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

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


  [X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 October 31, 2006, was 20,449,499.


<PAGE>

                   INTERCHANGE FINANCIAL SERVICES CORPORATION

INDEX

PART I     FINANCIAL INFORMATION
                                                                    Page No.
  Item 1   Financial Statements

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

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

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

           Unaudited Condensed Consolidated Statements of Cash Flows for
           the nine months ended September 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..............................21

  Item 3   Quantitative and Qualitative Disclosures About Market Risk.......36

  Item 4   Controls and Procedures..........................................40


PART II    OTHER INFORMATION


  Item 1   Legal Proceedings................................................41

  Item 1A  Risk Factors.....................................................41

  Item 2   Unregistered Sales of Equity Securities and Use of Proceeds......42

  Item 3   Defaults upon Senior Securities..................................42

  Item 4   Submission of Matters to a Vote of Security Holders..............42

  Item 5   Other Information................................................42

  Item 6   Exhibits.........................................................42

           Signatures.......................................................43



<PAGE>
                         PART I - FINANCIAL INFORMATION

Item 1:     FINANCIAL STATEMENTS
Interchange Financial Services Corporation
<Table>
<Caption>
-----------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
----------------------------------------------------------------------------------------------
(dollars in thousands, except share data)
(unaudited)                                                         September 30,  December 31
                                                                        2006          2005
                                                                   --------------- -----------
<S>                                                          <C>                   <C>
Assets
Cash and due from banks                                                $    38,046 $    42,620
Interest bearing demand deposits                                                 1           4
                                                                   --------------- -----------
Total cash and cash equivalents                                             38,047      42,624
                                                                   --------------- -----------

Securities held-to-maturity at amortized cost (estimated fair value
     of $31,113 and $36,199 for September 30, 2006 and December 31,
     2005, respectively)                                                    30,687      35,714
                                                                   --------------- -----------
Securities available-for-sale at estimated fair value (amortized
     cost of $288,900 and $324,548 for September 30, 2006 and
     December 31, 2005, respectively)                                      286,327     320,752
                                                                   --------------- -----------
Loans held-for-sale                                                          2,261       1,487
                                                                   --------------- -----------

Loans and leases (net of unearned income and deferred fees of
     $6,913 and $6,786 for September 30, 2006 and December 31,
     2005, respectively)                                                 1,137,803   1,104,482
Less:  Allowance for loan and lease losses                                  10,305      10,646
                                                                   --------------- -----------
Net loans and leases                                                     1,127,498   1,093,836
                                                                   --------------- -----------

Bank owned life insurance                                                   27,767      26,941
Premises and equipment, net                                                 16,593      17,509
Foreclosed assets and other repossessed assets                                 148         122
Goodwill                                                                    68,922      68,910
Intangible assets                                                            4,903       5,469
Accrued interest receivable and other assets                                18,122      18,022
                                                                   --------------- -----------
Total assets                                                           $ 1,621,275 $ 1,631,386
                                                                   =============== ===========

Liabilities
Deposits
    Non-interest bearing                                               $   226,433 $   260,151
    Interest bearing                                                     1,006,400     999,957
                                                                   --------------- -----------
Total deposits                                                           1,232,833   1,260,108
                                                                   --------------- -----------

Securities sold under agreements to repurchase                              12,264       3,939
Short-term borrowings                                                       64,580      46,150
Long-term borrowings                                                        90,328     110,333
Subordinated debentures                                                     20,620      20,620
Accrued interest payable and other liabilities                              11,551      11,234
                                                                   --------------- -----------
Total liabilities                                                        1,432,176   1,452,384
                                                                   --------------- -----------

Commitments and contingent liabilities

Stockholders' equity:
Common stock, without par value; 33,750,000 shares authorized;
     20,442,499 and 20,138,668 shares issued and outstanding for
    September 30, 2006 and December 31, 2005, respectively.                  5,397       5,397
Capital surplus                                                             97,395      97,238
Retained earnings                                                          105,891      99,222
Accumulated other comprehensive loss, net of taxes of $1,005 and
     ($1,497) for September 30, 2006 and December 31, 2005,
     respectively.                                                          (1,580)     (2,310)
                                                                   --------------- -----------
                                                                           207,103     199,547
Less:  Treasury stock                                                       18,004      20,545
                                                                   --------------- -----------
Total stockholders' equity                                                 189,099     179,002
                                                                   --------------- -----------
Total liabilities and stockholders' equity                             $ 1,621,275 $ 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           Nine Months Ended
                                                                 September 30,                September 30,
                                                             ------------------------  ------------------------
                                                              2006          2005          2006         2005
                                                             ----------  ------------  ------------- ----------
<S>                                                          <C>         <C>           <C>           <C>
Interest income
Interest on loans and leases                                  $ 20,138      $ 17,097       $ 58,578    $ 47,907
Interest on federal funds sold                                       5            17              5          18
Interest and dividends on securities
  Taxable interest income                                        2,700         2,342          7,783       7,464
  Interest income exempt from federal income taxes                 644           545          1,970       1,332
  Dividends                                                        170            59            428         196
                                                             ---------  ------------  ------------- -----------
Total interest income                                           23,657        20,060         68,764      56,917
                                                             ---------  ------------  ------------- -----------

Interest expense
Interest on deposits                                             7,828         5,265         21,404      13,782
Interest on securities sold under agreements to repurchase          83            35            180          91
Interest on short-term borrowings                                1,006           370          2,133         900
Interest on long-term borrowings and subordinated debentures     1,298           686          4,106       1,391
                                                             ---------  ------------  ------------- -----------
Total interest expense                                          10,215         6,356         27,823      16,164
                                                             ---------  ------------  ------------- -----------

Net interest income                                             13,442        13,704         40,941      40,753
Provision for loan and lease losses                                150           300            450         700
                                                             ---------  ------------  ------------- -----------
Net interest income after provision for loan and lease losses   13,292        13,404         40,491      40,053
                                                             ---------  ------------  ------------- -----------

Non-interest income
Service fees on deposit accounts                                   929           910          2,829       2,682
Net gain on sale of securities                                      41            77            130         394
Net gain on sale of loans and leases                               175           498            931         877
Bank owned life insurance                                          276           270            826         819
Commissions on sale of annuities and mutual funds                  140           237            417         567
Other                                                              794           685          2,688       2,008
                                                             ---------  ------------  ------------- -----------
Total non-interest income                                        2,355         2,677          7,821       7,347
                                                             ---------  ------------  ------------- -----------

Non-interest expense
Salaries and benefits                                            5,228         5,236         16,091      15,145
Occupancy                                                        1,602         1,382          4,833       4,188
Furniture and equipment                                            319           309          1,041         940
Advertising and promotion                                          190           242            724       1,060
Amortization of intangible assets                                  186           126            566         378
Other                                                            2,151         1,952          6,721       5,870
                                                             ---------  ------------  ------------- -----------
Total non-interest expense                                       9,676         9,247         29,976      27,581
                                                             ---------  ------------  ------------- -----------

Income before income taxes                                       5,971         6,834         18,336      19,819
Income taxes                                                     1,828         2,158          5,560       6,208
                                                             ---------  ------------  ------------- -----------
Net income                                                    $  4,143      $  4,676       $ 12,776    $ 13,611
                                                             =========  ============  ============= ===========

Basic earnings per common share                                  $0.20         $0.24          $0.63       $0.71
                                                                 =====         =====          =====       =====
Diluted earnings per common share                                $0.20         $0.24          $0.61       $0.69
                                                                 =====         =====          =====       =====
---------------------------------------------------------------------------------------------------------------
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 Nine Months Ended September 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 January 1, 2005                                  $ 86,542      $ (633)  $5,397   $73,320  $ (14,471) $150,155
Comprehensive income
    Net Income                                   $ 13,611     13,611                                              13,611
    Other comprehensive losses, net of taxes
       Less: unrealized losses on AFS debt
        securities                                 (1,378)
       Less: net gains on disposition of
        securities                                   (236)
                                               ----------
    Other comprehensive losses, net of taxes       (1,614)                (1,614)                                 (1,614)
                                               ----------
Comprehensive income                             $ 11,997
                                               ==========

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

                                                            -------- -----------  -------  --------  --------- ---------
 Balance at September 30, 2005                                94,976      (2,247)   5,397    73,531    (14,180)  157,477

Comprehensive income
    Net Income                                    $ 6,094      6,094                                               6,094
    Other comprehensive losses, net of taxes
       Less: unrealized losses on AFS debt
        securities                                    (53)
       Less: net gains on disposition of
        securities                                      -
       Minimum pension liability adjustment           (10)
                                               ----------
    Other comprehensive losses, net of taxes          (63)                   (63)                                    (63)
                                               ----------
Comprehensive income                              $ 6,031
                                               ==========

Dividends on common stock                                     (1,843)                                             (1,843)
Issued 1,323,181 shares of common stock in
    connection with the acquisition of
    Franklin Bank                                                                            23,738               23,738
Exercised 14,437 option shares                                                                  (31)       142       111
Purchased 321,737 shares of common stock                                                                (5,791)   (5,791)
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                                     12,776     12,776                                              12,776
    Other comprehensive losses, net of taxes
       Add: unrealized gains on AFS debt
        securities                                    957
       Less: net gains on disposition of
        securities                                   (227)
                                               ----------
    Other comprehensive losses, net of taxes          730                    730                                     730
                                               ----------
Comprehensive income                             $ 13,506
                                               ==========

Dividends on common stock                                     (6,107)                                             (6,107)
Unvested restricted stock                                                                      (210)                (210)
Amortization of deferred compensation of
 restricted stock                                                                               336                  336
Sale of 10,412 of discounted shares of stock                                                     40        108       148
Exercised 232,160 option shares                                                                (181)     2,442     2,261
Forfeiture of 554 shares from restricted
 stock issued                                                                                    (4)        (5)       (9)
Tax benefit from exercise of 56,100
 nonincentive option shares                                                                     176                  176
Purchased 227 shares of common stock                                                                        (4)       (4)

                                                           --------- -----------  -------  --------  --------- ---------
Balance at September 30, 2006                              $ 105,891    $ (1,580)  $5,397   $97,395   $(18,004) $189,099
                                                           ========= ===========  =======  ========  ========= =========
------------------------------------------------------------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements.
All share data was restated to reflect a 3-for-2 stock split declared on January 18, 2005 and paid on February 18, 2005.
</Table>
                                       3
<PAGE>
<Table>
<Caption>
INTERCHANGE FINANCIAL SERVICES CORPORATION
----------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30,
----------------------------------------------------------------------------------------------
(in thousands) (unaudited)
                                                                           2006         2005
                                                                      ------------  ----------
<S>                                                                   <C>           <C>
Cash flows from operating activities
Net income                                                                $ 12,776    $ 13,611
Adjustments to reconcile net income to net cash provided by
     operating activities
  Depreciation and amortization                                              1,723       1,495
  Amortization of securities premiums                                        1,919       3,043
  Accretion of securities discounts                                           (617)       (175)
  Amortization of loan premiums                                                 54          67
  Amortization of premiums in connection with acquisition                      512         518
  Provision for loan and lease losses                                          450         700
  Increase in cash surrender value of Bank Owned Life Insurance               (826)       (819)
  Net gain on sale of securities                                              (130)       (394)
  Origination of loans held for sale                                       (23,488)    (22,766)
  Net gain on sale of  loans and leases                                       (931)       (877)
  Net gain on sale of fixed assets                                              (3)          -
  Write off of foreclosed and repossessed assets                                68          13
  Net loss on sale of foreclosed and repossessed assets                          2           -
Decrease (increase) in operating assets
  Accrued interest receivable                                                  197        (673)
  Deferred taxes                                                              (248)      1,243
  Sale of loans held for sale                                               23,628      23,584
  Other Assets                                                                (769)     (3,313)
  Increase (decrease) in operating liabilities
  Accrued interest payable                                                     382         528
  Other                                                                        (65)        885
                                                                      ------------  ----------
Cash provided by operating activities                                       14,634      16,670
                                                                      ------------  ----------
Cash flows from investing activities
(Payments for) proceeds from
  Net originations of loans and leases                                     (35,027)   (112,778)
  Purchase of loans and leases                                                   -      (4,678)
  Sale of loans and leases                                                     686       1,792
  Purchase of securities available-for-sale                               (129,031)   (136,466)
  Maturities of securities available-for-sale                              127,425      92,475
  Sale of securities available-for-sale                                     36,207      89,926
  Maturities of securities held-to-maturity                                 19,536       1,705
  Sale of securities held-for-sale                                               -         270
  Sale of foreclosed and other repossessed assets                               72           -
  Purchase of securities held-to-maturity                                  (14,634)    (21,891)
  Purchase of fixed assets                                                  (2,945)     (1,054)
  Premium in connection with acquisition                                         6           -
  Sale of fixed assets                                                       2,380       1,171
                                                                      ------------  ----------
Cash provided by (used in) investing activities                              4,675     (89,528)
                                                                      ------------  ----------

Cash flows from financing activities
Proceeds from (payments for)
  Net change in deposits                                                   (27,227)     19,996
  Securities sold under agreements to repurchase and other borrowings      854,457     801,865
  Retirement of securities sold under agreement to repurchase and
         other borrowings                                                 (847,707)   (763,411)
  Issuance of long term subordinated debentures                                  -      20,620
  Dividends                                                                 (6,107)     (5,170)
  Common stock issued                                                          274         335
  Forfeiture of restricted stock                                                (9)          -
  Payout of fractional shares resulting from 3-for-2 stock split                 -          (7)
  Exercise of nonincentive option shares                                       755           -
  Tax benefit from exercise of nonincentive stock options                      176           -
  Treasury stock                                                                (4)       (112)
  Exercise of incentive option shares                                        1,506         279
                                                                      ------------  ----------
Cash provided by (used in) financing activities                            (23,886)     74,395
                                                                      ------------  ----------
Increase  in cash and cash equivalents                                      (4,577)      1,537
Cash and cash equivalents, beginning of period                              42,624      33,110
                                                                      ------------  ----------
Cash and cash equivalents, end of period                                  $ 38,047    $ 34,647
                                                                      ============  ==========
Supplemental disclosure of cash flow information:
Cash paid for:
  Interest                                                                $ 27,823    $ 15,883
  Income taxes                                                               6,962       7,217
Supplemental disclosure of non-cash investing and financing activities:
  Loans transferred to foreclosed real estate and other repossessed assets     168          13
----------------------------------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements.
</Table>
                                       4
<PAGE>

         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
             FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 Securities 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 nine month periods ended
September 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, income 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.

     On September 29, 2006,  the  Financial  Accounting  Standards  Board "FASB"
issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other
Postretirement  Plans ("SFAS 158"), which amends SFAS 87 and SFAS 106 to require
recognition  of the  overfunded  or  underfunded  status  of  pension  and other
postretirement  benefit plans on the balance  sheet.  Under SFAS 158,  gains and
losses,  prior service costs and credits,  and any remaining  transition amounts
under  SFAS 87 and SFAS  106 that  have  not yet  been  recognized  through  net
periodic  benefit cost will be recognized  in  accumulated  other  comprehensive
income,  net of tax  effects,  until they are  amortized  as a component  of net
periodic cost. The measurement date -- the date at which the benefit  obligation
and plan assets are measured -- is required to be the company's fiscal year end.
SFAS 158 is effective for publicly-held  companies for fiscal years ending after
December  15,  2006,  except  for the  measurement  date  provisions,  which are
effective  for fiscal  years ending  after  December  15,  2008.  The Company is
currently   analyzing   the  effects  of  SFAS  158  but  does  not  expect  its
implementation  will  have  a  significant  impact  on the  Company's  financial
conditions or results of operations.

     On September 13, 2006, the Securities and Exchange  Commission "SEC" issued
Staff Accounting

                                       6
<PAGE>

Bulleting No. 108 ("SAB 108"). SAB 108 provides interpretive guidance on how the
effects of the  carryover  or  reversal  of prior year  misstatements  should be
considered in quantifying a potential  current year  misstatement.  Prior to SAB
108,   Companies   might  evaluate  the   materiality   of   financial-statement
misstatements using either the income statement or balance sheet approach,  with
the income statement approach focusing on new misstatements added in the current
year,  and the  balance  sheet  approach  focusing on the  cumulative  amount of
misstatement  present in a company's balance sheet.  Misstatements that would be
material  under  one  approach  could be  viewed  as  immaterial  under  another
approach,  and not be  corrected.  SAB  108 now  requires  that  companies  view
financial statement  misstatements as material if they are material according to
either the income statement or balance sheet approach.  The Company has analyzed
SAB 108 and determined that upon adoption it will have no impact on the reported
results of operations or financial conditions.

     Fair Value  Measurement:  In September 2006, FASB issued FASB Statement No.
157, "Fair Value  Measurements" ("FAS 157"). FAS 157 provides guidance for using
fair  value of  measure  assets and  liabilities.  FAS 157 will  apply  whenever
another  standard  requires (or permits) assets or liabilities to be measured at
fair  value.  FAS 157  provides  guidance  about the  extent to which  companies
measure assets and liabilities at fair value,  the  information  used to measure
fair value and the effect that fair value measurements have on earnings. FAS 157
is effective for financial  statements  issued for fiscal years  beginning after
November  15,  2007  and  interim   periods  within  those  fiscal  years.   The
implementation  of FAS 157 is not  expected  to have a  material  impact  on the
Company's 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).


                                       7
<PAGE>

                                             -------------  ------------
                                             For the three  For the nine
                                             months ended   months ended
                                             September 30,  September 30,
                                                  2005          2005
                                             -------------  -------------
Net Income
     As reported                                   $4,676        $13,611
     Less: Total stock-based compensation
     expense determined under the fair
     value method for all rewards, net of
     related tax effects                              260            782
                                             -------------  -------------
     Pro-forma                                     $4,416        $12,829
                                             =============  =============

Earnings per share:
Basic:
     As reported                                     0.24           0.71
     Pro forma                                       0.23           0.67
Diluted:
     As reported                                     0.24           0.69
     Pro forma                                       0.23           0.66

     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 nine months ended  September  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 nine months  ended
September  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.

                                       8
<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 nine months ended September 30, 2006 (in thousands) (unaudited).

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

Outstanding at January         1,407,919        $ 12.41
Granted                                -              -
Excercised                      (232,160)          9.74
Forfeited                              -              -
                               ------------------------
Outstanding at September 30    1,175,759        $ 12.94
                               ========================

All options are  exercisable  as of  September  30, 2006.  The weighted  average
remaining life of options outstanding at September 30, 2006 was 6.3 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  September  30,  2006,  unrecognized  compensation  cost  related  to
unvested  restricted  stock  totaled  $1.1  million.  The cost is expected to be
recognized  over a weighted  average  period of 2.3 years.  The total grant date
fair value of shares vested during the nine months ended  September 30, 2006 and
2005 was $263,000 and $253,000, respectively.

                                       9
<PAGE>

The  following  table  presents the activity for  restricted  stock for the nine
months ended September 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 September 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.

     On October 16, 2006 at its annual meeting Interchange shareholders approved
the merger agreement between TD Banknorth Inc. and the Company.


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 September 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.

                                       10
<PAGE>

     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 nine
months results of operations ending September 30, 2006 also include those of the
acquired bank for the same period.

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 September 30, 2006 and 2005, the
weighted   average   diluted  shares   outstanding  for  the  nine  months  were
approximately 20.9 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,                                Nine Months Ended,
                           ------------------------------------------------  -----------------------------------------------------
                             September 30, 2006        September 30, 2005        September 30, 2006          September 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     $4,143   20,335   $0.20  $4,676   19,160   $0.24  $12,776    20,279    $0.63  $13,611   19,149   $0.71
                                             =====                    =====                     =======                     =====

Effect of Dilutive Shares
Options issued to
   management                          598                      447                        549                        436
                                  --------                  -------                   --------                    -------

Diluted Earnings per
   Common Share            $4,143   20,933   $0.20  $4,676   19,607   $0.24  $12,776    20,828    $0.61  $13,611   19,585   $0.69
                           ====== ========   =====  ======  =======   =====  =======  ========  =======  =======  =======   =====
</Table>

                                       11
<PAGE>

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  unaudited  condensed  consolidated  financial
condition, results of operations or liquidity of the Company.


Commitments to Extend Credit

     At September  30, 2006,  the Company had  commitments  to extend  credit of
approximately  $323.5 million,  of which  approximately  $5.4 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 that have caused
the Company to  consider  the need to test  goodwill  for  impairment  since the
Company's last assessment.

     Other  intangible  assets  are  amortized  to expense  using  straight-line
methods  over  their  respective  estimated  useful  lives.  At least  annually,
management  reviews goodwill and other intangible assets and evaluates events or
changes in circumstances that may indicate  impairment in the carrying amount of
such  assets.  If the  sum of  the  expected  undiscounted  future  cash  flows,
excluding  interest  charges,  is less than the carrying amount of the asset, an
impairment loss is recognized.  Impairment,  if any, is measured on a discounted
future cash flow basis.  Net  intangible  assets are as follows:  (in thousands)
(unaudited)

                                   -----------------    ------------------
                                     September 30,         December 31,
                                         2006                 2005
                                   -----------------    ------------------

Intangible assets                           $ 6,975               $ 6,975
Accumulated amortization                     (2,072)               (1,506)
                                   -----------------    ------------------
  Net intangible assets                     $ 4,903               $ 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  September  30,  2006 and 2005,  the CDI
amortized  were $186 thousand and $126 thousand,  respectively.  For each of the
nine month periods ended  September  30, 2006 and 2005,  the CDI amortized  were
$566 thousand and $378 thousand,  respectively. The CDI is periodically reviewed
for impairment.

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

                                       12
<PAGE>


2006 for remaining period          $   187
2007                                   747
2008                                   747
2009                                   747
2010                                   747
Thereafter                           1,728
                             -------------
Total                              $ 4,903
                             =============

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.

8.   Cash Dividend

     On October  17,  2006,  the Company  declared a cash  dividend of $0.10 per
share payable on November 7, 2006, to holders of record as of October 30, 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)


                                       13
<PAGE>
<Table>
<Caption>
                                          -------------------------------------------------------------
                                                              September 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             $     718       $     5    $       1        $     722
     Obligations of states & political
             subdivisions                           29,969           437           15           30,391
                                          ----------------   -----------  -----------   --------------
                                                 $  30,687       $   442    $      16        $  31,113
                                          ================   ===========  ===========   ==============

Securities available-for-sale
     Government-Sponsored Enterprises:
          Mortgage-backed securities             $ 150,308       $   146    $   1,771        $ 148,683
          Other debt                                92,105            17        1,068           91,054
     Obligations of states & political
             subdivisions                           35,118           140           37           35,221
     Equity securities                              11,369             -            -           11,369
                                          ----------------   -----------  -----------   --------------
                                                   288,900           303        2,876          286,327
                                          -----------------   -----------  -----------   --------------

        Total securities                         $ 319,587       $   745    $   2,892        $ 317,440
                                          ================   ===========  ===========   ==============

                                          -------------------------------------------------------------
                                                                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>

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

                                       14
<PAGE>

                                     Securities               Securities
                                 Held-to-Maturity          Available-for-Sale
                              ------------------------ ----------------------
                                            Estimated               Estimated
                              Amortized        Fair    Amortized      Fair
                                 Cost         Value       Cost       Value
                              ----------  ------------ ---------  -----------
  Within 1 year                $   3,579     $   3,589  $ 88,460     $ 87,943
  After 1 but within 5 years       3,678         3,783   160,778      158,698
  After 5 but within 10 years     17,796        18,044    23,056       23,002
  After 10 years                   5,634         5,697     5,237        5,315
  Equity securities                    -             -    11,369       11,369
                              ----------   ----------- ---------  -----------
                               $  30,687      $ 31,113  $288,900     $286,327
                              ==========   =========== =========  ===========

     Proceeds  from the sale of  securities  AFS  amounted to $36.2  million and
$89.9  million  for  the  nine  months  ended   September  30,  2006  and  2005,
respectively,  which  resulted in gross realized gains of $176 thousand and $747
thousand for those periods, respectively. Gross realized losses from the sale of
securities  AFS amounted to $46  thousand and $361  thousand for the nine months
ended  September  30,  2006 and 2005,  respectively.  Proceeds  from the sale of
securities HTM amounted to $270 thousand for the nine months ended September 30,
2005,  which resulted in realized  gains of $8 thousand.  The 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
September 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 September 30, 2006:  (in thousands)
(unaudited)

                                       15
<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      $ 39,689    $  275  $ 75,025    $1,496  $114,714     $1,771
     Obligations of U.S. agencies       5,026        14    75,448     1,054    80,474      1,068
Obligations of states & political
        subdivisions                    1,718        19     1,830        18     3,548         37
                                    --------- --------- --------- ---------  -------- ----------
                                     $ 46,433    $  308  $152,303    $2,568  $198,736     $2,876
                                    ========= ========= ========= =========  ======== ==========

Securities HTM
Government-Sponsored Enterprises:
     Mortgage-backed securities      $    178    $    -  $    124    $    1  $    302     $    1
Obligations of states & political
        subdivisions                    4,236        11       356         4     4,592         15
                                    --------- --------- --------- ---------  -------- ----------
                                     $  4,414    $   11  $    480    $    5  $  4,894     $   16
                                    ========= ========= ========= =========  ======== ==========
</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 AFS
Government-Sponsored Enterprises:
     Mortgage-backed securities      $ 42,556    $  561  $ 53,118    $1,148  $ 95,674     $1,709
     Obligations of U.S. agencies       6,058        89   153,227     2,451   159,285      2,540
Obligations of states & political
        subdivisions                    3,423        33     2,512        27     5,935         60
                                    --------- --------- --------- ---------  -------- ----------
                                     $ 52,037    $  683  $208,857    $3,626  $260,894     $4,309
                                    ========= ========= ========= =========  ======== ==========

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

     Securities  with  carrying  amounts of $184.9  million and $76.1 million at
September 30, 2006 and December 31, 2005, respectively,  were pledged for public
entity  deposits,  Federal  Home  Loan  Bank  advances,  securities  sold  under
repurchase agreements and other purposes required by law.

                                       16
<PAGE>

10.  Loans

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

                                      --------------     ---------------
                                      September 30,        December 31,
                                          2006                 2005
                                      --------------     ---------------

Real estate
  Residential                            $   280,564         $   291,448
  Commercial                                 504,846             479,120
  Construction                               110,538              92,390

Commercial
  Commercial and financial                   218,883             211,704
  Lease financing                             20,345              24,584

Consumer
  Lease financing                                  -                  94
  Installment                                  2,627               5,142
                                      --------------      --------------
                                           1,137,803           1,104,482
Allowance for loan and lease losses          (10,305)            (10,646)
                                      --------------      --------------
Net loans and leases                     $ 1,127,498         $ 1,093,836
                                      ==============      ==============

     Loans are net of unearned income and deferred fees of $6.9 million and $6.8
million at September 30, 2006 and December 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)

                                    ---------------     ---------------
                                     September 30,       December 31,
                                         2006                2005
                                    ---------------     ---------------

Nonaccrual loans
  Residential real estate                   $   179             $   822
  Commercial real estate                        176                 363
  Commercial and financial                    1,812                 997
  Commercial lease financing                    342               1,290
  Consumer                                      196                  86
                                    ---------------     ---------------
                                              2,705               3,558
                                    ---------------     ---------------

Troubled debt restructurings                  1,013                   -
                                    ---------------     ---------------

Total nonperforming loans                   $ 3,718             $ 3,558
                                    ===============     ===============


                                       17
<PAGE>

11.  Allowance for Loan and Lease Losses

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

<Table>
<Caption>
                                                   ---------------------- ---------------------
                                                        September 30,           December 31,
                                                            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                    $ 1,220      $ 272    $   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          -          -          -
                                                   ----------- ---------- ----------  ---------
                                                       $ 2,724      $ 276    $ 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         Nine months ended
                                                     September 30,             September 30,
                                                -----------------------   ----------------------
                                                   2006        2005         2006          2005
                                                ----------  -----------   ----------  ----------
<S>                                             <C>         <C>           <C>         <C>
Balance at beginning of period                    $ 10,649     $  9,945    $ 10,646      $ 9,797
Additions (deductions)
  Provision charged to operations                      150          300         450          700
  Recoveries on loans previously charged-off            23           18          84          101
  Loans charged-off                                   (517)        (104)       (875)        (439)
                                                ----------  -----------   ---------   ----------
Balance at end of period                          $ 10,305     $ 10,159    $ 10,305      $10,159
                                                ==========  ===========   =========   ==========
</Table>

12.  Other Non-interest Expense

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

<Table>
<Caption>
                                      ---------------------    -----------------------
                                        Three months ended       Nine months ended
                                          September 30,             September 30,
                                      ---------- -----------   -----------------------
                                         2006        2005          2006        2005
                                      ---------- -----------   -----------  ----------
<S>                                   <C>        <C>           <C>          <C>
Professional fees                        $   510     $   406       $ 1,275     $ 1,184
Legal fees                                   204         254         1,206         695
Directors' fees, travel and retirement       202         230           570         652
Data processing                              292         271           841         800
All other                                    943         791         2,829       2,539
                                      ---------- -----------   -----------  ----------
   Total                                 $ 2,151     $ 1,952       $ 6,721     $ 5,870
                                      ========== ===========   ===========  ==========
</Table>

                                       18
<PAGE>

13. Long-term Borrowings

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

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

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

January 2007                    -           -           10,000        2.69

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

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

December 2015 (d)          25,000        3.94           25,000        3.94
                      -----------   ---------    -------------   ---------
                         $ 90,000        3.92%       $ 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)  The FHLB has an option to call this advance in January 2008.
(c)  The FHLB has an option to call this advance quarterly after October 4,
     2008.
(d)  The FHLB has an option to call this advance quarterly after December 30,
     2007.

     Included in long-term  borrowings is a  capitalized  lease of $328 thousand
and $333 thousand at September 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  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

                                       19
<PAGE>


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)

<Table>
<Caption>
                                     ----------------------------  -----------------------------
                                          Three Months Ended             Nine Months Ended
                                              September 30,                  September 30,
                                     ----------------------------  -----------------------------
                                         2006            2005           2006            2005
                                     ------------   -------------  -------------   -------------
<S>                                  <C>            <C>            <C>             <C>
Service cost                                    -           $ 198              -           $ 594
Interest cost                                $ 86             102          $ 258             306
Expected return on plan assets                (65)            (56)          (195)           (168)
Amortization of prior service cost              -               1              -               3
Amortization of net (gain) loss                 -               1             (1)              3
                                     ------------   -------------  -------------   -------------
Net periodic benefit cost                    $ 21           $ 246          $  62           $ 738
                                     ============   =============  =============   =============
</Table>

     During 2006 the Bank  contributed  $466  thousand 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.


                                       20
<PAGE>

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

     The  following  discussion  is an  analysis of the  condensed  consolidated
financial  condition  and results of operations of the Company for the three and
nine month  periods  ended  September  30, 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.

                                       21
<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  September  30,  2006,  the  Company  had  consolidated   assets  of
approximately   $1.6  billion,   deposits  of  approximately  $1.2  billion  and
shareholders' equity of approximately $189 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%

                                       22
<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  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

                                       23
<PAGE>

considered inadequate to absorb 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 $10.3 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

                                       24
<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.  At December 31, 2005 the Pension  Plan and the defined  benefit
portion of the Supplemental Plan and the Directors Plan were frozen.

                                       25
<PAGE>

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

Summary

     For the third quarter of 2006,  the Company  reported  earnings per diluted
common  share of $0.20,  as compared  to $0.24 for the same period in 2005.  Net
income for the three  months ended  September  30, 2006 was  approximately  $4.1
million compared to $4.7 million for the same period in 2005. Earnings per share
was  affected  by both the  decline in net income and an increase in the average
diluted shares outstanding.

     The  Company's  return on average  assets  decreased to 1.01% for the three
months ended  September 30, 2006 as compared to 1.22% for the three months ended
September 30, 2005. In addition,  the Company's return on average  stockholders'
equity decreased to 8.94% for the third quarter 2006 versus 11.98% for the third
quarter in 2005.

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 35%  and  34% for the  quarters  ended
September 30, 2006 and 2005,  respectively.  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 decreased $201 thousand,  or
1.4%, to $13.8  million for the quarter ended  September 30, 2006 as compared to
the same quarter in 2005. The tax equivalent basis  adjustments for the quarters
ended  September  30,  2006 and  2005  were  $348  thousand  and $287  thousand,
respectively.  The decrease in net interest  income was offset by4 a 6.7% 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 third  quarter  of 2006 was  3.71%,  a decrease  of 31 basis
points as compared to the same quarter in 2005.

     Interest income, on a tax-equivalent  basis,  totaled $24.0 million for the
third quarter of 2006, an increase of $3.7 million, or 18.0%, 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 $113.0
million, while average investments declined by $18.8 million.

     Interest  expense  totaled  $10.2 million for the third quarter of 2006, an
increase of $3.9 million,  as compared to the same period in 2005.  The increase
in  interest  expense  was a result of the  increase  in rates paid

                                       26
<PAGE>
on interest bearing deposits and an increase in borrowings partially offset by a
decrease in interest bearing deposits. The average rate paid on interest bearing
deposit liabilities increased by 105 basis points to 3.14% for the quarter ended
September  30, 2006 as compared  to the same  period in 2005.  Interest  bearing
deposits  decreased on average $12.7 million,  or 1.3%, for the third quarter of
2006 as compared to the same period in 2005.

<Table>
<Caption>
----------------------------------------------------------------------------------------------------------------------------
Analysis of Net Interest Income
----------------------------------------------------------------------------------------------------------------------------
for the quarter ended September 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)                                               $1,139,639     $20,153     7.07 %   $1,026,631    $17,120      6.67 %
Taxable securities (4)                                     280,384       2,870     4.09        299,663      2,401      3.20
Tax-exempt securities (2) (4)                               64,564         977     6.05         64,078        809      5.05
Federal funds sold and interest earning deposits               409           5     4.89          1,968         17      3.46
                                                        ----------  ----------   ------    -----------  ---------  --------
     Total interest-earning assets                       1,484,996      24,005     6.47      1,392,340     20,347      5.85
                                                                    ----------                          ---------

Non-interest earning assets:
Cash and due from banks                                     34,797                              36,446
Allowance for loan and lease losses                        (10,396)                            (10,113)
Other assets                                               131,485                             116,003
                                                        ----------                         -----------
     Total assets                                       $1,640,882                          $1,534,676
                                                        ===========                        ===========

            Liabilities and stockholders' equity
Interest-bearing liabilities
Interest bearing deposits                               $  996,813       7,828     3.14     $1,009,488      5,265      2.09
Borrowings and subordinated debentures                     206,889       2,387     4.62        111,292      1,091      3.92
                                                        ----------  ----------   ------    -----------  ---------  --------
     Total interest-bearing liabilities                  1,203,702      10,215     3.39      1,120,780      6,356      2.27
                                                                    ----------                          ---------

Non-interest bearing liabilities
Demand deposits                                            239,441                             246,923
Other liabilities                                           12,291                              10,867
                                                        ----------                         -----------
     Total liabilities (3)                               1,455,434                           1,378,570
Stockholders' equity                                       185,448                             156,106
                                                        ----------                         -----------
     Total liabilities and stockholders' equity         $1,640,882                          $1,534,676
                                                        ==========                         ===========

Net interest income (tax-equivalent basis)                              13,790     3.08                    13,991      3.58
Tax-equivalent basis adjustment                                           (348)                              (287)
                                                                    ----------                          ---------
     Net interest income                                               $13,442                            $13,704
                                                                    ==========                          =========

Net interest income as a percent of interest-earning
assets (tax-equivalent basis)                                                      3.71 %                              4.02 %
-----------------------------------------------------------------------------------------------------------------------------------
(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 a corporate federal tax
    rate of 35% and 34% for the quarter ended September 30, 2006 and 2005, respectively.
(2) Computed on a fully taxable equivalent basis using a corporate federal tax rate of 35% and 34% for the quarter ended
    September 30, 2006 and 2005, respectively.
(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  of the  ALLL  can be  found  in the  section  titled  "Critical
Accounting  Policies and Judgments:  Allowance for Loan and Lease Losses" above.
In the third  quarter of 2006 and 2005,  the  Company's  provision  for loan and
lease losses was $150 thousand and $300 thousand, respectively.

Non-interest Income

     For the quarter  ended  September  30, 2006,  non-interest  income  totaled
approximately $2.4 million,  a decrease of $322 thousand,  or 12.0%, as compared
to the same  period in 2005.  The change was  largely  due to a

                                       27
<PAGE>

decrease  in net gains on sale of loans and leases and  commissions  on sales of
mutual fund and annuities of $323 thousand and $97 thousand,  respectively. This
was  partly  offset  by an  increase  in  "other"  non-interest  income  of $109
thousand.

Non-interest Expense

     For  the  quarter  ended  September  30,  2006,  non-interest  expense  was
approximately  $9.7 million,  an increase of $429  thousand,  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 $199 thousand.

Income Taxes

     Income tax  expense  as a  percentage  of pre-tax  income was 30.6% for the
three months ended  September  30, 2006 as compared to 31.6% for the same period
of 2005. The decline in the tax rate was partly  attributable to the increase in
non-taxable interest income.

                                       28
<PAGE>

                  NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
                              RESULTS OF OPERATIONS

Summary

     For the nine months ended September 30, 2006, the Company reported earnings
per diluted  common share of $0.61,  as compared to $0.69 for the same period in
2005. Net income for the nine months ended September 30, 2006 was  approximately
$12.8  million  compared to  approximately  $13.6 million for the same period in
2005.  The  earnings  per  share  were   primarily   affected  by  increases  in
non-interest  expense of 8.7% and an  increase  in the  average  diluted  shares
outstanding  offset  somewhat by increases  in net  interest  income of 0.5% and
non-interest income of 6.5%.

     The  Company's  return on average  assets  decreased  to 1.04% for the nine
months ended  September  30, 2006 as compared to 1.21% for the nine months ended
September 30, 2005.  For the nine months ended  September 30, 2006 and 2005, the
Company's  return  on  average   stockholders'  equity  was  9.32%  and  11.84%,
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 35% and 34% for the nine month  periods
ended  September  30,  2006 and 2005,  respectively.  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 $556 thousand,  or
1.3%, to $42.0 million for the nine months ended  September 30, 2006 as compared
to the same quarter in 2005. The tax equivalent  basis  adjustments for the nine
months ended  September  30, 2006 and 2005 were $1.1 million and $706  thousand,
respectively.  The  increase  in net  interest  income was due mostly to an 8.8%
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 nine months ended September 30, 2006 was 3.78%, a
decrease of 29 basis points as compared to the same period in 2005.

     Interest income, on a tax-equivalent  basis,  totaled $69.8 million for the
nine months ended September 30, 2006, an increase of $12.2 million, or 21.2%, as
compared to the same quarter in 2005.  The increase was

                                       29
<PAGE>

mostly  attributable  to the growth in interest  earning assets and the shift in
asset mix as average  loans  grew  $136.4  million,  while  average  investments
declined by $13.4 million.

     Interest  expense  totaled $27.8 million for the first nine months of 2006,
an increase  of $11.7  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 100 basis points to 2.84% for the nine months ended  September  30,
2006 as compared to the same period in 2005.  Interest  bearing deposits grew on
average $4.9 million,  or 0.5%, for the first nine 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 nine months ended September 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)                                                  $1,124,914    $58,644     6.95 %    $  988,490   $47,982      6.47 %
Taxable securities (4)                                        289,231      8,211     3.79         319,940     7,660      3.19
Tax-exempt securities (2) (4)                                  67,705      2,978     5.86          50,413     1,963      5.19
Federal funds sold and interest earning deposits                  140          5     4.76             717        18      3.35
                                                          -----------  ---------- --------    -----------  ---------  --------
     Total interest-earning assets                          1,481,990     69,838     6.28       1,359,560    57,623      5.65
                                                                       ----------                          ---------  --------

Non-interest earning assets
Cash and due from banks                                        36,128                              36,145
Allowance for loan and lease losses                           (10,567)                             (9,994)
Other assets                                                  131,752                             115,561
                                                          -----------                         -----------
     Total assets                                          $1,639,303                          $1,501,272
                                                          ===========                         ===========

            Liabilities and stockholders' equity
Interest-bearing liabilities
Interest bearing deposits                                  $1,006,000     21,404     2.84      $1,001,073    13,782      1.84
Borrowings and subordinated debentures                        192,962      6,419     4.44          93,071     2,382      3.41
                                                          -----------  ---------- --------    -----------  ---------  --------
     Total interest-bearing liabilities                     1,198,962     27,823     3.09      $1,094,144    16,164      1.97
                                                                       ----------                          ---------

Non-interest bearing liabilities
Demand deposits                                               245,641                             243,574
Other liabilities                                              11,877                              10,253
                                                          -----------                         -----------
     Total liabilities (3)                                  1,456,480                           1,347,971
Stockholders' equity                                          182,823                             153,301
                                                          -----------                         -----------
     Total liabilities and stockholders' equity            $1,639,303                          $1,501,272
                                                          ===========                         ===========

Net interest income (tax-equivalent basis)                                42,015     3.19                    41,459      3.68
Tax-equivalent basis adjustment                                           (1,074)                              (706)
                                                                       ----------                          ---------
     Net interest income                                                 $40,941                            $40,753
                                                                       ==========                          =========

Net interest income as a percent of interest-earning
assets (tax-equivalent basis)                                                        3.78 %                              4.07 %
-------------------------------------------------------------------------------------------------------------------------------
(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 a corporate federal tax
    rate of 35% and 34% for the quarter ended September 30, 2006 and 2005, respectively.
(2) Computed on a fully taxable equivalent basis using a corporate federal tax rate of 35% and 34% for the quarter ended
    September 30, 2006 and 2005, respectively.
(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>

                                       30
<PAGE>

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  of the  ALLL  can be  found  in the  section  titled  "Critical
Accounting  Policies and Judgments:  Allowance for Loan and Lease Losses" above.
In the first nine months of 2006 and 2005, the Company's  provision for loan and
lease losses was $450 thousand and $700 thousand, respectively.

Non-interest Income

     For the nine months ended September 30, 2006,  non-interest  income totaled
$7.8  million,  an increase of $474  thousand,  or 6.5%, as compared to the same
period  in  2005.  The  change  was  largely  due  to  an  increase  in  "other"
non-interest  income and service  charges on deposits of $680  thousand and $147
thousand,  respectively. This was partly offset by declines in net gains on sale
of securities and commissions on mutual funds and annuities of $264 thousand and
$150 thousand, respectively. The increase in "other" non-interest income was due
in part to an increase in referral  income and servicing fee income  relating to
the sales of Small Business Administration (SBA) loans.

Non-interest Expense

     For the nine months  ended  September  30, 2006,  non-interest  expense was
$30.0  million,  an increase of $2.4 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 $851  thousand.  The  increase in
"other" non-interest expense was principally due to an increase in legal fees of
$511 thousand,  of which $380 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 $336 thousand.

Income Taxes

     Income tax expense as a percentage of pre-tax income was 30.3% for the nine
months  ended  September  30,  2006 as  compared to 31.3% for the same period of
2005.  The decline in the tax rate was partly  attributable  to the  increase in
non-taxable interest income.

                                       31
<PAGE>

                               FINANCIAL CONDITION

Cash and Cash Equivalents

     At September 30, 2006, cash and cash  equivalents  totaled $38.0 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 September
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 September 30,
2006 and 2005, approximately $23.4 million and $32.4 million,  respectively, are
bond or tax anticipation notes from local municipalities, which are not rated.

     The Company uses its securities portfolio to ensure liquidity for cash flow
requirements,  to manage interest rate risk, provide a source of income,  ensure
collateral  is available  for  pledging  requirements  and manage asset  quality
diversification.  At September 30, 2006,  investment  securities  totaled $317.0
million and represented 19.6% of total assets, as compared to $356.5 million and
21.9%, respectively, at December 31, 2005. Securities AFS comprised 90.3% of the
total  securities  portfolio  at  September  30,  2006 as  compared  to 90.0% at
December 31, 2005. At September 30, 2006, the Company had a net unrealized  loss
of $2.1 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 $36.2  million and
$89.9  million  for  the  nine  months  ended   September  30,  2006  and  2005,
respectively,  which  resulted in gross realized gains of $176 thousand and $747
thousand for those periods, respectively. Gross realized losses from the sale of
securities  AFS amounted to $46  thousand and $361  thousand for the nine months
ended  September  30,  2006 and 2005,  respectively.  Proceeds  from the sale of
securities HTM amounted to $270 thousand for the nine months ended September 30,
2005,  which resulted in realized  gains of $8 thousand.  The HTM securities had
significantly  paid  down to less  than 85% of the

                                       32
<PAGE>


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.

Loans

     Total loans amounted to $1.14 billion at September 30, 2006, an increase of
$34.1  million  from  $1.10  billion  at  December  31,  2005.  The  growth  was
attributable to increases in commercial mortgage loans and construction loans of
$25.7 million and $18.1 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  September  30,  2006  amounted  to $3.9  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 0.34% at
September 30, 2006 from 0.33% at December 31, 2005.

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

                                               ---------------  --------------
                                                September 30,    December 31,
                                                     2006            2005
                                               ---------------  --------------

  Nonaccrual loans                               $       2,705    $      3,558
  Troubled debt restructurings                           1,013               -
  Foreclosed and other repossessed assets                  148             122
                                               ---------------- --------------
    Total nonperforming assets                   $       3,866    $      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 nine months ended
September 30, 2006, the ALLL remained  relatively  flat at $10.3  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 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 $10.3 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

                                       33
<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 nine  months  ended  September  30,  2006 and  2005:  (dollars  in
thousands) (unaudited)

<Table>
<Caption>
                                             -----------------------   ----------------------
                                                Three months ended       Nine months ended
                                                   September 30,            September 30,
                                             -----------------------   ----------------------
                                                2006         2005         2006        2005
                                             -----------  ----------   ----------   ---------
<S>                                          <C>          <C>          <C>          <C>
Average loans outstanding                    $ 1,139,639  $1,026,631   $1,124,914    $988,490
                                             ===========  ==========   ==========   =========

Allowance at beginning of period             $    10,649  $    9,945   $   10,646    $  9,797
                                             -----------  ----------   ----------   ---------
Loans charged-off:
          Commercial and financial                    18          68          176         157
          Commercial lease financing                 494          31          691         264
          Consumer loans                               5           5            8          18
                                             -----------  ----------   ----------   ---------
              Total                                  517         104          875         439
                                             -----------  ----------   ----------   ---------

Recoveries of loans previously charged-off:
          Real estate                                  -           -            -          72
          Commercial and financial                    23          12           80          12
          Commercial lease financing                   -           -            -           -
          Consumer loans                               -           6            4          17
                                             -----------  ----------   ----------   ---------
              Total                                   23          18           84         101
                                             -----------  ----------   ----------   ---------
Net loans charged-off                                494          86          791         338
                                             -----------  ----------   ----------   ---------

Provision for loan and lease losses                  150         300          450         700
                                             -----------  ----------   ----------   ---------
Allowance at end of period                   $    10,305  $   10,159   $   10,305    $ 10,159
                                             ===========  ==========   ==========   =========

Allowance to loans (end of period)                  0.91 %      0.97 %       0.91 %      0.97 %
Ratio of net charge-offs to average loans
   (annualized)                                     0.17 %      0.03 %       0.09 %      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 September 30, 2006 total deposits  declined  $27.3 million,  or 2.2%, to
$1.23 billion from December 31, 2005.  The decrease was largely in  non-interest
bearing demand  deposits,  which declined  $33.7  million,  or 13.0%,  to $226.4
million at September  30, 2006 from  December 31, 2005.  At September  30, 2006,
non-interest  bearing demand deposits equated to 18.4% of total deposits,  which
was down from  20.6% at  December  31,  2005.  Other  interest-bearing  deposits
remained at $687.4 million at September 30, 2006 and represented  55.8% of total
deposits as compared to 54.6% of total  deposits  at  December  31,  2005.  Time
deposits  amounted to $319.0  million,  or 25.8%, of total deposits at September
30, 2006, as compared to $312.5 million,  or 24.8% of total deposits at December
31, 2005.

                                       34
<PAGE>


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

                                     --------------    ------------
                                     September 30,     December 31,
                                          2006             2005
                                     --------------    ------------

Non-interest bearing demand deposits    $   226,433     $   260,151
Interest bearing demand deposits            479,466         466,436
Savings deposits                            110,711         121,093
Money market deposits                        97,231          99,907
Time deposits                               318,992         312,521
                                     --------------    ------------
    Total                               $ 1,232,833     $ 1,260,108
                                     ==============    ============


                                       35
<PAGE>

Item 3:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

     The  Company  does not have  any  material  exposure  to  foreign  currency
exchange rate risk or commodity  price risk.  The Company did not enter into any
market rate sensitive  instruments for trading purposes nor did it engage in any
trading or  hedging  transactions  utilizing  derivative  financial  instruments
during the first nine months of 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 September 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 2.9%.  At September  30, 2006,  the Company was within
policy limits  established by the board of directors for changes in net interest

                                       36
<PAGE>

income and future economic value of equity.  The following table illustrates the
effects on net interest income given an instantaneous  and parallel shift in the
yield curve of up to a 200 basis point rising  interest rate  environment  and a
200 basis point declining interest rate environment: (unaudited)


                        --------------------------------------------------
                        Percentage Change in Estimated Net Interest Income
                                    over a twelve month horizon
                        --------------------------------------------------
                              September 30,       September 30,
                                   2006               2005
                             ---------------    ---------------
+200 basis points                      -2.9 %             -4.9 %
+100 basis points                      -1.1               -2.1
-100 basis points                       5.6                1.1
-200 basis points                       6.2                0.0

     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

                                       37
<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  organzation's  total qualifying capital includes two components:
core capital (Tier 1 capital) and supplementary  capital (Tier 2 capital).  Core
capital,  which must comprise at least half of total  capital,  includes  common
shareholders'  equity,  qualifying  perpetual  preferred stock,  trust preferred
securities  (subject  to  certain  limitations)  and  minority  interests,  less
goodwill and any unrealized gains or losses.  Supplementary capital includes the
allowance  for loan losses  (subject to certain  limitations),  other  perpetual
preferred stock, trust preferred  securities that exceed Tier 1 limits,  certain
other capital  instruments and term subordinated  debt. Total capital is the sum
of core and supplementary  capital. The Company's $20 million of trust preferred
securities is considered Tier 1 capital by the Federal Reserve Board.

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

     The capital  levels of the Company and the Bank at September 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.

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

<Table>
<Caption>
                                                                                                     To Be "Well
                                                                                                 Capitalized" Under
                                                                            For Capital           Prompt Corrective
                                                     Actual              Adequacy Purposes        Action Provisions
                                            ------------------------   ----------------------   ---------------------
                                              Amount        Ratio         Amount      Ratio       Amount      Ratio
                                            -----------   ----------   ------------  --------   ----------  ---------
<S>                                         <C>           <C>          <C>           <C>        <C>         <C>
As of September 30, 2006 (unaudited):
   Total Capital (to Risk Weighted Assets):
     The Company                             $ 148,942        12.41 %     $ 96,030      8.00 %        N/A        N/A
     The Bank                                  148,948        12.38 %       96,242      8.00 %  $ 120,303      10.00 %
   Tier 1 Capital (to Risk Weighted Assets):
     The Company                               138,617        11.55 %       48,121      4.00 %        N/A        N/A
     The Bank                                  138,623        11.52 %       48,282      4.00 %     72,182       6.00 %
   Tier 1 Capital (to Average Assets):
     The Company                               138,617         8.80 %       47,233      3.00 %        N/A        N/A
     The Bank                                  138,623         8.79 %       47,310      3.00 %     78,850       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>

                                       38
<PAGE>

Liquidity

     Liquidity  is the  ability  to  provide  sufficient  resources  to meet all
current financial  obligations and finance prospective  business  opportunities.
The Company's  liquidity  position over any given period of time is a product of
its operating, financing and investing activities. The extent of such activities
is often shaped by such external  factors as competition for deposits and demand
for loans.

     The  Company's  most  liquid  assets  are  cash and  cash  equivalents.  At
September 30, 2006, the total of such assets amounted to $38.0 million, or 2.3%,
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 September 30, 2006 and December 31, 2005,  total  deposits  amounted to $1.23
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 September 30, 2006, short-term borrowings from the FHLB
and REPOS amounted to $64.6 million and $12.3 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 September 30, 2006 amounted to $317.0 million, a decrease of
$39.5  million,  from $356.5 million at December 31, 2005. At September 30, 2006
securities  AFS  amounted  to  $286.3  million,  or 90.3%,  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 $44.6 million was utilized at September 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 September 30, 2006 outstanding commitments to
fund loans totaled  $318.1  million and  outstanding  standby  letters of credit
totaled $5.4 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

                                       39
<PAGE>

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.

Item 4:  CONTROLS AND PROCEDURES

     In accordance  with Rule 13a-15(b) of the  Securities  Exchange Act of 1934
(the "Exchange  Act"), as of the end of the quarter ended September 30, 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.

                                       40
<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.

          The  Company's  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 shareholders have approved
          the merger and all required  regulatory  approvals have been obtained,
          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;

                                       41
<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


                                       42
<PAGE>

SIGNATURES

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

Interchange Financial Services Corporation

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


Dated: November 9, 2006

                                       43