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 JUNE 30, 2006

                         Commission File number 1-10518


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


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

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


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


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

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

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
                                 Yes |_| No |X|

         The number of outstanding shares of the Registrant's common stock, no
par value per share, as of July 31, 2006, was 20,442,499.

<PAGE>
                   INTERCHANGE FINANCIAL SERVICES CORPORATION

INDEX

PART I      FINANCIAL INFORMATION
                                                                        Page No.
   Item 1   Financial Statements

            Unaudited Condensed Consolidated Balance Sheets as of
            June 30, 2006 and December 31, 2005................................1

            Unaudited Condensed Consolidated Statements of Income for the
            three and six months ended June 30, 2006 and 2005..................2

            Unaudited Condensed Consolidated Statements of Changes in
            Stockholders' Equity for the six months ended
            June 30, 2006 and 2005.............................................3

            Unaudited Condensed Consolidated Statements of Cash Flows for
            the six months ended June 30, 2006 and 2005........................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...........................................39


PART II     OTHER INFORMATION

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

   Item 1A  Risk Factors......................................................40

   Item 2   Unregistered Sales of Equity Securities and Use of Proceeds.......41

   Item 3   Defaults upon Senior Securities...................................41

   Item 4   Submission of Matters to a Vote of Security Holders...............41

   Item 5   Other Information.................................................41

   Item 6   Exhibits..........................................................41

            Signatures........................................................42


<PAGE>
                         PART I - FINANCIAL INFORMATION

Item 1:      FINANCIAL STATEMENTS
<Table>
<Caption>
Interchange Financial Services Corporation
----------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
----------------------------------------------------------------------------------------
(dollars in thousands, except share data)
(unaudited)                                                       June 30,   December 31,
                                                                    2006        2005
                                                                 ----------- -----------
<S>                                                             <C>          <C>
Assets
Cash and due from banks                                          $    39,636 $    42,620
Interest bearing demand deposits                                           3           4
                                                                 ----------- -----------
Total cash and cash equivalents                                       39,639      42,624
                                                                 ----------- -----------

Securities held-to-maturity at amortized cost (estimated fair
  value of $30,845 and $36,199 for June 30, 2006 and December
  31, 2005, respectively)                                             31,208      35,714
                                                                 ----------- -----------
Securities available-for-sale at estimated fair value
  (amortized cost of $329,552 and $324,548 for June 30, 2006
  and December 31, 2005, respectively)                               323,279     320,752
                                                                 ----------- -----------

Loans held-for-sale                                                    3,070       1,487
                                                                 ----------- -----------

Loans and leases (net of unearned income and deferred fees of
  $6,405 and $6,786 for June 30, 2006 and December 31, 2005,
  respectively)                                                    1,134,217   1,104,482
Less:  Allowance for loan and lease losses                            10,649      10,646
                                                                 ----------- -----------
Net loans and leases                                               1,123,568   1,093,836
                                                                 ----------- -----------

Bank owned life insurance                                             27,492      26,941
Premises and equipment, net                                           17,018      17,509
Foreclosed assets and other repossessed assets                           112         122
Goodwill                                                              68,922      68,910
Intangible assets                                                      5,089       5,469
Accrued interest receivable and other assets                          19,925      18,022
                                                                 ----------- -----------
Total assets                                                     $ 1,659,322 $ 1,631,386
                                                                 =========== ===========

Liabilities
Deposits
    Non-interest bearing                                         $   246,482 $   260,151
    Interest bearing                                                 993,733     999,957
                                                                 ----------- -----------
Total deposits                                                     1,240,215   1,260,108
                                                                 ----------- -----------

Securities sold under agreements to repurchase                         6,088       3,939
Short-term borrowings                                                 97,792      46,150
Long-term borrowings                                                 100,330     110,333
Subordinated debentures                                               20,620      20,620
Accrued interest payable and other liabilities                        10,320      11,234
                                                                 ----------- -----------
Total liabilities                                                  1,475,365   1,452,384
                                                                 ----------- -----------

Commitments and contingent liabilities

Stockholders' equity:
Common stock, without par value; 33,750,000 shares authorized;
   20,406,124 and 20,138,668 shares issued and outstanding
   for June 30, 2006 and December 31, 2005, respectively.              5,397       5,397
Capital surplus                                                       97,075      97,238
Retained earnings                                                    103,792      99,222
Accumulated other comprehensive loss, net of taxes of $2,423 and
     $1,497 for June, 2006 and December 31, 2005, respectively.       (3,860)     (2,310)
                                                                 ----------- -----------
                                                                     202,404     199,547
Less:  Treasury stock                                                 18,447      20,545
                                                                 ----------- -----------
Total stockholders' equity                                           183,957     179,002
                                                                 ----------- -----------
Total liabilities and stockholders' equity                       $ 1,659,322 $ 1,631,386
                                                                 =========== ===========
----------------------------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements.
</Table>

                                       1
<PAGE>
<Table>
<Caption>
Interchange Financial Services Corporation
------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
(unaudited)                                                   Three Months Ended          Six Months Ended
                                                                   June 30,                  June 30,
                                                             -----------------------  ----------------------
                                                               2006         2005        2006         2005
                                                             ---------  ------------  ---------- -----------
<S>                                                          <C>        <C>           <C>        <C>
Interest income
Interest on loans and leases                                  $ 19,614      $ 15,853    $ 38,440    $ 30,810
Interest on federal funds sold                                       -             1           -           1
Interest and dividends on securities
  Taxable interest income                                        2,710         2,457       5,083       5,122
  Interest income exempt from federal income taxes                 639           464       1,326         787
  Dividends                                                        155            77         258         137
                                                             ---------  ------------  ---------- -----------
Total interest income                                           23,118        18,852      45,107      36,857
                                                             ---------  ------------  ---------- -----------

Interest expense
Interest on deposits                                             7,284         4,595      13,576       8,517
Interest on securities sold under agreements to repurchase          63            33          97          56
Interest on short-term borrowings                                  685           350       1,127         530
Interest on long-term borrowings and subordinated debentures     1,374           389       2,808         705
                                                             ---------  ------------  ---------- -----------
Total interest expense                                           9,406         5,367      17,608       9,808
                                                             ---------  ------------  ---------- -----------

Net interest income                                             13,712        13,485      27,499      27,049
Provision for loan and lease losses                                125           225         300         400
                                                             ---------  ------------  ---------- -----------
Net interest income after provision for loan and lease losses   13,587        13,260      27,199      26,649
                                                             ---------  ------------  ---------- -----------

Non-interest income
Service fees on deposit accounts                                 1,008           889       1,900       1,772
Net gain on sale of securities                                      66           250          89         317
Net gain on sale of loans and leases                               495           223         756         379
Bank owned life insurance                                          282           285         550         549
Commissions on sale of annuities and mutual funds                   84           148         277         330
Other                                                              847           681       1,894       1,323
                                                             ---------  ------------  ---------- -----------
Total non-interest income                                        2,782         2,476       5,466       4,670
                                                             ---------  ------------  ---------- -----------

Non-interest expense
Salaries and benefits                                            5,426         4,954      10,863       9,909
Occupancy                                                        1,645         1,343       3,231       2,806
Furniture and equipment                                            350           316         722         631
Advertising and promotion                                          298           423         534         818
Amortization of intangible assets                                  187           126         380         252
Other                                                            2,562         2,018       4,570       3,918
                                                             ---------  ------------  ---------- -----------
Total non-interest expense                                      10,468         9,180      20,300      18,334
                                                             ---------  ------------  ---------- -----------

Income before income taxes                                       5,901         6,556      12,365      12,985
Income taxes                                                     1,797         2,041       3,732       4,050
                                                             ---------  ------------  ---------- -----------
Net income                                                    $  4,104      $  4,515    $  8,633    $  8,935
                                                             =========  ============  ========== ===========

Basic earnings per common share                                 $0.20         $0.24       $0.43       $0.47
                                                                =====         =====       =====       =====

Diluted earnings per common share                               $0.20         $0.23       $0.42       $0.46
                                                                =====         =====       =====       =====

-------------------------------------------------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements.
</Table>

                                       2
<PAGE>
<Table>
<Caption>
Interchange Financial Services Corporation
-------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Six Months Ended June 30,
-------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
(unaudited)                                                         Accumulated
                                                                       Other
                                             Comprehensive Retained Comprehensive Common   Capital   Treasury
                                               Income      Earnings Income(Loss)   Stock   Surplus    Stock       Total
                                             ------------- -------- ------------- -------  --------- ---------  ---------
<S>                                          <C>           <C>      <C>           <C>      <C>       <C>        <C>
Balance at Jauary 1, 2005                                  $ 86,542      $ (633)  $ 5,397   $ 73,320 $ (14,471) $ 150,155
Comprehensive income
    Net Income                                   $ 8,935      8,935                                                 8,935
    Other comprehensive losses, net of taxes
       Less: unrealized losses on AFS debt
        securities                                  (808)
       Less: net gains on disposition of
        securities                                  (119)
                                               ---------
    Other comprehensive losses, net of taxes        (927)                  (927)                                     (927)
                                               ---------
Comprehensive income                             $ 8,008
                                               =========

Dividends on common stock                                    (3,445)                                               (3,445)
Issued 18,772 shares of common stock in
    connection with Executive Compensation Plan                                                  174       162        336
Exercised 24,335 option shares                                                                    26       194        220
Purchased 4,532 shares of common stock                                                                     (76)       (76)
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 June 30, 2005                                    92,025      (1,560)    5,397     73,520   (14,191)   155,191

Comprehensive income
    Net Income                                  $ 10,770     10,770                                                10,770
    Other comprehensive losses, net of taxes
       Less: unrealized losses on AFS debt
        securities                                  (623)
       Less: net gains on disposition of
        securities                                  (117)
       Minimum pension liability adjustment          (10)
                                               ---------
    Other comprehensive losses, net of taxes        (750)                  (750)                                     (750)
                                               ---------
Comprehensive income                            $ 10,020
                                               =========

Dividends on common stock                                    (3,568)                                               (3,568)
Issued 1,323,181 shares of common stock in
    connection with the acquisition of
    Franklin Bank                                                                             23,738               23,738
Exercised 20,687 option shares                                                                   (20)      189        169
Purchased 323,660 shares of common stock                                                                (5,827)    (5,827)
Payout of fractional shares in connection with
    the acquisition of Franklin Bank                             (5)                                                   (5)
Reacquired 39,228 shares in settlement of lawsuit                                                         (716)      (716)
                                                          --------- -----------   -------  --------- --------- ----------
Balance at December 31, 2005                                 99,222      (2,310)    5,397     97,238   (20,545)   179,002

Comprehensive income
    Net Income                                     8,633      8,633                                                 8,633
    Other comprehensive losses, net of taxes
       Less: unrealized losses on AFS debt
        securities                                (1,359)
       Less: net gains on disposition of
        securities                                  (191)
                                               ---------
    Other comprehensive losses, net of taxes      (1,550)                (1,550)                                   (1,550)
                                               ---------
Comprehensive income                             $ 7,083
                                               =========

Dividends on common stock                                    (4,063)                                               (4,063)
Unvested restricted stock                                                                       (220)                (220)
Amortization of deferred compensation of
 restricted stock                                                                                205                  205
Sale of 10,412 of discounted shares of stock                                                      40       108        148
Exercised 190,535 option shares                                                                 (274)    1,994      1,720
Tax benefit from exercise of 31,350
 nonincentive option shares                                                                       86                   86
Purchased 227 shares of common stock                                                                        (4)        (4)
                                                          --------- -----------   -------  --------- --------- ----------
Balance at June 30, 2006                                  $ 103,792 $    (3,860)  $ 5,397  $  97,075 $ (18,447) $ 183,957
                                                          ========= ===========   =======  ========= ========= ==========
------------------------------------------------------------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements.
</Table>
                                       3
<PAGE>
<Table>
<Caption>
INTERCHANGE FINANCIAL SERVICES CORPORATION
---------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30,
--------------------------------------------------------------------------------------
(in thousands)
(unaudited)
                                                                   2006        2005
                                                                ----------  ----------
<S>                                                             <C>           <C>
Cash flows from operating activities
Net income                                                         $ 8,633     $ 8,935
Adjustments to reconcile net income to net cash provided by
operating activities
  Depreciation and amortization                                      1,162       1,004
  Amortization of securities premiums                                1,417       2,080
  Accretion of securities discounts                                   (362)       (126)
  Amortization of loan premiums                                         37          46
  Amortization of premiums in connection with acquisition              342         371
  Provision for loan and lease losses                                  300         400
  Increase in cash surrender value of Bank Owned Life Insurance       (550)       (548)
  Net gain on sale of securities                                       (89)       (317)
  Origination of loans held for sale                               (23,335)     (7,582)
  Sale of loans held for sale                                       22,493       7,056
  Net gain on sale of  loans and leases                               (756)       (379)
  Net gain on sale of fixed assets                                      (3)          -
  Write off of foreclosed and repossessed assets                        68          13
Decrease (increase) in operating assets
  Accrued interest receivable                                          503        (247)
  Deferred taxes                                                      (189)      1,221
  Other Assets                                                      (1,447)     (3,202)
  Increase (decrease) in operating liabilities
  Accrued interest payable                                             195         145
  Other                                                             (1,109)      1,683
                                                               -----------  ----------
Cash provided by operating activities                                7,310      10,553
                                                               -----------  ----------

Cash flows from investing activities
(Payments for) proceeds from
  Net originations of loans and leases                             (30,814)    (81,876)
  Purchase of loans and leases                                           -      (4,678)
  Sale of loans and leases                                             686       1,215
  Purchase of securities available-for-sale                       (112,245)    (49,538)
  Maturities of securities available-for-sale                       82,191      17,155
  Sale of securities available-for-sale                             24,176      77,127
  Maturities of securities held-to-maturity                         19,048       1,209
  Sale of securities held-for-sale                                       -         270
  Purchase of securities held-to-maturity                          (14,634)    (21,891)
  Purchase of fixed assets                                          (2,890)       (503)
  Premium in connection with acquisition                                 6
  Sale of fixed assets                                               2,380           -
                                                                ----------  ----------
Cash used in investing activities                                  (32,096)    (61,510)
                                                                ----------  ----------

Cash flows from financing activities
Proceeds from (payments for)
  Net change in deposits                                           (19,859)     12,021
  Securities sold under agreements to repurchase and other
         borrowings                                                635,704     557,077
  Retirement of securities sold under agreement to repurchase
         and other borrowings                                     (591,916)   (532,945)
  Issuance of long term subordinated debentures                          -      20,620
  Dividends                                                         (4,063)     (3,445)
  Common stock issued                                                  133         335
  Payout of fractional shares resulting from 3-for-2 stock split         -          (7)
  Exercise of nonincentive option shares                               417           -
  Tax benefit from exercise of nonincentive stock options               86           -
  Treasury stock                                                        (4)        (76)
  Exercise of incentive option shares                                1,303         220
                                                                ----------  ----------
Cash provided by financing activities                               21,801      53,800
                                                                ----------  ----------

Increase in cash and cash equivalents                               (2,985)      2,843
Cash and cash equivalents, beginning of period                      42,624      33,110
                                                                ----------  ----------
Cash and cash equivalents, end of period                          $ 39,639    $ 35,953
                                                                ==========  ==========

Supplemental disclosure of cash flow information:
Cash paid for:
  Interest                                                        $ 17,316     $ 9,497
  Income taxes                                                       5,180       5,144
Supplemental disclosure of non-cash investing and
    financing activities:
  Loans transferred to foreclosed real estate and
    other repossessed assets                                            58          11
--------------------------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements.
</Table>
                                       4
<PAGE>

         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006


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 Securiti es and
Exchange  Commission.  The Company  has two wholly  owned  trusts  which are not
consolidated,  see  Note  13  "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  Amendment  No. 1 to the annual
report on Form 10-K/A of the Company for the year ended December 31, 2005.

     The condensed  consolidated  financial data for the six month periods ended
June 30, 2006 and 2005, 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 February  2006,  the  Financial  Accounting
Standards  Board  ("FASB")  issued  statement No. 155,  "Accounting  for Certain
Hybrid Financial Instruments" ("SFAS No. 155"). Under current generally accepted
accounting  principles  an entity  that  holds a  financial  instrument  with an
embedded  derivative must bifurcate the financial  instrument,  resulting in the
host and the embedded  derivative  being accounted for separately.  SFAS No. 155
permits,  but does not require,  entities to account for  financial  instruments
with an embedded  derivative  at fair value thus  negating the need to bifurcate
the instrument between its host and

                                       5
<PAGE>

the embedded  derivative.  SFAS No. 155 is effective as of the  beginning of the
first annual  reporting  period that begins after  September 15, 2006. We expect
that SFAS No. 155 will not have a material effect on our consolidated  financial
condition or results of operations.

     In March 2006, the FASB issued statement No. 156, "Accounting for Servicing
of Financial  Assets"  ("SFAS No. 156").  SFAS No. 156 amends FASB Statement No.
140,   Accounting   for  Transfers   and  Servicing  of  Financial   Assets  and
Extinguishments  of  Liabilities,  to  require  that all  separately  recognized
servicing assets and servicing  liabilities be initially measured at fair value,
if  practicable.  SFAS No. 156  permits,  but does not require,  the  subsequent
measurement of separately  recognized servicing assets and servicing liabilities
at fair value. An entity that uses derivative  instruments to mitigate the risks
inherent in servicing assets and serving  liabilities is required to account for
those derivative  instruments at fair value. SFAS No. 156 is effective as of the
beginning of the first annual  reporting  period that begins after September 15,
2006.  We  expect  that  SFAS No.  156 will not have a  material  effect  on our
financial condition or results of operations.

     In June 2006, the FASB issued FIN 48,  Accounting for Uncertainty in Income
Taxes--an interpretation of FASB Statement No. 109, Accounting for Income Taxes,
which  clarifies  the  accounting  for  uncertainty  in  income  taxes.  FIN  48
prescribes a recognition  threshold and measurement  attribute for the financial
statement  recognition and measurement of a tax position taken or expected to be
taken in a tax return. The Interpretation requires that the Company recognize in
the financial statements, the impact of a tax position, if that position is more
likely than not of being  sustained on audit,  based on the technical  merits of
the position.  FIN 48 also provides guidance on  derecognition,  classification,
interest  and  penalties,  accounting  in interim  periods and  disclosure.  The
provisions of FIN 48 are effective beginning January 1, 2007 with the cumulative
effect of the  change in  accounting  principle  recorded  as an  adjustment  to
opening  retained  earnings.  The Company is currently  evaluating the impact of
adopting FIN 48 on the financial condition or results of operations.

Stock Based Compensation:  The Company adopted Statement of Financial Accounting
Standards  ("SFAS") No.  123(R),  Share-Based  Payment ("SFAS No.  123(R)"),  on
January 1, 2006 using the  "modified  prospective"  method.  Under this  method,
awards that are granted,  modified,  or settled  after  December  31, 2005,  are
measured and accounted for in accordance  with SFAS No. 123(R).  Also under this
method,  expense is  recognized  for unvested  awards that were granted prior to
January 1, 2006,  based upon the fair value  determined  at the grant date under
SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"). Prior to
the adoption of SFAS No. 23(R),  the Company  accounted  for stock  compensation
under the  intrinsic  value method  permitted  by  Accounting  Principles  Board
Opinion No. 25,  Accounting  for Stock  Issued to  Employees  ("APB No. 25") and
related  interpretations.  Accordingly,  the Company  previously  recognized  no
compensation  cost for employee stock options that were granted with an exercise
price equal to the market  value of the  underlying  common stock on the date of
grant.

     The following  table  illustrates the effect on net income and earnings per
share if the Company had applied the fair value  recognition  provisions of SFAS
No. 123(R) in 2005 (in thousands) (unaudited).


                                       6
<PAGE>

                                              ------------------------------
                                              For the three    For the six
                                              months ended     months ended
                                                 June 30,        June 30,
                                                  2005            2005
                                              -------------    ------------
Net Income
     As reported                                     $4,515          $8,935
     Less: Total stock-based compensation
     expense determined under the fair
     value method for all rewards, net of
     related tax effects                                259             525
                                              -------------    ------------
      Pro-forma                                      $4,256          $8,410
                                              =============    ============

Earnings per share:
Basic:
     As reported                                       0.24            0.47
     Pro forma                                         0.22            0.44
Diluted:
     As reported                                       0.23            0.46
     Pro forma                                         0.22            0.43

     On October 18, 2005, the  Compensation  Committee of the Board approved the
accelerated vesting of all then outstanding  unvested options to purchase common
stock of the Company previously awarded to employees, officers and directors. No
options were granted  during the six months ended June 30, 2006.  As a result of
these actions, there was no option expense or unrecognized costs recorded during
the period.

     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 six months ended June
30, 2005:  dividend  yield of 2.00%;  expected  volatility of 23.07%;  risk-free
interest rate of 3.87%; and expected lives of approximately 7 years.

Director Stock Compensation Program

     In  2000,  the  Company  adopted  a  stock  option  plan,  titled  "Outside
Director's  Incentive  Compensation  Plan" (the  "Director's  Stock  Plan") that
covers  those  members of the Board of  Directors  of the  Company  who have not
served as a full-time employee of the Company or any of its subsidiaries  during
the prior twelve-month period. Under this plan, options to purchase a maximum of
225,000 shares of  Interchange  common stock may be granted at fair market value
at the date of grant.  Options to purchase  157,000 shares (net of  forfeitures)
have been granted to date.  Options  granted expire if not exercised  within ten
years of date of grant and are  exercisable  according  to a  vesting  schedule,
starting one year from the date of grant. Only  non-qualified  stock options are
granted under the  Director's  Stock Plan.  During 2005,  the Board of Directors
froze the issuance of any future stock option grants from the plan.

                                       7
<PAGE>

Employee Stock Option Plan

     The Company  maintains  two stock  option and  incentive  plans:  the Stock
Option and Incentive  Plan of 1997,  as amended,  and the 2005 Omnibus Stock and
Incentive Plan (together  "the Plans"),  that covers certain key employees.  The
Compensation  Committee  administers  the Plans,  reviews the awards and submits
recommendations  to the full board of  directors  for  action.  Options  granted
expire if not  exercised  within ten years of date of grant and are  exercisable
according  to a  vesting  schedule,  starting  one year  from the date of grant.
Pursuant to the Plans,  incentive stock options or  non-qualified  stock options
may be granted to employees.  In addition,  the 2005 Omnibus Stock and Incentive
Plan allows for other types of stock based awards to be issued  including  stock
appreciation  rights.  During 2005 the Board of Directors  froze the issuance of
any future stock option grants from the Plans.

         The following table presents the activity related to options under all
plans for the six months ended June 30, 2006 (in thousands) (unaudited).

                                                         Weighted-
                                                         Average
                                                         Exercise
                                         Options           Price
                                    ---------------    -------------

Outstanding at January 1                  1,407,919          $ 12.41
Granted                                           -                -
Exercised                                  (190,535)            9.03
Forfeited                                         -                -
                                    ---------------    -------------
Outstanding at June 30                    1,217,384          $ 12.94
                                    ===============   ==============

All options are exercisable as of June 30, 2006. The weighted average remaining
life of options outstanding at June 30, 2006 was 6.5 years.

Restricted Stock

     Restricted  Stock  provides  grantees with rights to shares of common stock
upon  completion of  achievement  of Company  performance  measures.  During the
restriction period, all shares are considered outstanding and dividends are paid
on the Restricted  Stock.  The Restricted Stock vests over three years from date
of grant. The Company recognizes  compensation  expense,  measured as the quoted
market price of the Restricted Stock on the grant date, on a straight-line basis
over  the  vesting  period  for  service  period  vesting.  Restricted  Stock is
cancelled if an employee terminates prior to the vesting of the stock.

     As of June 30,  2006,  unrecognized  compensation  cost related to unvested
restricted  stock  totaled $1.2  million.  The cost is expected to be recognized
over a weighted  average period of 2.8 years. The total grant date

                                       8
<PAGE>

fair value of shares  vested  during the six months ended June 30, 2006 and 2005
was $263,000 and $253,000, respectively.

The  following  table  presents the activity  for  restricted  stock for the six
months ended June 30, 2006.
                                                            Weighted Average
                                                             Grant-Date Fair
                                       Number of Shares       Value (000)
                                      -----------------   -------------------
Unvested as of December 31, 2005                 52,782             $     680
Granted                                          72,448                 1,231
Vested                                          (24,694)                 (263)
Forfeited                                          (554)                  (10)
                                      -----------------   -------------------
Unvested as of June 30, 2006                     99,982             $   1,638
                                      =================   ===================

2.   Pending Merger

     On April  13,  2006,  the  Company  announced  that it had  entered  into a
definitive  agreement  whereby TD Banknorth  Inc.  would acquire the Company for
approximately $480.6 million in an all cash transaction. The terms of the merger
agreement call for each  outstanding  share of the Company's  common stock to be
converted into the right to receive $23.00 in cash per share. The transaction is
subject  to  approval  by  shareholders  of the  Company,  as well as  customary
regulatory approvals, and is expected to close in early 2007.

3.   Acquisitions

     On October 13, 2005 the Company  completed its acquisition of Franklin Bank
("Franklin"),  a one branch bank operating in Nutley,  Essex County, New Jersey.
The  Company's   acquisition   of  Franklin  is  intended  to  further   enhance
Interchange's  presence in northern New Jersey. At October 13, 2005 Franklin had
approximately,  $87.0  million in total  assets,  $77.2 million in net loans and
$76.0  million  in  deposits.  Under  the  terms  of the  agreement,  the  total
consideration  received  by  Franklin  shareholders  in the  merger  is fixed at
1,323,575  shares of the common stock of the Company.  Based upon the  Company's
average  closing  stock  price  three  days  prior  to and  after  the  date  of
announcement of the acquisition  which occurred on June 23, 2005 of $17.94,  the
transaction  represents  total  consideration  of  approximately  $24.9 million,
including  approximately  $1.2 million for the cash payment for option  holders.
Under the  definitive  agreement,  each  Franklin  shareholder  received  1.2264
Company shares for each Franklin share held immediately prior to the merger.

     The  acquisition  was accounted for as a purchase and the cost in excess of
the fair value of net assets  acquired  was  allocated  first to net  identified
intangibles and then to goodwill.  The goodwill is not tax  deductible.  The six
months  results of  operations  ending June 30, 2006 also  include  those of the
acquired bank for the same period.

                                       9
<PAGE>

4.       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  restricted  stock,  and are
determined  using the  treasury  stock  method.  At June 30, 2006 and 2005,  the
weighted   average   diluted  shares   outstanding   for  the  six  months  were
approximately 20.8 million and 19.6 million, respectively.

     The following table shows the computation of earnings per shares:  (dollars
in thousands, except per share amounts) (unaudited)

<Table>
<Caption>
                            ----------------------------------------------  ------------------------------------------------
                                          Three Months Ended,                               Six Months Ended,
                            ----------------------------------------------  ------------------------------------------------
                                 June 30, 2006            June 30, 2005           June 30, 2006            June 30, 2005
                            ----------------------- ----------------------  ----------------------- ------------------------
                                   Weighted  Per           Weighted  Per           Weighted  Per           Weighted    Per
                                   Average  Share          Average  Share          Average  Share           Average   Share
                            Income  Shares  Amount  Income  Shares  Amount  Income  Shares  Amount  Income  Shares    Amount
                            ------ -------- ------- ------ -------- ------  ------ -------- ------- ------ --------- -------
<S>                         <C>    <C>      <C>     <C>    <C>      <C>     <C>    <C>      <C>     <C>    <C>       <C>
Basic Earnings per
   Common Share
Income available to
   common shareholders      $4,104   20,271  $0.20  $4,515   19,153  $0.24  $8,633   20,251  $0.43   $8,935   19,143   $0.47
                                            ======                  ======                  ======                    ======

Effect of Dilutive Shares
Options issued to
   management                           587                     444                     535                      433
                                   --------                --------                --------                 --------

Diluted Earnings per
   Common Share             $4,104   20,858  $0.20  $4,515   19,597  $0.23  $8,633   20,786  $0.42   $8,935   19,576   $0.46
                            ====== ======== ======  ====== ======== ======  ====== ======== ======   ====== ========  ======
</Table>

5.   Commitments and Contingent Liabilities

Legal Proceedings

     The Company is a party to routine litigations  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 June  30,  2006,  the  Company  had  commitments  to  extend  credit  of
approximately  $321.7 million,  of which  approximately  $4.2 million represents
standby letters of credit.

6.   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

                                       10
<PAGE>

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)

                              ----------------    ------------------
                                  June 30,           December 31,
                                    2006                 2005
                              ----------------    ------------------

Intangible assets                      $ 6,975               $ 6,975
Accumulated amortization                (1,886)               (1,506)
                              ----------------    ------------------
  Net intangible assets                $ 5,089               $ 5,469
                              ================    ==================

     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 month periods ended June 30, 2006 and 2005,  the CDI amortized
were $187 thousand and $107  thousand,  respectively.  For each of the six month
periods ended June 30, 2006 and 2005,  the CDI amortized  were $373 thousand and
$214 thousand, respectively. The CDI is periodically reviewed for impairment.

     At June 30, 2006 the scheduled  amortization of the intangible assets is as
follows (in thousands) (unaudited):

2006 for remaining period                          $ 373
2007                                                 747
2008                                                 747
2009                                                 747
2010                                                 747
Thereafter                                         1,728
                                       -----------------
Total                                            $ 5,089
                                       =================

7.   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.

                                       11
<PAGE>

8.   Cash Dividend

     On July 18, 2006,  the Company  declared a cash dividend of $0.10 per share
payable on August 8, 2006, to holders of record as of July 31, 2006.

9.       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)

<Table>
<Caption>
                                                ------------------------------------------------------------
                                                                       June 30, 2006
                                                ------------------------------------------------------------
                                                                      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                        $   1,223       $     2     $      1        $   1,224
  Obligations of states & political subdivisions          29,985           213          577           29,621
                                                ----------------    ----------   ----------    -------------
                                                       $  31,208       $   215     $    578        $  30,845
                                                ================    ==========   ==========    =============

Securities available-for-sale
  Government-Sponsored Enterprises:
     Mortgage-backed securities                        $ 160,068       $    36     $  3,871        $ 156,233
     Other debt                                          124,380             -        2,070          122,310
  Obligations of states & political subdivisions          31,727            29          397           31,359
  Equity securities                                       13,377             -            -           13,377
                                                 ---------------    ----------   ----------    -------------
                                                         329,552            65        6,338          323,279
                                                ----------------    ----------   ----------    -------------

     Total securities                                  $ 360,760       $   280     $  6,916        $ 354,124
                                                ================    ==========   ==========    =============


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

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

     Total securities                                  $ 360,262       $ 1,009      $ 4,320        $ 356,951
                                                ================    ==========   ==========    =============
</Table>

                                       12
<PAGE>

     At  June  30,  2006,  the  contractual  maturities  of  securities  HTM and
securities AFS are as follows: (in thousands) (unaudited)

                                     Securities            Securities
                                  Held-to-Maturity      Available-for-Sale
                             -----------------------   --------------------
                                          Estimated               Estimated
                              Amortized      Fair      Amortized     Fair
                                 Cost       Value         Cost      Value
                             -----------  ----------   ---------  ---------
Within 1 year                  $   3,698    $  3,704   $ 108,525  $ 107,616
After 1 but within 5 years         5,066       5,160     180,852    176,076
After 5 but within 10 years       16,163      15,901      20,852     20,348
After 10 years                     6,281       6,080       5,946      5,862
Equity securities                      -           -      13,377     13,377
                             -----------  ----------   ---------  ---------
                               $ 31,208l    $ 30,845   $ 329,552  $ 323,279
                             ===========  ==========   =========  =========

     Proceeds  from the sale of  securities  AFS  amounted to $24.2  million and
$77.1  million for the six months  ended June 30,  2006 and 2005,  respectively,
which  resulted in gross  realized  gains of $135 thousand and $670 thousand for
those periods,  respectively.  Gross realized losses from the sale of securities
AFS amounted to $46 thousand and $361 thousand for the six months ended June 30,
2006 and 2005,  respectively.  Proceeds from the sale of securities HTM amounted
to $270  thousand  for the six months  ended June 30,  2005,  which  resulted in
realized gains of $8 thousand. The HTM securities had significantly paid down to
less  than  85% of the  original  purchased  balance  through  normal  principal
amortization and prepayments.  These amounts are included in net gain on sale of
securities in the unaudited condensed consolidated statements of income.

     The  investment  portfolio is evaluated at least  quarterly to determine if
there are any securities with losses that are  other-than-temporary.  As of June
30, 2006, the Company has concluded that the unrealized  losses are temporary in
nature since they are  primarily  related to market  interest  rates and are not
related  to the  underlying  credit  quality of the  issuers  of our  investment
portfolio.  None of the  investments  are believed to be  other-than-temporarily
impaired.  The Company has the ability and intent to hold the  securities  until
maturity to recover the entire value.

     The following table  summarizes all securities that have an unrealized loss
and the  duration  of the  unrealized  loss at June  30,  2006:  (in  thousands)
(unaudited)

                                       13
<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 AFS
Government-Sponsored Enterprises:
     Mortgage-backed securities      $ 83,366    $1,672  $ 71,318    $2,199  $154,684     $3,871
     Obligations of U.S. agencies      12,874       127   105,838     1,943   118,712      2,070
Obligations of states & political
        subdivisions                   15,292       344     1,226        53    16,518        397
                                    ------------------- -------------------  -------------------
                                     $111,532    $2,143  $178,382    $4,195  $289,914     $6,338
                                    =================== ===================  ===================

Securities HTM
Government-Sponsored Enterprises:
     Mortgage-backed securities       $   169      $  1       $59         -   $   228       $  1
Obligations of states & political
        subdivisions                   18,821       577         -         -    18,821        577
                                    ------------------- -------------------  -------------------
                                      $18,990      $578       $59         -   $19,049       $578
                                    =================== ===================  ===================
</Table>

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

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

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

     Securities  with  carrying  amounts of $123.2  million and $76.1 million at
June 30, 2006 and  December  31,  2005,  respectively,  were  pledged for public
deposits,  Federal Home Loan Bank  advances,  securities  sold under  repurchase
agreements and other purposes required by law.

                                       14
<PAGE>

10.  Loans

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

                                          --------------   ---------------
                                             June 30,        December 31,
                                               2006             2005
                                          --------------   ---------------

Real estate
  Residential                               $   284,458       $   291,448
  Commercial                                    491,879           479,120
  Construction                                  122,531            92,390

Commercial
  Commercial and financial                      210,466           211,704
  Lease financing                                22,050            24,584

Consumer
  Lease financing                                    20                94
  Installment                                     2,813             5,142
                                          --------------   ---------------
                                              1,134,217         1,104,482
Allowance for loan and lease losses             (10,649)          (10,646)
                                          --------------   ---------------
Net loans and leases                        $ 1,123,568       $ 1,093,836
                                          ==============   ===============

     Loans are net of unearned income and deferred fees of $6.4 million and $6.8
million at 30, 2006 and 31, 2005, respectively.

Nonperforming Loans

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

                                    ---------------     ---------------
                                        June 30,          December 31,
                                          2006                2005
                                    ---------------     ---------------
Nonaccrual loans
  Residential real estate                   $   299             $   822
  Commercial real estate                        176                 363
  Commercial and financial                    1,487                 997
  Commercial lease financing                    920               1,290
  Consumer                                       90                  86
                                    ---------------     ---------------
                                              2,972               3,558
                                    ---------------     ---------------
Troubled debt restructurings                  1,013                   -
                                    ---------------     ---------------
Total nonperforming loans                   $ 3,985             $ 3,558
                                    ===============     ===============


                                       15
<PAGE>

11.  Allowance for Loan and Lease Losses

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

<Table>
<Caption>
                                                        ---------------------- ---------------------
                                                                June 30,             December 31,
                                                                  2006                 2005
                                                        ----------------------  --------------------
                                                         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                      $ 1,012      $ 281     $   997     $ 281
              Commercial real estate                            180          4         380         4
              Residential real estate                             -          -         594        88
       Without a related allowance for loan losses
              Commercial and financial                          788          -           -         -
              Commercial real estate                            536          -           -         -
                                                        ----------- ---------- ----------- ---------
                                                            $ 2,516      $ 285     $ 1,971     $ 373
                                                        =========== ========== =========== =========
</Table>


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

<Table>
<Caption>
                                                ---------------------  ---------------------
                                                  Three months ended      Six months ended
                                                         June 30,             June 30,
                                                ---------------------  ---------------------
                                                   2006       2005        2006       2005
                                                ----------  ---------  ----------  ---------
<S>                                             <C>         <C>        <C>         <C>
Balance at beginning of period                    $ 10,559    $ 9,876    $ 10,646    $ 9,797
Additions (deductions)
     Provision charged to operations                   125        225         300        400
     Recoveries on loans previously charged-off         57          5          61         83
     Loans charged-off                                 (92)      (161)       (358)      (335)
                                                ----------  ---------  ----------  ---------
Balance at end of period                          $ 10,649    $ 9,945    $ 10,649    $ 9,945
                                                ==========  =========  ==========  =========
</Table>

12.  Other Non-interest Expense

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

                                       ------------------  ------------------
                                       Three months ended   Six months ended
                                             June 30,           June 30,
                                       ------------------  ------------------
                                         2006      2005      2006       2005
                                       --------  --------  -------    -------
 Professional fees                        $ 403     $ 232    $ 765      $ 778
 Legal fees                                 700       256    1,002        441
 Directors' fees, travel and retirement     207       205      368        422
 Data processing                            288       264      549        529
 All other                                  964     1,061    1,886      1,748
                                        -------   -------  -------   --------
    Total                               $ 2,562   $ 2,018  $ 4,570    $ 3,918
                                        =======   =======  =======   ========


                                       16
<PAGE>


13. Long-term Borrowings

     Long-term borrowings consist of the following Federal Home Loan Bank of New
York ("FHLB") advances: (in thousands) (unaudited)

                                June 30, 2006             December 31, 2005
         Maturity           ----------------------    ------------------------
          Date                Balance       Rate       Balance          Rate
-------------------------   -----------   --------    ------------    --------

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

January 2007 (b)                      -          -          10,000        2.69

January 2010 (c)              $  15,000       3.66          15,000        3.66

October 2015 (d)                 50,000       3.99          50,000        3.99

December 2015 (e)                25,000       3.94          25,000        3.94

February 2016 (f)                10,000       4.04               -           -
                            -----------   --------    ------------    --------
                              $ 100,000       3.93%      $ 110,000        3.84%
                            ===========   ========    ============    ========

(a) The FHLB has an option to call this advance on a quarterly basis if the
    3-month LIBOR resets above 7.50%.
(b) Included in short-term borrowings as of March 31, 2006.
(c) The FHLB has an option to call this advance in January 2008.
(d) The FHLB has an option to call this advance quarterly after October 4, 2008.
(e) The FHLB has an option to call this advance quarterly after December 30,
    2007.
(f) The FHLB has an option to call this advance quarterly after August 24, 2006.


     Included in long-term  borrowings is a  capitalized  lease of $330 thousand
and $333 thousand at June 30, 2006 and December 31, 2005, respectively.

14.  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  debentures  after 5 years on any of the interest  payment
dates.  The final  maturity  date on the pool  trust  preferred  securities  and
debentures is 2035.

     The  Company  does not meet the  criteria  as primary  beneficiary  for the
Trusts  in  accordance   with  Financial   Accounting   Standards  Board  (FASB)
Interpretation  No. 46 (FIN 46) and FIN No.  46(R),  "Consolidation  of Variable
Interest Entities." As a result,  these trusts are not consolidated.  The Trusts
have no  independent

                                       17
<PAGE>

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.

15.  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)

                                    ------------------- -------------------
                                     Three Months Ended    Six Months Ended
                                          June 30,             June 30,
                                    ------------------- -------------------
                                       2006      2005      2006        2005
                                    --------  --------  --------   --------
Service cost                               -     $ 198         -      $ 396
Interest cost                           $ 86       102     $ 172        204
Expected return on plan assets           (65)      (56)     (130)      (112)
Amortization of prior service cost         -         1         -          2
Amortization of net (gain) loss            -         1        (1)         2
                                    --------  --------  --------   --------
Net periodic benefit cost               $ 21     $ 246     $  41      $ 492
                                    ========  ========  ========   ========

     During 2006, the Bank has not  contributed to the Pension Plan. At December
31, 2005 the Pension Plan and the defined  benefit  portion of the  Supplemental
Plan and the Directors Plan were frozen.


                                       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
six  month  periods  ended  June  30,  2006  and  2005,  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 Amendment No. 1 to the Company's 2005 Annual Report on Form 10-K/A.

Forward Looking Information

     In  addition  to  discussing  historical  information,  certain  statements
included  in  or  incorporated  into  this  report  relating  to  the  financial
condition,  results of  operations  and business of the  Company,  which are not
historical facts, may be deemed "forward-looking  statements" within the meaning
of the Private  Securities  Litigation Reform Act of 1995. When used herein, the
words  "anticipate,"   "believe,"   "estimate,"   "expect,"  and  other  similar
expressions  (including  when  preceded  or  followed  by the  word  "not")  are
generally intended to identify such forward-looking  statements. Such statements
are  intended to be covered by the safe harbor  provisions  for  forward-looking
statements  contained  in such Act,  and we are  including  this  statement  for
purposes  of  invoking  these  safe  harbor  provisions.   Such  forward-looking
statements  include,  but are not limited to, statements about the operations of
the Company,  the adequacy of the Company's allowance for losses associated with
the loan and lease portfolio,  the quality of the loan and lease portfolio,  the
prospects of continued loan and deposit growth, and improved credit quality. The
forward-looking   statements  in  this  report  involve  certain   estimates  or
assumptions, known and unknown risks and uncertainties, many of which are beyond
the control of the Company, and reflect what we currently anticipate will happen
in each  case.  What  actually  happens  could  differ  materially  from what we
currently anticipate will happen due to a variety of factors,  including,  among
others, (i) increased  competitive pressures among financial services companies;
(ii) changes in the interest  rate  environment,  reducing  interest  margins or
increasing   interest  rate  risk;  (iii)   deterioration  in  general  economic
conditions,  internationally,  nationally,  or in the State of New Jersey;  (iv)
disruptions  caused by  terrorism,  such as the events of September 11, 2001, or
military  actions  in the  Middle  East  or  other  areas;  (v)  legislation  or
regulatory  requirements  or changes  adversely  affecting  the  business of the
Company;  (vi) the  impact of the  proposed  acquisition  of the  Company  by TD
Banknorth;  and (vii) other risks  detailed in reports filed by the Company with
the  Securities  and  Exchange  Commission.   Readers  should  not  place  undue
expectations on any  forward-looking  statements.  We undertake no obligation to
update  forward-looking  statements or to make any public  announcement  when we
consider  forward-looking  statements in this document to be no longer accurate,
whether as a result of new  information,  what actually happens in the future or
for any other reason.

                                       19
<PAGE>

Company

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

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

     As of June 30, 2006, the Company had  consolidated  assets of approximately
$1.7 billion, deposits of approximately $1.2 billion and shareholders' equity of
approximately $184 million.

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

Banking Subsidiary

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

     Subsidiaries  of the Bank include:  FBCB, LLC established in 2004 to hold a
49% investment in Benjamin  Title LLC, a title  insurance  company,  Clover Leaf
Investment  Corporation,  established  in 1988 to engage in the  business  of an
investment  company  pursuant to New Jersey law;  Clover Leaf Insurance  Agency,
Inc., established in 1990 to engage in sales of tax-deferred  annuities;  Bridge
View Investment  Company, an investment company operating pursuant to New Jersey
law; and Interchange Capital Company,  L.L.C.,  established in 1999 to engage in
equipment lease  financing.  All of the Bank's  subsidiaries are organized under
New  Jersey  law  and  are  100%

                                       20
<PAGE>

owned by the Bank.  Clover Leaf Investment  Corporation has 99% ownership of one
subsidiary, Clover Leaf Management Realty Corporation,  established in 1998 as a
Real Estate  Investment  Trust ("REIT") which manages certain real estate assets
of the Company.  Bridge View Investment Company has one wholly owned subsidiary,
Bridge View Delaware,  Inc.  ("BVDI").  BVDI is an investment  company operating
pursuant to Delaware law.

Growth of the Company and the Bank

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

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

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

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 Amendment  No. 1 to our 2005 Annual  Report on Form 10-K/A,  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

                                       21
<PAGE>

considered  inadequate to absorb future loan losses on existing loans, based on,
but not limited to,  increases in the size of the loan  portfolio,  increases in
charge-offs or changes in the risk  characteristics of the loan portfolio,  then
the provision for loan and lease losses is increased.

     The Company considers the ALLL of $10.6 million adequate to cover estimated
losses  inherent in the loan portfolio,  loan  commitments and standby and other
letters  of  credit  that  may  become   uncollectible   based  on  management's
evaluations of the size and current risk  characteristics  of the loan and lease
portfolio as of the balance sheet date. The evaluations consider such factors as
changes  in the  composition  and  volume of the loan  portfolio,  the impact of
changing economic  conditions on the credit worthiness of the borrowers,  review
of specific problem loans and  management's  assessment of the inherent risk and
overall  quality of the loan  portfolio.  For further  discussion  see the "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 Amendment
No. 1 to our 2005 Annual Report on Form 10-K/A.

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

Goodwill and Other Intangible Assets:  Goodwill is not amortized to expense, but
rather is tested  for  impairment  periodically.  Other  intangible  assets  are
amortized to expense using straight-line methods over their respective estimated
useful  lives.  At least  annually,  and on an  interim  basis  when  conditions
require,  management  reviews goodwill and other intangible assets and evaluates
events or changes in circumstances that may indicate  impairment in the carrying
amount of such  assets.  If the sum of the  expected  undiscounted  future  cash
flows,  excluding  interest  charges,  is less than the  carrying  amount of the
asset,  an  impairment  loss is  recognized.  An  impairment  is  measured  on a
discounted  future cash flow basis and a charge is recognized in the period that
the asset has been deemed to be impaired. Based upon management's evaluation, no
impairment loss is required to be recognized.

Securities Held-to-Maturity and Securities  Available-for-Sale:  Debt securities
purchased  with the intent and ability to hold until  maturity are classified as
securities  held-to-maturity  ("HTM") and are carried at cost,  adjusted for the
amortization  of premiums and  accretion  of  discounts.  Management  determines
whether the security will be classified as HTM at the time of purchase.

     All other  securities,  including  equity  securities,  are  classified  as
securities  available-for-sale ("AFS"). Securities classified as AFS may be sold
prior to maturity in response to, but not limited to, changes in interest rates,
changes in prepayment risk or for asset/liability  management strategies.  These
securities  are  carried at fair

                                       22
<PAGE>

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.

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

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

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

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

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

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

                                       23
<PAGE>

                    THREE MONTHS ENDED JUNE 30, 2006 AND 2005
                              RESULTS OF OPERATIONS

Summary

     For the second quarter of 2006, the Company  reported  earnings per diluted
common  share of $0.20,  as compared  to $0.23 for the same period in 2005.  Net
income for the three months ended June 30, 2006 was  approximately  $4.1 million
compared to approximately $4.5 million for the same period in 2005. The earnings
per share were primarily  affected by increases net interest  income of 1.7% and
non-interest income of 12.4% being offset by an increase in non-interest expense
of 14% and the average diluted shares outstanding.

     The  Company's  return on average  assets  decreased to 1.00% for the three
months  ended June 30, 2006 as compared to 1.20% for the three months ended June
30, 2005. In addition,  the  Company's  return on average  stockholders'  equity
decreased  to 8.98% for the second  quarter  2006  versus  11.83% for the second
quarter  in 2005.  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 June 30, 2006
and 2005.  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 $320 thousand,  or
2.3%,  to $14.1  million for the quarter  ended June 30, 2006 as compared to the
same quarter in 2005.  The tax  equivalent  basis  adjustments  for the quarters
ended June 30, 2006 and 2005 were $350 thousand and $257 thousand, respectively.
The increase in net interest  income was due mostly to a 9.5% growth in interest
earning assets. This interest earning asset growth was funded by cash flows from
the securities portfolio,  deposit liabilities,  and borrowings.  The margin for
the second  quarter of 2006 was 3.78%, a decrease of 27 basis points as compared
to the same quarter in 2005.

     Interest income, on a tax-equivalent  basis,  totaled $23.5 million for the
second  quarter of 2006, an increase of $4.4 million,  or 22.8%,  as compared to
the same quarter in 2005. The increase was mostly  attributable to the growth in
interest  earning assets and the shift in asset mix as average loans grew $134.2
million, while investments declined by $5.3 million.


                                       24
<PAGE>

     Interest  expense  totaled $9.4 million for the second  quarter of 2006, an
increase of $4.0 million,  as compared to the same period in 2005.  The increase
in  interest  expense  was a result of the  increase  in rates paid on  interest
bearing  deposits,  an increase in borrowings and subordinated  debentures.  The
average rate paid on interest bearing deposit liabilities increased by 104 basis
points to 2.88% for the  quarter  ended June 30,  2006 as  compared  to the same
period in 2005.  Interest  bearing  deposits grew on average $15.2  million,  or
1.5%, for the second quarter of 2006 as compared to the same period in 2005.

     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 June 30,
(dollars in thousands)                                               2006                                2005
(unaudited)                                             --------------------------------    ----------------------------------
                                                         Average                Average      Average                  Average
                                                         Balance    Interest      Rate       Balance     Interest      Rate
                                                        ----------  ----------  --------    ----------   --------    -------
<S>                                                     <C>         <C>         <C>         <C>          <C>         <C>
                               Assets
Interest earning assets:
Loans (1)                                               $1,125,761    $19,639      6.98 %   $  991,543    $15,877       6.40 %
Taxable securities (4)                                     296,649      2,865      3.86        314,142      2,534       3.23
Tax-exempt securities (2) (4)                               64,244        964      6.00         52,069        697       5.35
Federal funds sold and interest earning deposits                 4          -         -             98          1       4.08
                                                        ----------  ----------  --------    ----------   --------    -------
     Total interest-earning assets                       1,486,658     23,468      6.31      1,357,852     19,109       5.63
                                                                    ----------                           --------

Non-interest earning assets:
Cash and due from banks                                     36,776                              37,098
Allowance for loan and lease losses                        (10,635)                             (9,993)
Other assets                                               130,535                             115,239
                                                        ----------                          ----------
     Total assets                                       $1,643,334                          $1,500,196
                                                        ==========                          ==========

                Liabilities and stockholders' equity
Interest-bearing liabilities
Interest bearing deposits                               $1,011,664      7,284      2.88     $  996,455      4,595       1.84
Borrowings and subordinated debentures                     190,722      2,122      4.45         95,446        772       3.24
                                                        ----------  ----------  --------    -----------   -------    -------
     Total interest-bearing liabilities                  1,202,386      9,406      3.13      1,091,901      5,367       1.97
                                                                    ----------                            -------

Non-interest bearing liabilities
Demand deposits                                            246,651                             245,157
Other liabilities                                           11,546                              10,447
                                                        ----------                          ----------
     Total liabilities (3)                               1,460,583                           1,347,505
Stockholders' equity                                       182,751                             152,691
                                                        ----------                          ----------
     Total liabilities and stockholders' equity         $1,643,334                          $1,500,196
                                                        ==========                          ==========

Net interest income (tax-equivalent basis)                             14,062      3.18                    13,742       3.66
Tax-equivalent basis adjustment                                          (350)                               (257)
                                                                    ----------                            -------
     Net interest income                                              $13,712                             $13,485
                                                                    ==========                            =======

Net interest income as a percent of interest-earning
assets (tax-equivalent basis)                                                      3.78 %                               4.05 %
------------------------------------------------------------------------------------------------------------------------------
(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  losses inherent in the

                                       25
<PAGE>

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 second quarter of 2006 and 2005, the Company's  provision
for loan and lease losses was $125 thousand and $225 thousand, respectively.

Non-interest Income

     For the quarter  ended June 30,  2006,  non-interest  income  totaled  $2.8
million, an increase of $306 thousand,  or 12.4%, as compared to the same period
in 2005. The change was largely due to an increase in net gains on sale of loans
and leases and "other"  non-interest  income of $272 thousand and $166 thousand,
respectively.  This was  partly  offset  by a  decline  in net  gains on sale of
securities  of $184  thousand.  The increase in gain on sale of loans was due in
most part to an increase in sales of Small Business Administration loans.

Non-interest Expense

     For the  quarter  ended  June 30,  2006,  non-interest  expense  was  $10.5
million,  an increase of $1.3  million,  as compared to the same period in 2005.
This  increase was largely due to the  operating  expenses  associated  with the
acquisition  of Franklin  Bank,  which was acquired on October 13, 2005,  and an
increase  in "other"  non-interest  expense of $544  thousand.  The  increase in
"other" non-interest expense was principally due to an increase in legal fees of
$444 thousand,  of which $319 thousand was related to the Company's  anticipated
merger with TD Banknorth  Inc.,  which is expected to close in the first quarter
of 2007.  The  aforementioned  increases  were  partly  offset by a decrease  in
advertising and promotion expense of $125 thousand.

Income Taxes

     Income tax  expense  as a  percentage  of pre-tax  income was 30.5% for the
three  months  ended June 30,  2006 as  compared to 31.1% for the same period of
2005.  The decline in the tax rate was partly  attributable  to the  increase in
non-taxable interest income.


                                       26
<PAGE>

                     SIX MONTHS ENDED JUNE 30, 2006 AND 2005
                              RESULTS OF OPERATIONS

Summary

     For the six months ended June 30, 2006, the Company  reported  earnings per
diluted common share of $0.42, as compared to $0.46 for the same period in 2005.
Net income for the six months ended June 30, 2006 was approximately $8.6 million
compared to $8.9  million for the same period in 2005.  The  earnings  per share
were primarily  affected by increases in  non-interest  expense of 10.7% and the
average  diluted  shares  outstanding  being offset by increases in net interest
income of 1.7% and non-interest income of 17.0%.

     The  Company's  return on  average  assets  decreased  to 1.05% for the six
months  ended June 30, 2006 as  compared to 1.20% for the six months  ended June
30, 2005. For the six months ended June 30, 2006 and 2005, the Company's  return
on average stockholders' equity was 9.51% and 11.77%, respectively.  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 six month  periods ended June
30, 2006 and 2005. 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 $757 thousand,  or
2.8%, to $28.2 million for the six months ended June 30, 2006 as compared to the
same quarter in 2005. The tax equivalent  basis  adjustments  for the six months
ended June 30, 2006 and 2005 were $726 thousand and $419 thousand, respectively.
The increase in net interest income was due mostly to a 10.2% growth in interest
earning assets. This interest earning asset growth was funded by cash flows from
the securities portfolio,  deposit liabilities,  and borrowings.  The margin for
the six months  ended June 30, 2006 was 3.81%,  a decrease of 28 basis points as
compared to the same period in 2005.

     Interest income, on a tax-equivalent  basis,  totaled $45.8 million for the
six months  ended June 30,  2006,  an increase  of $8.6  million,  or 23.0%,  as
compared to the same quarter in 2005.  The increase was mostly  attributable  to
the  growth in  interest  earning  assets  and the shift in asset mix as average
loans grew $148.3 million, while investments declined by $10.7 million.

                                       27
<PAGE>
     Interest expense totaled $17.6 million for the first six months of 2006, an
increase of $7.8 million,  as compared to the same period in 2005.  The increase
in  interest  expense  was a result of the  increase  in rates paid on  interest
bearing  deposits,  an increase in borrowings and subordinated  debentures.  The
average rate paid on interest bearing deposit liabilities  increased by 98 basis
points to 2.69% for the  quarter  ended June 30,  2006 as  compared  to the same
period in 2005.  Interest  bearing  deposits grew on average $13.9  million,  or
1.4%, for the first six months of 2006 as compared to the same period in 2005.

     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 six months ended June 30
(dollars in thousands)                                                   2006                                  2005
(unaudited)                                             ------------------------------------  ------------------------------------
                                                           Average                  Average     Average                   Average
                                                           Balance     Interest      Rate      Balance        Interest      Rate
                                                        -----------  ----------  -----------  -----------    ----------   --------
<S>                                                     <C>          <C>         <C>          <C>            <C>          <C>
                               Assets
Interest earning assets
Loans (1)                                                $1,117,429     $38,491        6.89 %  $  969,104      $30,862      6.37 %
Taxable securities (4)                                      293,751       5,341        3.64       330,151        5,259      3.19
Tax-exempt securities (2) (4)                                69,278       2,001        5.78        43,563        1,154      5.30
Federal funds sold and interest earning deposits                  4           -           -            82            1      2.44
                                                        -----------  ----------  ----------   -----------    ---------    ------
     Total interest-earning assets                        1,480,462      45,833        6.19     1,342,899       37,276      5.55
                                                                     ----------                              ---------    ------

Non-interest earning assets
Cash and due from banks                                      36,805                                35,992
Allowance for loan and lease losses                         (10,653)                               (9,934)
Other assets                                                131,887                               115,337
                                                        -----------                           -----------
     Total assets                                        $1,638,501                            $1,484,294
                                                        ===========                           ===========

                Liabilities and stockholders' equity
Interest-bearing liabilities
Interest bearing deposits                                $1,010,671      13,576        2.69    $  996,796        8,517      1.71
Borrowings and subordinated debentures                      185,884       4,032        4.34        83,808        1,291      3.08
                                                        -----------  ----------  ----------   -----------    ---------    ------
     Total interest-bearing liabilities                   1,196,555      17,608        2.94    $1,080,604        9,808      1.82
                                                                     ----------                              ---------

Non-interest bearing liabilities
Demand deposits                                             248,792                               241,871
Other liabilities                                            11,666                                 9,943
                                                        -----------                           -----------
     Total liabilities (3)                                1,457,013                             1,332,418
Stockholders' equity                                        181,488                               151,876
                                                        -----------                           -----------
     Total liabilities and stockholders' equity          $1,638,501                            $1,484,294
                                                        ===========                           ===========

Net interest income (tax-equivalent basis)                               28,225        3.25                     27,468      3.73
Tax-equivalent basis adjustment                                            (726)                                  (419)
                                                                     ----------                              ---------
     Net interest income                                                $27,499                                $27,049
                                                                     ==========                              =========

Net interest income as a percent of interest-earning
assets (tax-equivalent basis)                                                          3.81 %                               4.09 %
----------------------------------------------------------------------------------------------------------------------------------
(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  losses inherent in the Company's loan
and lease portfolio as of the balance sheet date. A more detailed  discussion of
the  evaluation

                                       28
<PAGE>

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 six months
of 2006 and 2005,  the  Company's  provision  for loan and lease losses was $300
thousand and $400 thousand, respectively.


Non-interest Income

     For the six months ended June 30, 2006,  non-interest  income  totaled $5.5
million, an increase of $796 thousand,  or 17.0%, as compared to the same period
in 2005.  The change was  largely  due to an  increase  in "other"  non-interest
income  and net gains on sale of loans  and  leases  of $571  thousand  and $377
thousand, respectively. This was partly offset by a decline in net gains on sale
of securities of $228 thousand.  The increase in "other" non-interest income was
due in most part to an  increase  in referral  income and  servicing  fee income
relating to the sales of Small Business Administration (SBA) loans. In addition,
the increase in gain on sale of loans was also due to the sale of SBA loans.

Non-interest Expense

     For the six months  ended June 30,  2006,  non-interest  expense  was $20.3
million,  an increase of $2.0  million,  as compared to the same period in 2005.
This  increase was largely due to the  operating  expenses  associated  with the
acquisition  of Franklin  Bank,  which was acquired on October 13, 2005,  and an
increase  in "other"  non-interest  expense of $652  thousand.  The  increase in
"other" non-interest expense was principally due to an increase in legal fees of
$561 thousand,  of which $319 thousand was related to the Company's  anticipated
merger with TD Banknorth  Inc.,  which is expected to close in the first quarter
of 2007.  The  aforementioned  increases  were  partly  offset by a decrease  in
advertising and promotion expense of $284 thousand.

Income Taxes

     Income tax expense as a percentage of pre-tax  income was 30.2% for the six
months ended June 30, 2006 as compared to 31.2% for the same period of 2005. The
decline in the tax rate was partly  attributable  to the increase in non-taxable
interest income.

                                       29
<PAGE>

                               FINANCIAL CONDITION

Cash and Cash Equivalents

     At June 30, 2006,  cash and cash  equivalents was $39.6 million as compared
to $42.6 million at December 31, 2005.


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 June 30,
2006 and 2005 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 June 30, 2006
and 2005, approximately $15.1 million and $26.8 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 June 30, 2006, investment securities totaled $354.5 million
and represented  21.4% of total assets, as compared to $356.5 million and 21.9%,
respectively,  at December 31, 2005. Securities AFS comprised 91.2% of the total
securities portfolio at June 30, 2006 as compared to 90.0% at December 31, 2005.
At June 30,  2006,  the Company  had a net  unrealized  loss of $6.6  million as
compared to a net  unrealized  loss of $3.3 million at December  31,  2005.  The
decrease in value was attributed to an increase in market  interest rates during
that period.

     Proceeds  from the sale of  securities  AFS  amounted to $24.2  million and
$77.1  million for the six months  ended June 30,  2006 and 2005,  respectively,
which  resulted in gross  realized  gains of $135 thousand and $670 thousand for
those periods,  respectively.  Gross realized losses from the sale of securities
AFS amounted to $46 thousand and $361 thousand for the six months ended June 30,
2006 and 2005,  respectively.  Proceeds from the sale of securities HTM amounted
to $270  thousand  for the six months  ended June 30,  2005,  which  resulted in
realized gains of $8 thousand. The HTM securities had significantly paid down to
less  than  85% of the  original

                                       30
<PAGE>

purchased balance through normal principal  amortization and prepayments.  These
amounts  are  included  in net  gain  on  sale of  securities  in the  unaudited
condensed consolidated statements of income.

Loans

     Total loans  amounted  to $1.13  billion at June 30,  2006,  an increase of
$29.7  million  from  $1.10  billion  at  December  31,  2005.  The  growth  was
attributable to increases in commercial mortgage loans and construction loans of
$12.8 million and $30.1 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 June 30, 2006  amounted to $4.1 million as compared to $3.7 million at
December  31,  2005.  The  ratio of  nonperforming  assets  to total  loans  and
foreclosed real estate and other  repossessed  assets increased to 0.36% at June
30, 2006 from 0.33% at December 31, 2005.

     The following table lists  nonaccrual  loans and foreclosed real estate and
other repossessed assets at June 30, 2006, and December 31, 2005: (in thousands)

                                            -------------   -------------
                                               June 30,      December 31,
                                                 2006            2005
                                            -------------   -------------

  Nonaccrual loans                                $ 2,972         $ 3,558
  Troubled debt restructurings                      1,013               -
  Foreclosed and other repossessed assets             112             122
                                            -------------   -------------
    Total nonperforming assets                    $ 4,097         $ 3,680
                                            =============   =============

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 six months ended
June 30, 2006, the ALLL remained flat at $10.6 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 $10.6 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
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

                                       31
<PAGE>

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 six months  ended June 30, 2006 and 2005:  (dollars in  thousands)
(unaudited)

<Table>
<Caption>
                                             --------------------  --------------------
                                              Three months ended     Six months ended
                                                    June 30,             June 30,
                                             --------------------  --------------------
                                               2006       2005       2006       2005
                                             ---------- ---------  ---------- ---------
<S>                                          <C>        <C>        <C>        <C>
Average loans outstanding                    $1,125,761 $ 991,543  $1,117,429  $969,104
                                             ========== =========  ========== =========

Allowance at beginning of period               $ 10,559   $ 9,876     $10,646    $9,797
                                             ---------- ---------  ---------- ---------
Loans charged-off:
          Commercial and financial                    -         -         158        89
          Commercial lease financing                 90       151         197       233
          Consumer loans                              2        10           3        13
                                             ---------- ---------  ---------- ---------
              Total                                  92       161         358       335
                                             ---------- ---------  ---------- ---------

Recoveries of loans previously charged-off:
          Real estate                                 -         -           -        72
          Commercial and financial                   57         1          57         1
          Commercial lease financing                  -         -           -         -
          Consumer loans                              -         4           4        10
                                             ---------- ---------  ---------- ---------
              Total                                  57         5          61        83
                                             ---------- ---------  ---------- ---------
Net loans charged-off                                35       156         297       252
                                             ---------- ---------  ---------- ---------

Provision for loan and lease losses                 125       225         300       400
                                             ---------- ---------  ---------- ---------
Allowance at end of period                     $ 10,649   $ 9,945     $10,649    $9,945
                                             ========== =========  ========== =========

Allowance to loans (end of period)                 0.94%     0.98%       0.94%     0.98
Ratio of net charge-offs to average loans
     (annualized)                                  0.01%     0.06%       0.05%     0.05
</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 June 30, 2006 total deposits  declined $19.9 million,  or 1.6%, to $1.24
billion from December 31, 2005. The decrease was largely in non-interest bearing
demand  deposits,  which declined  $13.7 million,  or 5.3%, to $246.5 million at
June 30, 2006 from  December 31, 2005.  At June 30, 2006,  non-interest  bearing
demand  deposits  amounted to $246.5  million,  which  equates to 19.9% of total
deposits,  which was down  slightly  from  20.6% at  December  31,  2005.  Other
interest-bearing  deposits  decreased $9.7 million to $677.8 million at June 30,
2006 and  remained at 54.6% of total  deposits as compared to December 31, 2005.
Time deposits  amounted to $316.0  million,  or 25.5%, of total deposits at June
30, 2006, as compared to $312.5 million,  or 24.8% of total deposits at December
31, 2005.

                                       32
<PAGE>

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

                                     --------------   -------------
                                        June 30,       December 31,
                                          2006             2005
                                     --------------   -------------

Non-interest bearing demand deposits    $   246,482     $   260,151
Interest bearing demand deposits            460,357         466,436
Savings deposits                            114,063         121,093
Money market deposits                       103,353          99,907
Time deposits                               315,960         312,521
                                     --------------   -------------
    Total                               $ 1,240,215     $ 1,260,108
                                     ==============   =============


                                       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 six months of 2006. 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 June 30, 2006, 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 2.3%.  At June 30,  2006,  the  Company was within  policy
limits  established by the board of directors for changes in net interest income
and

                                       34
<PAGE>

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 twelse month horizon
                          --------------------------------------------------
                                 June 30,                 June 30,
                                   2006                     2005
                            -------------------      --------------------
+200 basis points                         -2.3 %                    -3.3 %
+100 basis points                         -0.8                      -1.4
-100 basis points                          0.8                      -1.6
-200 basis points                          0.9                      -4.4

     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 among bank holding  companies and banks, to account
for off-balance sheet exposure and to minimize  disincentives for holding liquid
assets.   Assets

                                       35
<PAGE>

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 June  30,  2006,  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 June 30, 2006,  the
minimum leverage ratio requirement to be considered  adequately  capitalized was
3%.

     The capital  levels of the Company and the Bank at June 30,  2006,  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 June 30, 2006 (unaudited):
   Total Capital (to Risk Weighted Assets):
     The Company                              $ 146,245        12.14 %     $ 96,349      8.00 %       N/A        N/A
     The Bank                                   146,517        12.14 %       96,563      8.00 % $ 120,704      10.00 %
   Tier 1 Capital (to Risk Weighted Assets):
     The Company                                135,576        11.26 %       48,175      4.00 %       N/A        N/A
     The Bank                                   135,848        11.25 %       48,282      4.00 %    72,422       6.00 %
   Tier 1 Capital (to Average Assets):
     The Company                                135,576         8.60 %       47,316      3.00 %       N/A        N/A
     The Bank                                   135,848         8.60 %       47,363      3.00 %    78,939       5.00 %

As of December 31, 2005:
   Total Capital (to Risk Weighted Assets):
     The Company                              $ 139,560        11.93 %     $ 93,595      8.00 %       N/A        N/A
     The Bank                                   140,863        11.98 %       94,042      8.00 % $ 117,553      10.00 %
   Tier 1 Capital (to Risk Weighted Assets):
     The Company                                128,894        11.02 %       46,797      4.00 %       N/A        N/A
     The Bank                                   130,197        11.08 %       47,021      4.00 %    70,532       6.00 %
   Tier 1 Capital (to Average Assets):
     The Company                                128,894         8.20 %       47,158      3.00 %       N/A        N/A
     The Bank                                   130,197         8.29 %       47,110      3.00 %    78,516       5.00 %
</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 June 30,
2006,  the total of such assets  amounted to $39.6  million,  or 2.4%,  of total
assets,  compared to $42.6  million,  or 2.6%,  of total  assets at December 31,
2005.

     Financing for the Company's loans and investments is derived primarily from
deposits,  along with interest and principal  payments on loans and investments.
At June 30, 2006 and December 31, 2005, total deposits amounted to $1.24 billion
and $1.26 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 June 30,  2006,  short-term  borrowings  from the FHLB and  REPOS
amounted to $97.8 million and $6.1 million,  respectively,  as compared to $46.2
million and $3.9 million, respectively, at December 31, 2005.

     Another significant liquidity source is the Company's securities portfolio.
Total securities at June 30, 2006 amounted to $354.5 million, a decrease of $2.0
million,  from $356.5 million at December 31, 2005. At

                                       37
<PAGE>

June 30, 2006  securities  AFS amounted to $323.3  million,  or 91.2%,  of total
securities compared to $320.8 million, or 90.0%, of total securities at December
31, 2005.

     In addition to the  aforementioned  sources of  liquidity,  the Company has
available various other sources of liquidity,  including federal funds purchased
from other banks and the Federal Reserve  discount  window.  The Bank also has a
$101.8  million line of credit  available  through its membership in the FHLB of
which $37.8 million was utilized at June 30, 2006.

     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 June 30, 2006 outstanding commitments to fund
loans totaled $317.5 million and  outstanding  standby letters of credit totaled
$4.2 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 19  "Restrictions  of
Subsidiary Bank Dividends" in the Notes to Consolidated  Financial Statements in
Amendment No. 1 to the Company's  2005 Annual Report on Form 10-K/A.  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.

                                       38
<PAGE>

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 June 30,  2006,  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.

     The Company maintains internal control over financial reporting. There were
no changes in our internal  controls  over  financial  reporting  identified  in
connection  with  our  evaluation  of  the  Company's  disclosure  controls  and
procedures  that  occurred  during  the  last  fiscal  quarter  that  materially
affected, or are reasonably likely to materially affect, those controls.

                                       39
<PAGE>

                           PART II - OTHER INFORMATION

Item 1.   Legal Proceedings

          In the ordinary  course of business,  the Company and it  subsidiaries
          are involved in routine litigation  involving various aspects of their
          business,  none of which,  individually  or in the  aggregate,  in the
          opinion of  management  and its legal  counsel,  is expected to have a
          material  adverse  effect  on the  consolidated  financial  condition,
          results of operations or liquidity of the Company.

Item 1A.  Risk Factors

          Except for the risk  factors set forth below  relating to the proposed
          acquisition  of the Company by TD Banknorth  Inc.,  there have been no
          material changes to any of the risk factors disclosed in Amendment No.
          1 to the  Company's  Annual  Report on Form 10-K/A for the fiscal year
          ended December 31, 2005.

          Our business could be adversely affected by uncertainty related to the
          proposed merger and contractual restrictions while the proposed merger
          is pending.

               Uncertainty  about when and whether the merger will be  completed
          and the effects of the merger may have an adverse  effect on us. These
          uncertainties could cause depositors and others that deal with to seek
          to change their existing business  relationships  with us, which could
          negatively affect our growth,  revenues and results of operations.  In
          addition,  the merger  agreement  restricts  us from taking  specified
          actions without the buyer's approval. These restrictions could prevent
          us from  pursuing  attractive  business  opportunities  that may arise
          prior to the completion of the proposed merger.

          Failure to complete the proposed  merger could  negatively  impact our
          stock price, future business and financial results.

               Completion  of the  merger  is  subject  to the  satisfaction  of
          various  conditions,  including the approval by our  shareholders,  as
          well as regulatory  approvals.  Although our board of directors  will,
          subject  to  fiduciary  exceptions,  recommend  that our  stockholders
          approve and adopt the merger agreement, there is no assurance that the
          merger  agreement  and the merger  will be  approved,  and there is no
          assurance  that the other  conditions to the  completion of the merger
          will be satisfied.  If the merger is not completed, we will be subject
          to several risks, including the following:

          o    under certain circumstances,  if the merger is  not completed, we
          may be required to pay the buyer a termination fee of $20 million;


                                       40
<PAGE>

          o    the  current  market  price of  our common  stock  may  reflect a
          market  assumption  that  the  merger  will  occur, and  a  failure to
          complete the merger could result in a negative perception by the stock
          market of us generally and a decline in the market price of our common
          stock;

          o    certain costs relating to the merger, such  as legal,  accounting
          and financial  advisory  fees, are payable  by  us  whether or not the
          merger is completed;

          o    matters  related  to  the merger may  focus  our  management  and
          employees  away  from  day-to-day  operations and  require substantial
          commitments of  time  and resources  which could  otherwise  have been
          devoted to other opportunities that could have been beneficial to us;

          o    we would  continue  to face the risks that we  currently  face as
          an independent company.

Item 2.  Unregistered Sales of Equity in Securities and Use of Proceeds
          None.

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


                                       41
<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: August 9, 2006

                                       42