                                                    700        975
  Increase in cash surrender value of Bank Owned Life Insurance                         (819)      (732)
  Net gain on sale of securities                                                        (394)      (982)
  Origination of loans held for sale                                                 (22,766)    (6,077)
  Sale of loans held for sale                                                         23,584      6,433
  Net gain on sale of  loans and leases                                                 (877)      (406)
  Net gain on sale of fixed assets                                                         -        (16)
  Write off of foreclosed and repossessed assets                                          13          -
  Net gain on sale of foreclosed and repossessed assets                                    -        (14)
Decrease (increase) in operating assets
  Accrued interest receivable                                                           (673)       380
  Other Assets                                                                        (2,070)    (3,157)
 Increase in operating liabilities
 Accrued interest payable                                                                528         61
 Other                                                                                   885        554
                                                                                ------------- ----------
Cash provided by operating activities                                                 16,670     16,293
                                                                                ------------- ----------

Cash flows from investing activities
(Payments for) proceeds from
  Net originations of loans and leases                                              (112,778)   (92,659)
  Purchase of loans and leases                                                        (4,678)   (40,459)
  Sale of loans and leases                                                             1,792      1,193
  Purchase of securities available-for-sale                                         (136,466)   (71,960)
  Maturities of securities available-for-sale                                         92,475     79,126
  Sale of securities available-for-sale                                               89,926     63,612
  Maturities of securities held-to-maturity                                            1,705      9,059
  Sale of securities held-to-maturity                                                    270          -
  Purchase of securities held-to-maturity                                            (21,891)    (6,820)
  Sale of foreclosed and other repossessed assets                                          -         77
  Purchase of fixed assets                                                            (1,054)    (1,591)
  Sale of fixed assets                                                                 1,171      2,766
                                                                                ------------- ----------
Cash used in investing activities                                                    (89,528)   (57,656)
                                                                                ------------- ----------

Cash flows from financing activities
Proceeds from (payments for)
  Net change in deposits                                                              19,996     88,532
  Securities sold under agreements to repurchase and other borrowings                801,865    319,132
  Retirement of securities sold under agreement to repurchase and
         other borrowings                                                           (763,411)  (337,485)
  Issuance of long term subordinated debentures                                       20,620          -
  Dividends                                                                           (5,170)    (4,788)
  Common stock issued                                                                    335        205
  Payout of fractional shares resulting from 3-for-2 stock split                          (7)         -
  Treasury stock                                                                        (112)    (2,154)
  Exercise of option shares                                                              279        135
                                                                                ------------- ----------
Cash provided by financing activities                                                 74,395     63,577
                                                                                ------------- ----------

Increase  in cash and cash equivalents                                                 1,537     22,214
Cash and cash equivalents, beginning of period                                        33,110     31,435
                                                                                ------------- ----------
Cash and cash equivalents, end of period                                            $ 34,647   $ 53,649
                                                                                ============= ==========

Supplemental disclosure of cash flow information:
Cash paid for:
  Interest                                                                          $ 15,883     $6,275
  Income taxes                                                                         7,217      4,100

Supplemental disclosure of non-cash investing and financing activities:
  Loans transferred to foreclosed and repossessed assets                                  13         34
--------------------------------------------------------------------------------------------------------
See notes to condensed consolidated financial statements.
</Table>
                                      -4-
<PAGE>

         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
          FOR THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2005

1.   Basis of Presentation

     The accompanying  unaudited  condensed  consolidated  financial  statements
include the accounts of Interchange  Financial Services  Corporation and certain
of its wholly  owned  subsidiaries  (on a  consolidated  basis,  the  "Company")
including its principal operating subsidiary,  Interchange Bank (the "Bank") and
Clover  Leaf  Mortgage  Company,  and have  been  prepared  in  conformity  with
accounting  principles  generally  accepted  in the  United  States  of  America
("GAAP") and in accordance  with the rules and regulations of the Securities and
Exchange  Commission.  The Company  has two wholly  owned  trusts  which are not
consolidated,  see  Note  12  "Subordinated  Debentures"  for  a  more  detailed
discussion  of these  subsidiaries.  Pursuant  to such  rules  and  regulations,
certain  information  or  footnotes  necessary  for a complete  presentation  of
financial  condition,  results of operations  and cash flows in conformity  with
GAAP have been  condensed or omitted.  These  condensed  consolidated  financial
statements  should  be read  in  conjunction  with  the  consolidated  financial
statements and schedules  thereto  included in the annual report on Form 10-K of
the Company for the year ended December 31, 2004.

     The  condensed  consolidated  financial  data for the three and nine months
ended  September  30,  2005 and 2004,  are  unaudited  but  reflect  adjustments
consisting  of only normal  recurring  adjustments  which are, in the opinion of
management,  considered  necessary  for a fair  presentation  of  the  financial
condition  and results of  operations  for the interim  periods.  The results of
operations for interim periods are not  necessarily  indicative of results to be
expected for any other period or the full year.

Use of estimates:  The  preparation of 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 condensed  consolidated  financial statements
and the reported  amount of revenues and expenses  during the reporting  period.
Actual results could differ from those estimates. The most significant estimates
pertain to the allowance for loan and lease losses,  the fair value of financial
instruments, goodwill, intangibles, taxes and retirement benefits.

New  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

                                      -5-

<PAGE>

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 condensed
consolidated financial statements.

     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 condensed 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 the June 29, 2005 FASB Board meeting,  the Board agreed to issue FSP FAS
115-1,  "The Meaning of  Other-Than-Temporary  Impairment and Its Application to
Certain  Investments"  which will replace the guidance  previously  set forth in
EITF 03-1, "The Meaning of  Other-Than-Temporary  Impairment and Its Application
to Certain Investments". This FSP effectively eliminates the accounting guidance
provided in EITF 03-1 in favor of existing impairment recognition guidance under
SFAS 115, Staff  Accounting  Bulletin  ("SAB") 59,  Accounting  Principles Board
("APB")  Opinion  No. 18,  and EITF Topic  D-44.  During the  Board's  September
meetings the Board determined that the FSP will retain the paragraph  pertaining
to the  accounting  for debt  securities  subsequent to an other-than  temporary
impairment,  but add a footnote clarifying that this FSP does not address when a
security should be placed on a nonaccrual  status. The effective date of the FSP
is for periods  beginning after December 15, 2005, but is not expected to have a
material impact on our condensed consolidated financial statements.  Prospective
transition  will be provided for debt  securities  subsequent  to an  other-than
-temporary impairment.

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

                                      -6-

<PAGE>

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.

     On April 15, 2005, the Securities and Exchange  Commission ("SEC") issued a
ruling amending the date for compliance with SFAS No. 123(R).  Registrants  will
be  required  to adopt FAS  123(R)  beginning  with the first  interim or annual
reporting  period of the  registrant's  first fiscal year  beginning on or after
September 15, 2005. For the Company,  this ruling will require  adoption of SFAS
No.  123(R) by no later than  January 1, 2006.  The Company is in the process of
evaluating and determining which of the alternative methodologies under SFAS No.
123(R) will be utilized.

     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  following  table  illustrates  the effect on net  income  and  diluted
earnings per common share if the Company had applied the fair value  recognition
provisions of SFAS No. 123, to stock-based  compensation  for the three and nine
months ended September 30, 2005 and 2004: (in thousands,  except per share data)
(unaudited)

                                      -7-

<PAGE>

<Table>
<Caption>
                                              --------------------------------------   ------------------------------------
                                                   For the three months ended               For the nine months ended
                                                        September 30,                              September 30,
                                              --------------------------------------   ------------------------------------
                                                    2005                 2004               2005                2004
                                              -----------------     ----------------   ----------------    ----------------
<S>                                           <C>                   <C>                <C>                 <C>
Net Income
      As reported                                       $4,676               $4,661            $13,611             $13,002

      Less: Total stock-based
      compensation expense determined
      under the fair value method for all
      rewards, net of related tax effects                  260                  218                782                 619
                                              -----------------     ----------------   ----------------    ----------------
      Pro-forma                                         $4,416               $4,443            $12,829             $12,383
                                              =================     ================   ================    ================

Earnings per share:
Basic:
     As reported                                          0.24                 0.24               0.71                0.68
     Pro forma                                            0.23                 0.23               0.67                0.65
Diluted:
     As reported                                          0.24                 0.24               0.69                0.67
     Pro forma                                            0.23                 0.23               0.66                0.64
</Table>

     The fair value of each option grant is estimated on the date of grant using
the   Black-Scholes   option-pricing   model.  The  following   weighted-average
assumptions  were used for option  grants  issued  during the nine months  ended
September 30, 2005 and 2004,  respectively:  dividend  yield of 2.00% and 2.01%;
expected  volatility of 23.07% and 23.05%;  risk-free interest rate of 3.87% and
3.86%; and expected lives of approximately 7 years.

2.   Earnings Per Common Share

     Basic  earnings  per common  share  represent  income  available  to common
stockholders divided by the weighted-average number of common shares outstanding
during the period.  Diluted earnings per common share reflect  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 Company
relate  solely  to  outstanding  stock  options,  and are  determined  using the
treasury  stock  method.  At September  30, 2005 and 2004 the  weighted  average
diluted shares  outstanding for the three months were approximately 19.6 million
and  19.5  million,  respectively.  For  each of the nine  month  periods  ended
September 30, 2005 and 2004, the weighted  average  diluted  shares  outstanding
were approximately 19.6 million.

                                      -8-

<PAGE>

3.   Commitments and Contingent Liabilities

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

Commitments to Extend Credit
     At September  30, 2005,  the Company had  commitments  to extend  credit of
approximately  $268.1 million,  of which  approximately  $3.8 million represents
standby letters of credit.

4.   Goodwill and Other Intangibles

     Goodwill is not amortized to expense,  but rather is tested for  impairment
periodically.  Goodwill is tested for impairment at least annually in accordance
with the  provisions of SFAS No. 142. There have been no events that have caused
the Company to  consider  the need to test  goodwill  for  impairment  since the
Company's last assessment.

     Other  intangible  assets  are  amortized  to expense  using  straight-line
methods  over  their  respective  estimated  useful  lives.  At least  annually,
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.  Impairment,  if any, is measured on a discounted
future cash flow basis.  Net  intangible  assets are as follows:  (in thousands)
(unaudited)

                                        ----------------    -----------------
                                          September 30,        December 31,
                                              2005                 2004
                                        ----------------    -----------------

Intangible assets                               $ 4,595              $ 4,595
Accumulated amortization                         (1,313)                (935)
                                        ----------------    -----------------
  Net intangible assets                         $ 3,282              $ 3,660
                                        ================    =================

     Intangible assets are a result of acquisitions and are primarily related to
core deposit  intangibles  ("CDI") which have an estimated life of 10 years. For
each of the three and nine month periods ended  September 30, 2005 and 2004, the
CDI amortized were $107 thousand and $322 thousand,  respectively.  The CDI will
be periodically reviewed for impairment.

     At September 30, 2005 the scheduled  amortization of the intangible  assets
is as follows (in thousands) (unaudited):

                                      -9-

<PAGE>

2006                                            $   436
2007                                                430
2008                                                430
2009                                                430
2010                                                430
Thereafter                                          999
                                        ----------------
Total                                           $ 3,155
                                        ================

5.   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.

6.   Cash Dividend

     On October  18,  2005,  the Company  declared a cash  dividend of $0.09 per
share payable on November 18, 2005, to holders of record as of October 31, 2005.

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

     Securities  held-to-maturity  ("HTM")  and  securities   available-for-sale
("AFS") consist of the following: (in thousands) (unaudited)

                                      -10-

<PAGE>
<Table>
<Caption>
                                                                    --------------------------------------------------------
                                                                                     September 30, 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                                       $ 3,327         $ 30           $ 1         $ 3,356
   Obligations of states & political subdivisions                         30,856          616             1          31,471
                                                                    -------------  -----------  ------------  --------------
                                                                        $ 34,183        $ 646           $ 2        $ 34,827
                                                                    =============  ===========  ============  ==============
Securities available-for-sale
   Government-Sponsored Enterprises:
        Mortgage-backed securities                                     $ 110,110         $ 65       $ 1,562       $ 108,613
        Other debt                                                       171,372            -         2,757         168,615
   Obligations of states & political subdivisions                         39,775          580            45          40,310
   Equity securities                                                       5,838            -             -           5,838
                                                                    -------------  -----------  ------------  --------------
                                                                         327,095          645         4,364         323,376
                                                                    -------------  -----------  ------------  --------------

     Total securities                                                   $361,278      $ 1,291       $ 4,366       $ 358,203
                                                                    =============  ===========  ============  ==============

                                                                    --------------------------------------------------------
                                                                                       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          793           599         121,392
        Other debt                                                       211,856          344         2,352         209,848
   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>

     At September 30, 2005,  the  contractual  maturities of securities  HTM and
securities AFS are as follows: (in thousands) (unaudited)

<Table>
<Caption>
                                                           Securities                  Securities
                                                        Held-to-Maturity            Available-for-Sale
                                                  ----------------------------  -------------------------
                                                                  Estimated                   Estimated
                                                   Amortized         Fair       Amortized       Fair
                                                      Cost          Value          Cost         Value
                                                  -------------  -------------  -----------  ------------
<S>                                               <C>            <C>            <C>          <C>
Within 1 year                                         $ 14,476       $ 14,498    $ 131,423     $ 130,256
After 1 but within 5 years                               4,380          4,553      174,252       171,181
After 5 but within 10 years                             11,864         12,237        5,593         5,743
After 10 years                                           3,463          3,539        9,989        10,358
Equity securities                                            -              -        5,838         5,838
                                                  -------------  -------------  -----------  ------------
                                Total                 $ 34,183       $ 34,827    $ 327,095     $ 323,376
                                                  =============  =============  ===========  ============
</Table>

     Proceeds  from the sale of  securities  AFS  amounted to $89.9  million and
$63.6  million  for  the  nine  months  ended   September  30,  2005  and  2004,
respectively,  which  resulted in gross realized gains of $747 thousand and $1.1
million for those periods, respectively.  Gross realized losses from the sale of
securities  AFS  amounted to $361  thousand and $94 thousand for the nine months
ended  September  30,  2005 and

                                      -11-

<PAGE>

2004,  respectively.  Proceeds from the sale of securities  HTM amounted to $270
thousand  for the nine  months  ended  September  30,  2005,  which  resulted in
realized gains of $8 thousand.  The securities  had  significantly  paid down to
less  than  85% of the  original  purchased  balance  through  normal  principal
amortization and prepayments. There were no sales of securities HTM for the nine
months ended September 30, 2004.  These amounts are included in net gain on sale
of securities in the unaudited condensed consolidated statements of income.

     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).  Based  upon the  Company's
evaluation  of the  securities  portfolios  no other than  temporary  impairment
charge was necessary at September 30, 2005 and 2004.

     The following table  summarizes all securities that have an unrealized loss
and the duration of the  unrealized  loss at September 30, 2005:  (in thousands)
(unaudited)

<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                   $ 60,784        $ 834     $ 38,309        $ 728      $ 99,093      $ 1,562
     Other debt                                      9,488          182      159,128        2,575       168,616        2,757
Obligations of states & political subdivisions       2,265           32        1,832           13         4,097           45
                                               ------------ ------------  -----------  -----------  ------------ ------------
                                                  $ 72,537      $ 1,048    $ 199,269      $ 3,316     $ 271,806      $ 4,364
                                               ============ ============  ===========  ===========  ============ ============

Securities held-to-maturity
Government-Sponsored Enterprises:
     Mortgage-backed securities                      $ 153          $ 1         $ 28          $ -         $ 181          $ 1
Obligations of states & political subdivisions         362            1            -            -           362            1
                                               ------------ ------------  -----------  -----------  ------------ ------------
                                                     $ 515          $ 2         $ 28          $ -         $ 543          $ 2
                                               ============ ============  ===========  ===========  ============ ============
</Table>

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

                                      -12-

<PAGE>

<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>

     Securities  with  carrying  amounts of $137.1  million and $62.2 million at
September 30, 2005 and December 31, 2004, respectively,  were pledged for public
deposits,  Federal Home Loan Bank  advances,  securities  sold under  repurchase
agreements and other purposes required by law.

8.   Loans

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

                                     -------------  ------------
                                     September 30,  December 31,
                                        2005           2004
                                     -------------  ------------
                                     (unaudited)
Real estate
  Residential                          $286,578      $292,406
  Commercial                            431,372       375,985
  Construction                           90,575        51,162

Commercial
  Commercial and financial              213,481       186,386
  Lease financing                        22,853        23,535

Consumer
  Lease financing                           113           680
  Installment                             4,360         4,027
                                      ---------      --------
                                      1,049,332       934,181
Allowance for loan and lease losses     (10,159)       (9,797)
                                      ---------      --------
Net loans and leases                 $1,039,173      $924,384
                                     ==========      ========

     Loans are net of unearned income and deferred fees of $6.5 million and $5.5
million  for the  periods  ended  September  30,  2005 and  December  31,  2004,
respectively.  Loans held for sale amounted to $2.3 million and $650 thousand at
September  30, 2005 and December 31,  2004,  respectively,  which are carried at
lower of cost or market.

Nonperforming Loans
     Nonperforming  loans  include  loans that are accounted for on a nonaccrual
basis. Nonperforming loans are as follows: (in thousands)

                                      -13-

<PAGE>

                           -------------   ------------
                           September 30,   December 31,
                               2005            2004
                           -------------   ------------
                            (unaudited)

Nonaccrual loans
 Residential real estate        $ 818         $ 1,660
 Commercial real estate           185           2,320
 Commercial and financial       3,392           2,981
 Commercial lease financing     1,411           1,836
 Consumer                         111             336
                            ----------       ---------
                               $5,917          $9,133
                            ==========       =========

9.  Allowance for Loan and Lease Losses

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

<Table>
<Caption>
                                                       ---------------------- -----------------------
                                                             September 30,          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                  $ 4,637     $ 1,023        $2,981      $420
                Commercial real estate                        190           5         2,320        98
                Residential real estate                       594          88           822       123
         Without a related allowance for loan losses            -           -             -         -
                                                       ---------- ----------- ------------- ---------
                                                           $5,421     $ 1,115        $6,123      $641
                                                       ========== =========== ============= =========

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

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

<Table>
<Caption>
                                                  -----------------------------------------------
                                                    Three months ended      Nine months ended
                                                       September 30,          September 30,
                                                  ---------------------- ------------------------
                                                     2005        2004       2005         2004
                                                  ---------- ----------- ----------- ------------
<S>                                               <C>        <C>         <C>         <C>
Balance at beginning of period                       $9,945      $9,788      $9,797       $9,641
Additions (deductions)
     Provision charged to operations                    300         300         700          975
     Recoveries on loans previously charged-off          18          16         101           76
     Loans charged-off                                 (104)       (307)       (439)        (895)
                                                  ---------- ----------- ----------- ------------
Balance at end of period                            $10,159      $9,797     $10,159       $9,797
                                                  ========== =========== =========== ============
</Table>

                                      -14-

<PAGE>

10.  Other Non-interest Expense

     Expenses  included  in  other  non-interest  expense  are as  follows:  (in
thousands) (unaudited)

<Table>
<Caption>
                                            ---------------------------   ---------------------------
                                                 Three months ended             Nine months ended
                                                    September 30,                  September 30,
                                            ---------------------------   ---------------------------
                                               2005           2004            2005          2004
                                            ------------  -------------   -------------  ------------
<S>                                         <C>           <C>             <C>            <C>
Professional fees                                 $ 406          $ 385         $ 1,184       $ 1,062
Legal fees                                          254            310             695           760
Directors' fees, travel and retirement              230            198             652           609
Data processing                                     271            284             800           848
All other                                           791            894           2,539         2,472
                                            ------------  -------------   -------------  ------------

   Total                                        $ 1,952        $ 2,071         $ 5,870       $ 5,751
                                            ============  =============   =============  ============
</Table>

11. Long-term Borrowings

     Long-term borrowings consist of the following FHLB advances: (in thousands)

        Maturity                        September 30,        December 31,
          Date           Rate                2005                2004
--------------------- ------------     -----------------   -----------------
                                         (unaudited)
January 2006                 2.09 %                   -            $ 10,000

January 2007 (a)             4.22              $ 10,000              10,000

January 2007                 2.69                10,000              10,000

January 2010 (b)             3.66                15,000                   -
                      ------------     -----------------   -----------------
                             3.52 %            $ 35,000            $ 30,000
                      ============     =================   =================

(a)  The FHLB has an option to call this advance on a quarterly basis if
the 3-month LIBOR resets above 7.50%.

(b)  The FHLB has an option to call this advance in January 2008.

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),

                                      -15-
<PAGE>

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

13.  Benefit Plans

     In 1993, the Bank  established a  non-contributory  defined benefit pension
plan covering all eligible  employees  (the "Pension  Plan").  In 1994, the Bank
established  a   supplemental   plan  covering  all  eligible   employees   (the
"Supplemental  Plan") that provides for income that would have been paid out but
for the limitation  under the qualified  Pension Plan. Also in 1994, the Company
established  a  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").

     The following table shows the aggregated components of net periodic benefit
costs for the periods noted: (in thousands) (unaudited)

<Table>
<Caption>
                                     -----------------------------  -----------------------------
                                          Three Months Ended             Nine Months Ended
                                             September 30,                  September 30,
                                     -----------------------------  -----------------------------
                                         2005            2004           2005            2004
                                     -------------   -------------  -------------   -------------
<S>                                  <C>             <C>            <C>             <C>
Service cost                                $ 198           $ 166          $ 594           $ 499
Interest cost                                 102              95            306             286
Expected return on plan assets                (56)            (39)          (168)           (118)
Amortization of prior service cost              1               1              3               4
Amortization of net (gain) loss                 1               -              3               -
                                     -------------   -------------  -------------   -------------
Net periodic benefit cost                   $ 246           $ 223          $ 738           $ 671
                                     =============   =============  =============   =============
</Table>

     During 2005, the Bank contributed approximately $43 thousand to the Pension
Plan.

                                      -16-
<PAGE>

14.  Subsequent Events

     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 September 30, 2005 Franklin had approximately, $87.5 million in total assets,
$76.3 million in total loans and $75.4 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 Interchange'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  will be accounted for as a purchase and the cost in excess
of the net assets acquired will be allocated first to net identified intangibles
and then to goodwill.

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

     During  October the Board  authorized  the  accelerated  vesting of 564,528
stock options,  representing all unvested stock options on such date. The number
of shares and exercise  prices of the options  subject to the  acceleration  are
unchanged. The remaining terms for each of the options granted remain the same.

     On  October  27,  2005,  the  Board of  Directors  of the  Bank,  adopted a
resolution  to "freeze"  all future  benefit  accruals  under 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
anticipates   recognizing  a  one-time  gain  of  approximately  $1  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.  In 2006 it is anticipated that the freezing of the benefit accruals
will result in annual service cost savings of approximately $500 thousand.

     The Board also  authorized  the  "freeze" of all future  benefit  accruals,
Directors' Plan and the defined benefit  portion of the  Supplemental  Plan. The
anticipated  annual service cost savings of freezing both plans is approximately
$100 thousand.

                                      -17-

<PAGE>

     In  addition,  the Board  approved  amending the  Interchange  Bank Capital
Investment  Plan,  a 401(k) plan  available to all  employees  who are age 21 or
older. The amendment to the 401(k) plan will increase the fixed  contribution to
employees to 2% from 1%. The fixed contribution is made in the form of shares of
Company stock based upon an employee's  base salary.  In 2006 it is  anticipated
that  the  annual  cost  of the  increase  in the  fixed  contribution  will  be
approximately $140 thousand. The estimated savings for the freezing of the plans
and cost for the  increase in fixed  contributions  is only an  estimate  and is
subject to change  based upon a number of factors  including  but not limited to
the number of employees, base salaries and actuarial assumptions.

                                      -18-

<PAGE>

Item 2:   MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General

     The  following  discussion  is an  analysis of the  condensed  consolidated
financial  condition  and results of operations of the Company for the three and
nine month  periods  ended  September  30, 2005 and 2004,  and should be read in
conjunction  with the  condensed  consolidated  financial  statements  and notes
thereto included in Item 1 hereof. In addition,  you should read this section in
conjunction with Management's  Discussion and Analysis and Results of Operations
included in the Company's 2004 Annual Report on Form 10-K.

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) adverse changes in  Government-Sponsored  Enterprises (the "GSE") status or
financial  condition  impacting the GSE's  guarantees or ability to pay or issue
debt;  (iii) changes in the interest rate yield curve such as flat,  inverted or
steep yield curves,  or interest rate environment  which impact interest margins
and may impact prepayments on the  mortgage-backed  securities  portfolio;  (iv)
changes in consumer  spending,  borrowing and saving habits;  (v)  technological
changes,  (vi)  deterioration in general economic  conditions,  internationally,
nationally,  or in  the  State  of  New  Jersey;  (vii)  disruptions  caused  by
terrorism,  such as the events of September 11, 2001, or military actions in the
Middle East or other areas;  (viii)  legislation or regulatory  requirements  or
changes  adversely  affecting the business of the Company;  and (ix) 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 are  not  promising  to make  any  public  announcement  when we

                                      -19-

<PAGE>

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.

Company

     The Company is a bank holding company  headquartered in Bergen County,  New
Jersey. The Company's principal operating  subsidiary is Interchange Bank, a New
Jersey-chartered commercial bank. In addition to the Bank, the Company has three
other wholly owned direct  subsidiaries:  Clover Leaf  Mortgage  Company,  a New
Jersey corporation, 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  Bank  has  five  direct
subsidiaries:   Clover  Leaf  Investment  Corporation,   an  investment  company
operating pursuant to New Jersey law; Clover Leaf Insurance Agency,  Inc., a New
Jersey corporation engaged in the sale of tax-deferred  annuities and insurance;
Clover  Leaf  Management  Realty  Corporation,  a Real Estate  Investment  Trust
("REIT"),  which manages certain real estate assets of the Company;  Bridge View
Investment  Company, an investment company operating pursuant to New Jersey law;
and Interchange Capital Company,  L.L.C. ("ICC"), a New Jersey limited liability
company  which  engages  in  equipment  lease  financing.   All  of  the  Bank's
subsidiaries are 100% owned by the Bank, except for the REIT, which is 99% owned
by the Bank.  Bridge View  Investment  Company has one wholly owned  subsidiary,
Bridge View Delaware,  Inc.  ("BVDI").  BVDI is an investment  company operating
pursuant to Delaware law.

     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 September 30, 2005 Franklin had approximately, $87.5 million in total assets,
$76.3 million in total loans and $75.4 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 Interchange'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  will be accounted for as a purchase and the cost in excess
of the net assets acquired will be allocated first to net identified intangibles
and then to goodwill.

     The  Company's  acquisition  of Franklin  is  intended  to further  enhance
Interchange's  presence in northern New Jersey.  As a result of the  acquisiton,
the Bank will now operate 30 banking  offices and will

                                      -20-

<PAGE>

have  approximately  $1.6  billion in assets.  The  acquisition  of Franklin was
accomplished through a merger of Franklin with and into the Bank, a wholly-owned
subsidiary of Interchange.

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 our 2004 Annual Report on Form 10-K, Note 1 "Nature of Business and
Summary  of  Significant  Accounting  Policies"  to our  consolidated  financial
statements and in  Management's  Discussion and Analysis of Financial  Condition
and Results of Operations ("MDA"): "Critical Accounting Policies and Judgments."
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
("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.
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 $10.2  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 "Loan
Quality" and  "Allowance  for Loan and Lease Losses"  sections of the MDA, along
with Note 1 "Nature of Business and Summary of Significant Accounting Policies";
Note 6  "Allowance  for Loan and Lease  Losses";  and Note 12  "Commitments  and
Contingent  Liabilities" to the  Consolidated  Financial  Statements in our 2004
Annual Report on Form 10-K.

                                      -21-

<PAGE>

Business  Combinations:  Business  combinations  are  accounted  for  using  the
purchase method of accounting, which requires that the assets and liabilities of
the companies acquired are recorded at their estimated fair value at the date of
acquisition  and included in the results of  operations  of the Company 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.  Any  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.

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  HTM and are  carried  at  cost,  adjusted  for the  amortization  of
premiums and  accretion of discounts.  All other  securities,  including  equity
securities,  are classified as securities 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 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.

     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).

                                      -22-

<PAGE>

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.

                                      -23-

<PAGE>

                 THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
                              RESULTS OF OPERATIONS

Summary

     For the third quarter of 2005,  the Company  reported  earnings per diluted
common  share of $0.24,  as compared  to $0.24 for the same period in 2004.  Net
income for the three  months ended  September  30, 2005 was  approximately  $4.7
million.  The earnings  were  primarily  affected by an increase in net interest
income of 1.9%  being  offset by a decline in service  charges on  deposits  and
gains on sales of securities.

     The Company's  return on average  assets  decreased to 1.22% as compared to
1.31% for the three months ended September 30, 2005 and 2004,  respectively.  In
addition,  the Company's  return on average  stockholders'  equity  decreased to
11.98% for the third  quarter 2005 versus  12.90% for the third quarter in 2004.
The changes in return on average  assets and equity were primarily the result of
the decline in the net interest margin.

Net Interest Income

     Net  interest  income  is the  most  significant  source  of the  Company's
operating  income.  A portion of the Company's  total interest income is derived
from  investments  that are exempt from federal  taxation.  The amount of pretax
income realized from those investments,  due to the tax exemption,  is less than
the amount of pretax income  realizable from comparable  investments  subject to
federal  taxation.  For purposes of the following  discussion,  interest  income
exempt from federal taxation has been restated to a fully  tax-equivalent  basis
using a corporate  federal tax rate of 34% for the quarters ended  September 30,
2005 and 2004. This was  accomplished by adjusting this income upward to make it
equivalent to the level of taxable income required to earn the same amount after
taxes.

     Net interest income on a tax-equivalent  basis increased $354 thousand,  or
2.6%, to $14.0  million for the quarter ended  September 30, 2005 as compared to
the same quarter in 2004. The tax equivalent basis  adjustments for the quarters
ended  September  30,  2005 and  2004  were  $287  thousand  and $177  thousand,
respectively.  The  increase  in net  interest  income was due mostly to an 8.3%
growth in interest earning assets. This interest earning asset growth was funded
primarily by deposit liabilities,  which grew $51.3 million, or 4.2% on average,
for the third  quarter of 2005 as  compared  to the same  quarter  in 2004.  The
margin for the third quarter of 2005 was 4.02%, a decrease of 22 basis points as
compared to the same quarter in 2004.

     Interest income, on a tax-equivalent  basis,  totaled $20.3 million for the
third quarter of 2005, an increase of $3.3 million, or 19.3%, as compared to the
same  quarter  in 2004.  The  increase  was mostly  attributed  to the growth in
interest  earning assets and the shift in asset mix as average loans grew $123.5
million, while investments declined by $10.0 million.

                                      -24-

<PAGE>
     Interest  expense  totaled $6.4 million for the third  quarter of 2005,  an
increase of $2.9 million,  as compared to the same period in 2004.  The increase
in interest  expense was a result of the increase in short-term  market interest
rates  during the second  half of 2004 and  throughout  2005.  The  increase  in
short-term  interest rates  increased the average rate paid on interest  bearing
deposit  liabilities by 82 basis points to 2.09% for the quarter ended September
30, 2005 as compared to the same period in 2004.  Interest bearing deposits grew
on average $40.3 million,  or 4.2%, for the third quarter of 2005 as compared to
the same period in 2004.

     During  June  2005  the  Company  issued  $20.6  million  of   subordinated
debentures to unconsolidated  trust  subsidiaries.  The average rate paid on the
subordinated  debentures is 6.10% and is fixed for 5 years, after which time the
rate paid on the  subordinated  debentures will be the 3-month LIBOR plus 1.71%.
The  subordinated  debentures can be called at any of the interest payment dates
following the fifth  anniversary  of their  issuance.  The final maturity on the
subordinated debentures is 2035.

<Table>
<Caption>
---------------------------------------------------------------------------------------------------------------------------------
Analysis of Net Interest Income
---------------------------------------------------------------------------------------------------------------------------------
for the quarter ended September 30,
(dollars in thousands)
(unaudited)                                                                2005                              2004
                                                         ----------------------------------   ----------------------------------
                                                             Average                 Average      Average               Average
                                                             Balance      Interest    Rate        Balance    Interest     Rate
                                                          --------------  ---------  -------   ------------ ---------  ---------
<S>                                                       <C>             <C>        <C>       <C>          <C>        <C>
Assets
Interest earning assets:
Loans (1)                                                    $1,026,631    $17,120     6.67 %     $903,113   $13,913       6.16 %
Taxable securities (4)                                          299,663      2,401     3.20        346,836     2,663       3.07
Tax-exempt securities (2) (4)                                    64,078        809     5.05         26,930       444       6.59
Interest earning deposits                                             4          -        -             12         -          -
Federal funds sold                                                1,964         17     3.46          8,899        33       1.48
                                                          --------------  ---------  -------   ------------ ---------  ---------
     Total interest-earning assets                            1,392,340     20,347     5.85      1,285,790    17,053       5.31
                                                                          ---------                         ---------
Non-interest earning assets:
Cash and due from banks                                          36,446                             36,837
Allowance for loan and lease losses                             (10,113)                            (9,981)
Other assets                                                    116,003                            114,422
                                                          --------------                       ------------
     Total assets                                            $1,534,676                         $1,427,068
                                                          ==============                       ============

Liabilities and stockholders' equity
Interest-bearing liabilities
Interest bearing deposits                                    $1,009,488      5,265     2.09       $969,217     3,085       1.27
Borrowings and subordinated debentures                          111,292      1,091     3.92         61,043       331       2.17
                                                          --------------  ---------  -------   ------------ ---------  ---------
     Total interest-bearing liabilities                       1,120,780      6,356     2.27      1,030,260     3,416       1.33
                                                                          ---------                         ---------

Non-interest bearing liabilities
Demand deposits                                                 246,923                            235,869
Other liabilities                                                10,867                             16,427
                                                          --------------                       ------------
     Total liabilities (3)                                    1,378,570                          1,282,556
Stockholders' equity                                            156,106                            144,512
                                                          --------------                       ------------
     Total liabilities and stockholders' equity              $1,534,676                         $1,427,068
                                                          ==============                       ============

Net interest income (tax-equivalent basis)                                  13,991     3.58                   13,637       3.98
Tax-equivalent basis adjustment                                               (287)                             (177)
                                                                          ---------                         ---------
     Net interest income                                                   $13,704                           $13,460
                                                                          =========                         =========
Net interest income as a percent of interest-earning assets
(tax-equivalent basis)                                                                 4.02 %                              4.24 %
-----------------------------------------------------------------------------------------------------------------------------------
(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%.
(2) Computed on a fully taxable equivalent basis using the corporate federal tax rate of 34%.
(3) All deposits are in domestic bank offices.
(4) The average balances are based on historical cost and do not reflect unrealized gains or losses.
</Table>

Provision for Loan and Lease Losses

     The provision for loan and lease losses represents management's estimate of
the  amount  necessary  to bring the ALLL to a level that  management  considers
adequate to reflect the risk of estimated

                                      -25-
<PAGE>

losses  inherent in the  Company's  loan and lease  portfolio  as of the balance
sheet date. A more  detailed  discussion  of the  evaluation  of the ALLL can be
found  in the  section  titled  "Critical  Accounting  Policies  and  Judgments:
Allowance  for Loan and Lease  Losses"  above.  In the third quarter of 2005 and
2004, the Company's provision for loan and lease losses was $300 thousand.

Non-interest Income

     For the quarter ended September 30, 2005,  non-interest income totaled $2.7
million, a decrease of $200 thousand, or 7.0%, as compared to the same period in
2004.  The change was largely due to a decline in "other"  non-interest  income,
service  fees on deposit  accounts and net gains on sale of  securities  of $244
thousand, $91 thousand and $86 thousand, respectively. This was partly offset by
growth in gain on sale of loans and leases of $225  thousand.  The  increase  in
gain on sale of  loans  was due in most  part to an  increase  in sales of Small
Business Administration originated loans.

Non-interest Expense

     For the quarter  ended  September 30, 2005,  non-interest  expense was $9.2
million,  a slight  decrease of $20 thousand,  as compared to the same period in
2004.  This  decrease was due to a decline in "other"  non-interest  expense and
advertising  and  promotion of $162  thousand and $104  thousand,  respectively,
offset by an increase in Salaries  and benefits  and  occupancy  expense of $207
thousand and $57 thousand, respectively.

Income Taxes

     Income tax  expense  as a  percentage  of pre-tax  income was 31.6% for the
three months ended  September  30, 2005 as compared to 31.2% for the same period
of 2004.

                                      -26-

<PAGE>

           NINE MONTHS ENDED SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004
                              RESULTS OF OPERATIONS

Summary

     Net income for the nine months ended  September 30, 2005 was  approximately
$13.6 million, an increase of $609 thousand,  or 4.7%, over the same period last
year.  The  increase in earnings  resulted  from an  increase  primarily  in the
average  balance of loans  outstanding  of $136.6  million.  The  improvement in
earnings  was partly  offset by an 11 basis  point  decline in the net  interest
margin and a $588 thousand decrease in gains on sales of securities, or 60%, and
a 2.2%, or $599 thousand,  increase in non-interest  expense. For the first nine
months of 2005, the Company reported  earnings per diluted common share of $0.69
as compared to $0.67 for the same period in 2004.

     For the nine months ended September 30, 2005 and 2004, the Company's Return
on Average Assets ("ROA") was 1.21% and 1.24%,  respectively.  Return on Average
Equity  ("ROE")  for the nine  months  ended  September  30,  2005 was  11.84% a
decrease from 12.04% when compared to the same period last year.

Net Interest Income

     Net interest income on a  tax-equivalent  basis increased $2.0 million,  or
5.1%, to $41.5 million for the nine months ended  September 30, 2005 as compared
to the same period in 2004. The tax equivalent  basis  adjustments  for the nine
months ended  September 30, 2005 and 2004 were $706 thousand and $499  thousand,
respectively.  The  increase  in net  interest  income was due mostly to an 8.2%
growth in interest earning assets. This interest earning asset growth was funded
primarily by deposit liabilities,  which grew 5.4% on average for the first nine
months  of 2005 as  compared  to the same  period  in 2004.  The  aforementioned
improvement  in net  interest  income  was  partly  offset by an 11 basis  point
decline in the net interest  margin for the nine months ended September 30, 2005
as compared to the same period in 2004.  The margin was primarily  affected by a
62 basis point increase in the cost of interest bearing deposits and borrowings.

     Interest income, on a tax-equivalent  basis,  totaled $57.6 million for the
nine months ended September 30, 2005, an increase of $8.6 million,  or 17.5%, as
compared to the same period in 2004.  The  increase was mostly  attributed  to a
$102.8  million,  or 8.2%,  growth in  interest  earning  assets.  The growth in
interest  earning  assets was the result of increases in average loans of $136.6
million, while investments declined by $26.4 million.

     Interest  expense,  which  totaled  $16.2 million for the nine months ended
September 30, 2005,  increased $6.5 million,  or 68.1%,  as compared to the same
period in 2004.  The increase in interest  expense was primarily a result of the
increase in short-term market interest rates, during the second half of 2004 and
throughout 2005. The increase in short-term interest rates increased the average
rate paid on interest  bearing  liabilities  by 62 basis points to 1.84% for the
nine  months  ended  September  30, 2005 as compared to the same period in 2004.
Interest bearing deposits grew on average $51.1 million,

                                      -27-

<PAGE>
or 5.4%,  for the third  quarter of 2005 as compared to the same period in 2004.
Augmenting our deposit  growth and  supporting our increase in interest  earning
assets was an increase of $32.6 million in average  borrowings  during the first
nine months of 2005 as compared to the same period in 2004.

     During  June  2005,  the  Company  issued  $20.6  million  of  subordinated
debentures to unconsolidated  trust  subsidiaries.  The average rate paid on the
subordinated  debentures is 6.10% and is fixed for 5 years, after which time the
rate will float at 3-month LIBOR plus 1.71%. The subordinated  debentures can be
called at any of the interest  payment dates following the fifth  anniversary of
their issuance. The final maturity on the subordinated debentures is 2035.

<Table>
<Caption>
----------------------------------------------------------------------------------------------------------------------------------
Analysis of Net Interest Income
----------------------------------------------------------------------------------------------------------------------------------
for the nine months ended September 30,
(dollars in thousands)
(unaudited)                                                                  2005                                 2004
                                                              ----------------------------------   -------------------------------
                                                                Average                 Average      Average               Average
                                                                Balance     Interest      Rate       Balance    Interest    Rate
                                                              ------------ -----------  --------   ----------- ---------- --------
<S>                                                           <C>          <C>          <C>        <C>         <C>        <C>
Assets
Interest earning assets
Loans (1)                                                        $988,490     $47,982      6.47 %    $851,936    $39,821     6.23 %
Taxable securities (4)                                            319,940       7,660      3.19       371,774      7,915     2.84
Tax-exempt securities (2) (4)                                      50,413       1,963      5.19        24,964      1,238     6.61
Interest earning deposits                                               3           -         -            10          -        -
Federal funds sold                                                    714          18      3.36         8,088         70     1.15
                                                              ------------ -----------  --------   ----------- ---------- --------
     Total interest-earning assets                              1,359,560      57,623      5.65     1,256,772     49,044     5.20
                                                                           -----------                         ----------
Non-interest earning assets
Cash and due from banks                                            36,145                              36,239
Allowance for loan and lease losses                                (9,994)                             (9,812)
Other assets                                                      115,561                             117,245
                                                              ------------                         -----------
     Total assets                                              $1,501,272                          $1,400,444
                                                              ============                         ===========

Liabilities and stockholders' equity
Interest-bearing liabilities
Interest bearing deposits                                      $1,001,073      13,782      1.84      $949,929      8,672     1.22
Borrowings and subordinated debentures                             93,071       2,382      3.41        60,426        943     2.08
                                                              ------------ -----------  --------   ----------- ---------- --------
     Total interest-bearing liabilities                         1,094,144      16,164      1.97    $1,010,355      9,615     1.27
                                                                           -----------                         ----------

Non-interest bearing liabilities
Demand deposits                                                   243,574                             230,919
Other liabilities                                                  10,253                              15,194
                                                              ------------                         -----------
     Total liabilities (3)                                      1,347,971                           1,256,468
Stockholders' equity                                              153,301                             143,976
                                                              ------------                         -----------
     Total liabilities and stockholders' equity                $1,501,272                          $1,400,444
                                                              ============                         ===========

Net interest income (tax-equivalent basis)                                     41,459      3.68                   39,429     3.93
Tax-equivalent basis adjustment                                                  (706)                              (499)
                                                                           ----------                          ---------
     Net interest income                                                      $40,753                             38,930
                                                                           ===========                         ==========
Net interest income as a percent of interest-earning assets
(tax-equivalent basis)                                                                     4.07 %                            4.18 %
-----------------------------------------------------------------------------------------------------------------------------------
(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%.
(2) Computed on a fully taxable equivalent basis using the corporate federal tax rate of 34%.
(3) All deposits are in domestic bank offices.
(4) The average balances are based on historical cost and do not reflect unrealized gains or losses.
</Table>

Provision for Loan and Lease Losses

     The provision for loan and lease losses represents management's estimate 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 estimated
losses  inherent in the Company's loan portfolio as of the balance sheet date. A
more  detailed  discussion  of the  evaluation  of the  ALLL can be found in the
section titled "Critical  Accounting Policies and Judgments:  Allowance for Loan
and Lease  Losses"  above.  In the  first  nine  months  of 2005 and  2004,  the
Company's  provision  for loan and  lease  losses  was  $700  thousand  and $975
thousand, respectively.

                                      -28-
<PAGE>

Non-interest Income

     Non-interest  income  totaled  $7.3  million  for  the  nine  months  ended
September  30, 2005, a decrease of $737  thousand,  or 9.1%,  as compared to the
same  period in 2004.  The  decline  in  non-interest  income  was mostly due to
decreases in net gains on the sale of securities,  "other"  non-interest  income
and  commissions  on sale of annuities and mutual funds of $588  thousand,  $444
thousand and $167 thousand, respectively. The decline in non-interest income was
partly  offset by an  increase  in net gain on sale of loans and  leases of $471
thousand.

Non-interest Expense

     For the nine months  ended  September  30, 2005,  non-interest  expense was
$27.6 million, an increase of $599 thousand,  or 2.2%, when compared to the same
period in 2004.  Contributing  to the  increase  was an increase in salaries and
benefits,   and  occupancy   expenses  of  $604  thousand  and  $211   thousand,
respectively,  offset somewhat by a decrease of $149 thousand in advertising and
promotion,  as  compared to the same  period in 2004.  The  Company  continually
evaluates its process and workflow in  determining  its allocation of resources.
As  technological  advances  occur or customer  trends  change the Company  will
realign its staffing  needs in seeking to maximize  productivity.  As such,  the
Company has  eliminated or curtailed  certain  positions in October which should
produce estimated annual cost savings of $400 thousand; however the cost savings
realized  will likely be somewhat  offset by an increase in  personnel  in other
revenue producing areas such as lending or new branch personnel.

Income Taxes

     Income tax expense as a percentage of pre-tax income was 31.3% for the nine
months  ended  September  30,  2005 as  compared to 31.8% for the same period of
2004.  The  decline in income tax  expense was partly a result of an increase in
income for securities exempt from federal income taxes.

                                      -29-

<PAGE>

                               FINANCIAL CONDITION

Cash and Cash Equivalents

     At  September  30, 2005,  cash and cash  equivalents  was $34.6  million as
compared to $33.1 million at December 31, 2004.

Securities Portfolio

     Under Statement of Financial  Accounting  Standards No. 115 "Accounting for
Certain  Investments in Debt and Equity  Securities" ("SFAS 115"), each security
is classified as either trading, AFS, or HTM. The Company has no securities held
in a trading  account.  The securities AFS are recorded at their  estimated fair
value. The after-tax  difference between amortized cost and estimated fair value
of securities AFS is recorded as "accumulated other comprehensive income" in the
equity  section  of the  balance  sheet.  The tax impact of such  adjustment  is
recorded as an  adjustment  to the amount of the  deferred  tax  liability.  The
securities HTM are carried at cost adjusted for the amortization of premiums and
accretion of discounts,  which are recognized as an adjustment to income.  Under
SFAS No. 115,  securities  HTM,  with some  exceptions,  may only be sold within
three months of maturity.

     The Company's U.S. Government-Sponsored Enterprises securities at September
30, 2005 and 2004 are not guaranteed by the U.S. Government;  however,  they are
credit  rated  AAA  or  Aaa  by   nationally   recognized   statistical   rating
organizations.   Substantially   all   obligations   of  states  and   political
subdivisions are credit rated AAA or Aaa due to insurance,  which guarantees the
obligations  against default, by private insurance  companies.  At September 30,
2005 and 2004, approximately $32.4 million and $9.9 million,  respectively,  are
bond or tax anticipation notes from local municipalities, which are not rated.

     The Company uses its securities portfolio to ensure liquidity for cash flow
requirements,  to manage interest rate risk, provide a source of income,  ensure
collateral  is available  for  pledging  requirements  and manage asset  quality
diversification.  At September 30, 2005,  investment  securities  totaled $357.6
million and represented 23.0% of total assets, as compared to $388.7 million and
26.5%, respectively, at December 31, 2004. Securities AFS comprised 90.4% of the
total  securities  portfolio  at  September  30,  2005 as  compared  to 96.3% at
December 31, 2004. At September 30, 2005, the Company had a net unrealized  loss
of $3.1  million  as  compared  to a net  unrealized  loss of $296  thousand  at
December 31, 2004. The decrease in value was attributed to an increase in market
interest  rates  during  that  period.  The  average  life  of  securities  with
unrealized losses is approximately one year.

     Proceeds  from the sale of  securities  AFS  amounted to $89.9  million and
$63.6  million  for the nine months  ended  September  30, 2005 and 2004,  which
resulted in gross  realized  gains of $747  thousand  and $1.1 million for those
periods,  respectively.  Gross  realized  losses from the sale of securities AFS
amounted to $361  thousand and $94 thousand for the nine months ended  September
30,  2005 and  2004,  respectively.  Proceeds  from the sale of  securities  HTM
amounted to $270 thousand for the nine months ended  September  30, 2005,  which
resulted in realized gains of $8 thousand. The securities had

                                      -30-

<PAGE>

significantly  paid  down to less  than 85% of the  original  purchased  balance
through normal principal  amortization  and prepayments.  There were no sales of
securities HTM for the nine months ended  September 30, 2004.  These amounts are
included  in  net  gain  on  sale  of  securities  in  the  unaudited  condensed
consolidated statements of income.

Loans

     Total loans  amounted to $1.0 billion at September 30, 2005, an increase of
$115.2  million  from  $934.2  million  at  December  31,  2004.  The growth was
attributable to increases in commercial mortgage loans, commercial and financial
loans,  and  construction  loans of $55.4  million,  $27.1  million,  and  $39.4
million, respectively.

Nonperforming Assets

     Nonperforming assets are comprised of nonaccrual loans, restructured loans,
foreclosed real estate and other repossessed assets. The Company's nonperforming
assets at  September  30,  2005  amounted  to $6.1  million as  compared to $9.3
million at December 31, 2004. The ratio of  nonperforming  assets to total loans
and foreclosed real estate and other  repossessed  assets  decreased to 0.58% at
September 30, 2005 from 0.99% at December 31, 2004.

     The following table lists  nonaccrual  loans and foreclosed real estate and
other  repossessed  assets at  September  30, 2005,  and December 31, 2004:  (in
thousands)

                                                   ------------  ------------
                                                   September 30, December 31,
                                                        2005         2004
                                                   ------------  ------------
                                                    (unaudited)
   Nonaccrual loans                                    $ 5,917       $ 9,133
   Foreclosed and other repossessed assets                 156           156
                                                   ------------  ------------
     Total nonperforming assets                        $ 6,073       $ 9,289
                                                   ============  ============

Allowance for Loan and Lease Losses

     The ALLL is  generally  established  through  periodic  charges  to  income
through the provision  for loan and lease  losses.  During the nine months ended
September 30, 2005,  the ALLL  increased  $362 thousand to $10.2  million.  Loan
losses are charged against the ALLL when  management  believes that the probable
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 $10.2 million adequate to cover estimated
losses  inherent in the loan  portfolio that may become  uncollectible  based on
management's  periodic  evaluations  of the loan  portfolio  and other  relevant
factors.  The  evaluations  are inherently  subjective as they require  material

                                      -31-

<PAGE>

estimates including such factors as potential loss factors,  changes in trend of
non-performing  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  following  table  presents the  provisions  for loan and lease losses,
loans charged-off and recoveries on loans previously  charged-off, the amount of
the allowance,  the average loans  outstanding and certain  pertinent ratios for
the three and nine  months  ended  September  30,  2005 and  2004:  (dollars  in
thousands) (unaudited)

<Table>
<Caption>
                                             -------------------------  -----------------------
                                                Three months ended         Nine months ended
                                                    September 30,             September 30,
                                             -------------------------  -----------------------
                                                 2005         2004         2005        2004
                                             -------------  ----------  -----------  ----------
<S>                                          <C>            <C>         <C>          <C>
Average loans outstanding                      $1,026,631    $903,113     $988,490    $851,936
                                             =============  ==========  ===========  ==========

Allowance at beginning of period                   $9,945      $9,788       $9,797      $9,641
                                             -------------  ----------  -----------  ----------
Loans charged-off:
          Real estate                                   -         202            -         278
          Commercial and financial                     68          30          157          87
          Commercial lease financing                   31          67          264         478
          Consumer loans                                5           8           18          52
                                             -------------  ----------  -----------  ----------
              Total                                   104         307          439         895
                                             -------------  ----------  -----------  ----------

Recoveries of loans previously charged-off:
          Real estate                                   -          15           72          19
          Commercial and financial                     12           -           12           6
          Commercial lease financing                    -           -            -          48
          Consumer loans                                6           1           17           3
                                             -------------  ----------  -----------  ----------
              Total                                    18          16          101          76
                                             -------------  ----------  -----------  ----------

Provision for loan and lease losses                   300         300          700         975
                                             -------------  ----------  -----------  ----------
Allowance at end of period                        $10,159      $9,797      $10,159      $9,797
                                             =============  ==========  ===========  ==========

Allowance to loans (end of period)                   0.97 %      1.06 %       0.97 %      1.06 %
Ratio of net charge-offs to average loans
                         (annualized)                0.03 %      0.13 %       0.05 %      0.13 %
</Table>

Deposits

     Deposits, which include non-interest bearing demand deposits, time deposits
and other interest-bearing deposits, are an essential and cost-effective funding
source  for  the  Company.  Other  interest-bearing   deposits,   which  include
interest-bearing demand, money market and savings accounts, comprise the largest
segment of the Company's total deposits.  The Company  emphasizes  building core
customer  relationships  by offering a variety of products  designed to meet the
financial needs of its customers based on their identifiable "life stages".

     At  September  30,  2005  total  deposits  grew  $20.0  million,   or  2.1%
annualized,  to $1.27 billion from December 31, 2004 and experienced a favorable
shift in deposit mix. The increase was largely in other interest  bearing demand
deposits, which increased $37.1 million, or 5.5%, to $710.8 million at September
30, 2005 from  December 31, 2004.  Non-interest  bearing  demand  deposits  also
experienced an increase

                                      -32-

<PAGE>

of $4.8 million to $239.8 million.  The aforementioned  increase was offset by a
decline in time deposits of $21.9 million.

     At September 30, 2005,  non-interest  bearing  deposits  amounted to $239.8
million,  which  equates to 18.9% of total  deposits  reported at September  30,
2005. Other  interest-bearing  deposits  amounted to $710.8 million at September
30, 2005 and  increased  to 56.2% of total  deposits  compared to 54.1% of total
deposits at December 31, 2004.  Time  deposits  amounted to $315.5  million,  or
24.9%,  of total deposits at September 30, 2005, as compared to $337.3  million,
or 27.1% of total deposits at December 31, 2004.

     The  following  table  reflects  the  composition  of deposit  liabilities:
(dollars in thousands)

                                 September 30,    December 31,
                                     2005            2004
                                ---------------  ------------
                                  (unaudited)
Non-interest bearing demand           $ 239,796     $ 235,036
Interest bearing demand                 480,063       472,807
Money market                            121,990        87,595
Savings                                 108,785       113,352
Time deposits < $100,000                279,790       286,471
Time deposits > $100,000                 35,704        50,877
                                ---------------  ------------
                                    $ 1,266,128    $1,246,138
                                ===============  ============

Subordinated Debentures

     During June of 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 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 Trusts are wholly owned unconsolidated  subsidiaries of the Company and
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 of pooled trust preferred  securities  issued by the Trusts having an
aggregate  liquidation  amount  equal  to the  principal  amount  of  debentures
redeemed.

     The trust  preferred  securities were issued as part of our overall capital
management plan and in support of our continued loan growth.

                                      -33-

<PAGE>

Item 3:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 the first nine months of 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 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")
manages  our  exposure to changes in market  interest  rates.  ALCO  attempts to
maintain stable net interest margins by periodically evaluating the relationship
between interest-rate-sensitive assets and liabilities. The evaluation, which is
performed at least  quarterly and presented to the board of directors,  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 September 30, 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 a
200 basis point declining  interest rate environment.  Based on that simulation,
it was estimated that net interest income,  over a twelve-month  horizon,  would
not decrease by more than 4.9%.  At September  30, 2005,  the

                                      -34-

<PAGE>

Company was within  policy  limits  established  by the board of  directors  for
changes  in net  interest  income  and  future  economic  value of  equity.  The
following  table  illustrates  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 a 200 basis point declining  interest rate
environment: (unaudited)

                       ---------------------------------------------------
                          Percentage Change in Estimated Net Interest
                             Income over a twelve month horizon
                       ---------------------------------------------------
                              September 30,          September 30,
                                  2005                    2004
                          --------------------     -----------------
+200 basis points                  -4.9 %                 -5.3 %
+100 basis points                  -2.1                   -2.5
-100 basis points                   1.1                   -2.0
-200 basis points                   0.0                     *

* 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.

Capital Adequacy

     The  Company is subject to  capital  adequacy  requirements  imposed by the
Board of Governors of the Federal  Reserve System (the "Federal  Reserve");  and
the Bank is subject  to similar  capital  adequacy  requirements  imposed by the
Federal Deposit Insurance  Corporation (the "FDIC"). The Federal Reserve and the
FDIC have adopted  risk-based  capital  requirements  for assessing bank holding
company and bank capital adequacy.  These standards define capital and establish
minimum  capital  requirements  in  relation  to assets  and  off-balance  sheet
exposure,  adjusted for credit risk. The risk-based capital standards  currently
in effect are designed to make regulatory capital requirements more sensitive to
differences in risk profiles

                                      -35-

<PAGE>

among bank  holding  companies  and  banks,  to account  for  off-balance  sheet
exposure and to minimize  disincentives  for holding liquid  assets.  Assets and
off-balance  sheet  items  are  assigned  to broad  risk  categories,  each with
appropriate  relative  risk  weights.  The resulting  capital  ratios  represent
capital as a  percentage  of total  risk-weighted  assets and off balance  sheet
items.

     A banking  organization's total qualifying capital includes two components:
core capital (Tier 1 capital) and supplementary  capital (Tier 2 capital).  Core
capital,  which must comprise at least half of total  capital,  includes  common
shareholders'  equity,  qualifying  perpetual  preferred stock,  trust preferred
securities  (subject  to  certain  limitations)  and  minority  interests,  less
goodwill and any unrealized gains or losses.  Supplementary capital includes the
allowance  for loan losses  (subject to certain  limitations),  other  perpetual
preferred stock, trust preferred  securities that exceed Tier 1 limits,  certain
other capital  instruments and term subordinated  debt. Total capital is the sum
of core and supplementary  capital. The Company's $20 million of trust preferred
securities is considered Tier 1 capital by the Federal Reserve Board.

     At September 30, 2005, the minimum  risk-based  capital  requirements to be
considered  adequately  capitalized  were 4% for Tier 1 capital and 8% for total
capital.

     Federal banking regulators have also adopted leverage capital guidelines to
supplement the risk-based measures. The leverage ratio is determined by dividing
Tier 1 capital as  defined  under the  risk-based  guidelines  by average  total
assets (non risk-adjusted) for the preceding quarter. At September 30, 2005, the
minimum leverage ratio requirement to be considered  adequately  capitalized was
3%.

     The capital  levels of the Company and the Bank at September 30, 2005,  and
the  two  highest  capital  adequacy  levels  recognized  under  the  guidelines
established by the federal banking agencies are included in the following table.
The Company's and the Bank's ratios all exceeded the well-capitalized guidelines
shown in the table.

                                      -36-

<PAGE>

     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 September 30, 2005 (unaudited):
  Total Capital (to Risk Weighted Assets):
   The Company                                 $131,730         11.93 %       $88,335      8.00 %         N/A         N/A
   The Bank                                     131,220         11.88 %        88,360      8.00 %    $110,450       10.00 %
  Tier 1 Capital (to Risk Weighted Assets):
   The Company                                  121,551         11.01 %       $44,168      4.00 %         N/A         N/A
   The Bank                                     121,041         10.96 %        44,180      4.00 %      66,270        6.00 %
  Tier 1 Capital (to Average Assets):
   The Company                                  121,551          8.21 %        44,404      3.00 %         N/A         N/A
   The Bank                                     121,041          8.18 %        44,406      3.00 %      74,010        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>

Liquidity

     Liquidity  is the  ability  to  provide  sufficient  resources  to meet all
current financial  obligations and finance prospective  business  opportunities.
The Company's  liquidity  position 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 demand
for loans.

     The  Company's  most  liquid  assets  are  cash and  cash  equivalents.  At
September 30, 2005, the total of such assets amounted to $34.6 million, or 2.2%,
of total assets, compared to $33.1 million, or 2.3%, of total assets at December
31, 2004.

     Financing for the Company's loans and investments is derived primarily from
deposits,  along with interest and principal  payments on loans and investments.
At September  30, 2005 and December 31, 2004,  total  deposits  amounted to $1.3
billion and $1.2 billion,  respectively.  In addition,  the Company supplemented
the more traditional  funding sources with borrowings from the Federal Home Loan
Bank  of New  York  ("FHLB")  and  with  securities  sold  under  agreements  to
repurchase ("REPOS"). At September 30, 2005, short-term borrowings from the FHLB
and REPOS amounted to $58.0 million and $4.4 million,  respectively, as compared
to $24.6 million and $4.4 million, respectively, at December 31, 2004.

     Another significant liquidity source is the Company's securities portfolio.
Total securities at September 30, 2005 amounted to $357.6 million, a decrease of
$31.2  million,  from $388.7 million at December 31, 2004. At September 30, 2005
securities  AFS  amounted  to  $323.4  million,  or 90.4%,  of total  securities
compared to $374.2 million, or 96.3%, of total securities at December 31, 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

                                      -37-

<PAGE>

window.  The Bank also has a $101.8 million line of credit available through its
membership  in the FHLB of which $40.6  million was  utilized at  September  30,
2005.

     The Company is party to financial  instruments with off-balance  sheet risk
in the normal course of business to meet the financing  needs of its  customers.
These  instruments,  which  include  commitments  to extend  credit and  standby
letters of credit, involve, to a varying degree, elements of credit and interest
rate  risk  in  excess  of the  amount  recognized  in the  unaudited  Condensed
Consolidated Balance Sheets. Commitments to extend credit are agreements to lend
to a customer as long as there is no violation of any condition  established  in
the contract.  Commitments generally have fixed expiration dates and may require
collateral from the borrower if deemed necessary by the Company. Standby letters
of credit are  conditional  commitments  issued by the Company to guarantee  the
performance  of a customer to a third party up to a  stipulated  amount and with
specified terms and conditions. At September 30, 2005 outstanding commitments to
fund loans totaled  $268.1  million and  outstanding  standby  letters of credit
totaled $3.8 million.

     The Company has historically  paid quarterly cash dividends and anticipates
continuing  paying  quarterly  dividends in the future.  The Company's  Board of
Directors could, if they deemed it necessary, modify the amount or frequency, of
dividends  as an  additional  source of  liquidity.  There are imposed  dividend
restrictions  on the  Bank,  which are  described  in Note 18  "Restrictions  of
Subsidiary Bank Dividends" in the Notes to Consolidated  Financial Statements in
the  Company's  2004 Annual  Report on Form 10-K.  Management  believes that the
Company has sufficient cash flow and borrowing  capacity to fund all outstanding
commitments and letters of credit and to maintain proper levels of liquidity.

Item 4:   CONTROLS AND PROCEDURES

     In accordance  with Rule 13a-15(b) of the  Securities  Exchange Act of 1934
(the "Exchange  Act"), as of the end of the quarter ended September 30, 2005, we
carried out an evaluation  under the supervision and with the  participation  of
our  management,  including  our Chief  Executive  Officer  and Chief  Financial
Officer,  of the  effectiveness  of the design and  operation of our  disclosure
controls and  procedures  as defined in Rule  13a-15(e)  under the Exchange Act.
Based on that  evaluation,  our Chief  Executive  Officer  and  Chief  Financial
Officer have concluded that our disclosure controls and procedures are effective
to ensure that information required to be disclosed by us in the reports we file
or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods  specified in the rules and forms of the  Securities and
Exchange  Commission,  and  accumulated  and  communicated  to  our  management,
including  our  chief  executive  officer  and  chief  financial   officer,   as
appropriate to allow timely decisions regarding required disclosure.

     In designing and  evaluating the disclosure  controls and  procedures,  our
management  recognized  that any  controls  and  procedures,  no matter how well
designed and operated,  can provide only  reasonable  assurance of achieving the
desired control  objectives and in reaching a reasonable  level of assurance our
management  necessarily  was  required to apply its judgment in  evaluating  the
cost-benefit relationship of possible controls and procedures.

                                      -38-

<PAGE>

     The Company maintains internal control over financial reporting. During the
quarter ended September 30, 2005, there were no changes in our internal controls
over financial reporting that materially  affected,  or are reasonably likely to
materially affect, those controls.

                                      -39-

<PAGE>

                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings
         Reference is also made to Note 3 of the Company's Consolidated
         Financial Statements in this Form 10-Q.

Item 2.  Unregistered Sales of Equity in Securities and Use of Proceeds

         Set forth below is certain  information  regarding  repurchases of our
         common stock during the quarter.

                             Total Number         Average
                               of Shares        Price Paid
               Period          Purchased         per Share
         ---------------    ----------------   -------------

         7/1/05-7/31/05               1,923         $ 18.95
                            ================   =============

         The shares  were owned and  tendered  by  employees  to the Company as
         payment for option  exercises in accordance with the Outside  Director
         Incentive Compensation Plan and the Stock Option and Incentive Plan of
         1997, as amended.

Item 3.  Defaults Upon Senior Securities
         None

Item 4.  Submission of Matters to a Vote of Security Holders
         None

Item 5.  Other Information
         None

Item 6.  Exhibits
         The following exhibits are furnished herewith:

              Exhibit
              -------

              11     Statement re computation of per share earnings
              31.1   Certification of Chief Executive Officer pursuant to
                     Section 302 of the Sarbanes-Oxley Act of 2002
              31.2   Certification of Chief Financial Officer pursuant to
                     Section 302 of the Sarbanes-Oxley Act of 2002
              32     Certifications pursuant to Section 906 of the
                     Sarbanes-Oxley Act of 2002

                                      -40-

<PAGE>


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Interchange Financial Services Corporation

By:      /s/ Charles T. Field
         -----------------------------------
         Charles T. Field
         Senior Vice President and CFO
         (Duly Authorized Officer and Principal
         Financial and Accounting Officer)

Dated: November 9, 2005



                                      -41-