EXHIBIT 13

                       2005 ANNUAL REPORT TO STOCKHOLDERS
<PAGE>

                                                                      Exhibit 13

Dear Stockholder:

      The past year has seen Sound  Federal  pass the $1.0  billion  asset mark.
While this is a milestone that we are very proud of, this notable achievement is
equally  significant for what it does not state. It does not adequately  reflect
the 114 years of dedicated  care and diligence  that so many people have devoted
to our  Company  and to the  community.  It  does  not  tell  the  story  of the
generations  of dedicated  employees who  envisioned  and then molded and shaped
Sound Federal into the Company you see today. Nor does it adequately acknowledge
the  loyalty  of our valued  customers  over the years.  It  certainly  does not
reflect  the  tragedies  and  triumphs of the last 114 years that we have shared
with the communities we serve and that are woven into the fabric of who and what
we are.  We are  fortunate  to be the  stewards  of Sound  Federal  to mark this
milestone as others have marked milestones before us.

      As we reflect on passing the $1.0 billion asset mark, we are proud of this
year's principal accomplishments:

      o     The  opening  of  our  Carmel,  New  York  and  Bethel,  Connecticut
            branches, bringing our total number of branches to fourteen.

      o     The growth of our loan portfolio by 17.2% to $560.8 million.

      o     The growth of our deposits by 17.4% to $831.8 million.

      o     The   continued   high   quality   of  our  loan   portfolio,   with
            non-performing  loans  consisting of only $580,000 or 0.10% of total
            loans.

As our franchise continues to grow, changes in the economy continue to challenge
us. The yield curve  flattened  during fiscal 2005 as short-term  interest rates
began to increase.  As a result,  our net interest  margin and net interest rate
spread  have  decreased.  As rates  continue  to rise,  we expect to see further
decreases in net interest  margin and net interest  rate spread.  Several  years
ago, we began to restructure our balance sheet in order to mitigate our interest
rate  risk.  Adjustable  rate  loans,  which  accounted  for only  1.6% our loan
portfolio   at  March  31,   2000,   now  account  for  37.8%  of  total  loans.
Adjustable-rate  mortgage-backed  securities  now  represent  41% of  our  total
securities  portfolio.  We continue  to strive to lengthen  the terms of deposit
accounts.

While rising  interest  rates continue to challenge us, we remain focused on the
fundamentals of building a solid franchise.  We are confident that the growth of
the franchise  will provide  growth in  stockholder

                                       1
<PAGE>

value.  However,  franchise  growth  must be  accompanied  by  strong  operating
principles and discipline.  This  discipline has resulted in operating  expenses
that are 1.95% of average assets - well below our peers. Equally significant, we
believe  our  market  area  provides   Sound  Federal  with   excellent   growth
opportunities.

Our success is due in no small  measure to the customers  and  communities  that
have  supported  Sound  Federal  for 114 years and to a talented  and  dedicated
banking  staff.  As the stewards of Sound  Federal,  the Board of Directors  and
Management  remain  focused on our  customers and our  stockholders.  Building a
strong  franchise  depends on it. Building a strong franchise in our market area
is the  cornerstone of our business model which is designed to grow  stockholder
value.

We look forward to fiscal 2006 with enthusiasm and pride. On behalf of all of us
at Sound Federal, thank you for your support.

/s/ Richard P. McStravick                            /s/ Bruno J. Gioffre


                                       2
<PAGE>

Selected Consolidated Financial Information
(In thousands)

<TABLE>
<CAPTION>
                                                                           At or for the Years Ended March 31,
                                                      ------------------------------------------------------------------------------
                                                         2005             2004             2003            2002             2001
                                                      ------------------------------------------------------------------------------
<S>                                                   <C>              <C>              <C>              <C>              <C>
Results of Operations:
Net interest income                                   $   26,423       $   26,192       $   25,839       $   18,906       $   14,568
Provision for loan losses                                    300              275              275              175              208
Non-interest income                                        1,447            1,041              890              731              382
Non-interest expense                                      18,568           16,106           12,709           10,316           10,033
                                                      ----------       ----------       ----------       ----------       ----------
Income before income tax expense                           9,002           10,852           13,745            9,146            4,709
Income tax expense                                         3,533            4,234            5,219            3,376            2,050
                                                      ----------       ----------       ----------       ----------       ----------
Net income                                            $    5,469       $    6,618       $    8,526       $    5,770       $    2,659
                                                      ==========       ==========       ==========       ==========       ==========

Financial Condition:
Total assets                                          $1,006,950       $  890,541       $  796,088       $  623,985       $  552,934
Loans, net                                               560,751          478,455          427,684          418,368          293,807
Mortgage-backed securities:
      Available for sale                                 199,745          255,853          212,484          104,134          115,931
      Held to maturity                                    59,777               --               --               --           25,177
Other securities:
      Available for sale                                  76,409           81,877           82,564           46,097           41,595
      Held to maturity                                    19,712               --               --               --            3,038
Deposits                                                 831,768          708,330          604,260          519,905          473,546
Borrowings                                                38,000           35,000           35,000           34,922           14,698
Stockholders' equity                                     127,160          137,059          138,321           61,015           56,929
</TABLE>


                                       3
<PAGE>

Selected Consolidated Financial Information (continued)
(Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                  At or for the Years Ended March 31,
                                                                    ----------------------------------------------------------------
                                                                         2005         2004           2003         2002         2001
                                                                    ----------------------------------------------------------------
<S>                                                                      <C>          <C>            <C>          <C>          <C>
Performance Ratios:
Return on average assets                                                 0.57%        0.79%          1.23%        1.01%        0.56%
Return on average equity                                                 4.23         4.87          10.50         9.85         4.89
Average interest rate spread (1)                                         2.69         2.98           3.71         3.31         2.96
Net interest margin (2)                                                  2.91         3.24           3.93         3.51         3.26
Efficiency ratio (3)                                                    66.85        59.14          47.65        52.72        64.80
Dividend payout ratio (4)                                               51.06        40.74          20.90        22.22        50.00

Per Common Share Data:
Basic earnings per share                                                $0.47        $0.54          $0.67        $0.45        $0.20
Diluted earnings per share                                               0.46         0.52           0.65         0.44         0.20
Book value per share (5)                                                10.27        10.40          10.44         4.62         4.28
Tangible book value per share (5)                                        9.15         9.34           9.39         3.56         3.23
Dividends per share                                                      0.24         0.22           0.14         0.10         0.10

Capital Ratios:
Average equity to average total assets (consolidated)                   13.59%       16.15%         11.68%       10.26%       11.42%
Tier 1 leverage capital at end of period (Bank only)                    10.26        10.92          11.29         6.54         6.35

Asset Quality Data:
Total non-performing loans                                               $580       $1,981           $477         $755         $933
Total non-performing assets                                               580        1,981            477          869        1,130
</TABLE>

(1)   Represents   the  difference   between  the  weighted   average  yield  on
      interest-earning  assets and the weighted average cost of interest-bearing
      liabilities.

(2)   Represents  net interest  income as a percent of average  interest-earning
      assets.

(3)   Computed  by  dividing  non-interest  expense  by the sum of net  interest
      income and non-interest income.

(4)   Calculated  by dividing  cash  dividends  per share by basic  earnings per
      share for the period.

(5)   Computed  based on total  common  shares  issued,  less  treasury  shares.
      Tangible book value excludes goodwill.


                                       4
<PAGE>

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

      Our principal business has historically  consisted of offering savings and
other  deposits to the general public and using the funds from these deposits to
make loans secured by residential real estate.  Our net income depends primarily
upon our net interest  income,  which is the difference  between interest income
earned  on  interest-earning  assets,  such as loans  and  investments,  and the
interest  expense paid on deposits.  To a much lesser degree,  our net income is
affected by non-interest  income,  such as banking service charges and fees. Net
income is also affected by, among other things,  provisions  for loan losses and
non-interest   expenses.   Our  principal   non-interest   expenses  consist  of
compensation  and benefits,  occupancy and equipment,  data  processing  service
fees,  advertising  and  promotion  and other  expenses,  such as ATM  expenses,
professional  fees and  insurance  premiums.  Our net  income  also is  affected
significantly  by general  economic  and  competitive  conditions,  particularly
changes in market interest rates;  government legislation and policies affecting
fiscal affairs,  housing and financial  institutions;  monetary  policies of the
Federal Reserve System; and the actions of bank regulatory authorities.

Forward-Looking Statements

      When  used in this  Annual  Report,  the  words or  phrases  "will  likely
result," "are  expected  to," "will  continue,"  "is  anticipated,"  "estimate,"
"project"  or similar  expressions  are  intended to  identify  "forward-looking
statements" within the meaning of the Private  Securities  Litigation Reform Act
of 1995. Such statements reflect our current view with respect to future-looking
events and are  subject  to certain  risks and  uncertainties  that could  cause
actual results to differ  materially  from  Management's  current  expectations.
Among others, these risks and uncertainties  include changes in general economic
conditions,  changes in policies by regulatory agencies,  hostilities  involving
the United  States,  fluctuations  in  interest  rates,  demand for loans in the
Company's  market area,  changes in the quality or  composition of the Company's
loan and investment portfolios,  changes in accounting  principles,  policies or
guidelines  and other  economic,  competitive,  governmental  and  technological
factors  affecting our operations,  markets and products.  The Company wishes to
caution  readers  not  to  place  undue  reliance  on any  such  forward-looking
statements,  which speak only as of the date made.  The Company wishes to advise
readers  that the factors  listed  above could  affect the  Company's  financial
performance  and could cause the Company's  actual results for future periods to
differ materially from its forward-looking statements.

Critical Accounting Policies

      Accounting  policies  considered  particularly  critical to our  financial
results  include the allowance for loan losses and accounting for goodwill.  The
methodology  for  determining  the  allowance  for loan losses is  considered  a
critical  accounting  policy by  management  due to the high  degree of judgment
involved,  the  subjectivity of the  assumptions  utilized and the potential for
changes in the economic  environment  that could result in changes to the amount
of the  allowance for loan losses  considered  necessary.  Management  considers
accounting for goodwill to be a critical policy because  goodwill must be tested
for  impairment at least annually using an approach that involves the estimation
of fair values.  Estimating  fair values  involves a high degree of judgment and
subjectivity in the assumptions utilized.

Management of Market Risk

      Our most significant form of market risk is interest rate risk. Our assets
consist  primarily  of mortgage  loans,  which have longer  maturities  than our
liabilities,  which  consist  primarily  of  deposits.  Our  interest  rate risk
management  program focuses primarily on evaluating and managing the composition
of assets and  liabilities  in the context of various  interest rate  scenarios.
Factors  beyond  management's   control,  such  as  market  interest  rates  and
competition,  also have an impact on interest income and interest expense. We do
not own any trading assets and have not engaged in hedging  transactions such as
interest rate swaps and caps.


                                       5
<PAGE>

      We attempt to manage  interest  rate risk and to minimize  the exposure of
earnings  to changes in market  interest  rates.  During the low  interest  rate
environment  that has existed in recent  years,  we have  followed the following
strategies  to  manage  interest  rate  risk:  (i)  purchasing  adjustable  rate
mortgage-backed securities issued by Fannie Mae, Freddie Mac or Ginnie Mae, (ii)
purchasing  securities  with an  average  life of five  years or less and  (iii)
originating a greater volume of adjustable  rate mortgage loans. By investing in
shorter term and adjustable rate financial instruments, we believe we are better
positioned  to react to  increases  in market  interest  rates.  However,  these
financial instruments generally bear lower yields than longer term or fixed rate
instruments. Thus, during the recent sustained period of relatively low interest
rates,  these  strategies  have resulted in lower levels of interest income than
would be obtained by investing in longer term fixed rate instruments. Management
believes,  however,  that  maintaining  a  significant  portion of our assets in
shorter  term  and  adjustable  rate  assets  enables  us to take  advantage  of
increases in interest  rates,  reduces the exposure of earnings to interest rate
fluctuations and enhances long-term profitability.

      Management  monitors interest rate sensitivity  through the use of a model
that  estimates  the change in the Bank's net  portfolio  value  ("NPV") and net
interest  income  ("NII") in  response  to a range of assumed  changes in market
interest  rates.  NPV is the present  value of expected  cash flows from assets,
liabilities,  and off-balance sheet items.  Management is not aware of any known
trends that would significantly affect the timing or amount of the expected cash
flows utilized in the model. The model, as currently used,  estimates the effect
on NPV and NII of  instantaneous  and permanent 100 to 300 basis point increases
and 100 to 200 basis point decreases in market  interest  rates,  with no effect
given to any  actions  that  management  might  take to  counter  the  effect of
interest rate  movements.  We  historically  estimated the effects of 100 to 300
basis point decreases in interest rates. However, given the current low level of
market interest rates and the low probability of further significant declines in
absolute  rates,  we did not calculate  the effects of interest  rate  decreases
greater than 200 basis points.

      The table below sets forth, as of March 31, 2005, the estimated changes in
the Bank's  NPV and NII that  would  result  from the  designated  instantaneous
changes in  interest  rates.  The  interest  rate  changes  are assumed to occur
uniformly across the yield curve.

                                    Estimated Increase      Estimated Increase
   Changes in                      (Decrease) in NPV (1)     (Decrease) in NII
 Interest Rates     Estimated    -----------------------    --------------------
 (Basis Points)        NPV          Amount      Percent          Percent
 --------------     ---------    -----------   ---------    --------------------
                      (Dollars in thousands)

      +300          $ 71,492      $ (59,449)    (45.4)%           (10.5)%
      +200            92,820        (38,121)    (29.1)             (5.8)
      +100           113,502        (17,439)    (13.3)             (2.4)
        0            130,941             --        --                --
      -100           141,788         10,847       8.3               0.9
      -200           149,051         18,110      13.8              (0.9)

----------
(1)   Represents  the decrease in the estimated  NPV at the indicated  change in
      interest rates compared to the NPV assuming no change in interest rates.

      Computations of prospective effects of hypothetical  interest rate changes
are based on numerous  assumptions  including relative levels of market interest
rates,  loan  prepayments  and deposit  decay,  and should not be relied upon as
indicative  of actual  results.  Further,  the  computations  do not reflect any
actions management may undertake in response to changes in interest rates.

      The above table  indicates  that at March 31, 2005,  in the event of a 100
basis point  decrease in interest  rates,  we would expect to experience an 8.3%
increase  in NPV and a 0.9%  increase  in NII. In the event of a 200 basis point
increase in interest  rates,  we would expect to experience a 29.1%  decrease in
NPV and a 5.8% decrease in NII. Subsequent to March 31, 2005, there have been no
significant  changes in our interest rate risk exposures or how those  exposures
would be managed.

      Certain shortcomings are inherent in the methodology used to model changes
in NPV and NII. The model requires that management make certain assumptions that
may or may not  reflect  the  manner in which  yields  and costs  will  actually
respond to changes in market interest rates.  Further,  the  computations do not
reflect any actions


                                       6
<PAGE>

management  may  undertake  in response to changes in  interest  rates.  In this
regard,  the table  presented  assumes that (i) the  composition of the interest
sensitive  assets and  liabilities  existing at the  beginning  of a period will
remain  constant over the period being measured and (ii) a particular  change in
interest rates is reflected  uniformly  across the yield curve regardless of the
duration or repricing of specific assets and liabilities.  Accordingly, although
the table  provides an indication of interest rate risk exposure at a particular
point in time,  these  measurements  are not  intended  to and do not  provide a
precise  forecast of the effect of changes in market  interest  rates on our net
interest  income,  and will differ from actual results.  We will not necessarily
limit  projected  changes  in  NPV  if  the  required  action  would  present  a
disproportionate risk to continued profitability.

Comparison of Financial Condition at March 31, 2005 and 2004

Assets. The Company's total assets amounted to $1.0 billion at March 31, 2005 as
compared to $890.5  million at March 31, 2004.  The $116.4  million  increase in
assets  primarily  consisted of an $82.3 million increase in net loans to $560.8
million and a $17.9 million increase in securities to $355.6 million.  Our asset
growth was funded principally by a $123.5 million increase in deposits to $831.8
million.

The increase in securities  consisted of a $79.5 million  increase in securities
classified  as held to  maturity  and a $61.6  million  decrease  in  securities
available  for sale. In June 2004,  the Company began to classify  substantially
all  securities  purchases as held to maturity.  This  decision was based on the
size  of  the   portfolio   classified   as  available   for  sale  relative  to
interest-earning  assets  and  stockholders'  equity,  the  Company's  liquidity
position  (which allows the Company to hold  securities  until  maturity) and an
increase in market interest  rates.  As these factors change in the future,  the
Company will evaluate the classification of future securities purchases.

Liabilities. Total deposits were $831.8 million at March 31, 2005 as compared to
$708.3 million at March 31, 2004, an increase of $123.5 million. Certificates of
deposit increased $107.2 million to $552.9 million from $445.7 million;  savings
and club accounts  increased $2.3 million to $150.5 million from $148.2 million;
and money market,  NOW and commercial  checking accounts increased $14.0 million
to $128.4 million from $114.4 million.

Stockholders'  Equity.  Total  stockholders'  equity  decreased  $9.9 million to
$127.2  million at March 31,  2005 as  compared  to $137.1  million at March 31,
2004. The decrease reflects treasury stock purchases at a cost of $12.1 million,
dividends  paid of $2.9 million and a decrease of $3.4 million  attributable  to
the change in accumulated other comprehensive  income or loss,  partially offset
by net income of $5.5  million and  proceeds of  $258,000  from the  issuance of
treasury shares for stock options exercised.

The  accumulated  other  comprehensive  loss of $2.7  million at March 31,  2005
represents  the after-tax net unrealized  loss on securities  available for sale
($4.5  million  pre-tax).  The  Company  invests  primarily  in  mortgage-backed
securities  issued by Ginnie Mae,  Fannie Mae and  Freddie  Mac, as well as U.S.
Government and Agency  securities.  The unrealized losses on these securities at
March 31, 2005 were caused by increases in market yields subsequent to purchase.
There  were no debt  securities  past due or  securities  for which the  Company
currently  believes  it is not  probable  that it will  collect  all amounts due
according to the contractual terms of the security.  Because the Company has the
ability to hold securities with unrealized  losses until a market price recovery
(which, for debt securities may be until maturity), the Company did not consider
these securities to be other-than-temporarily impaired at March 31, 2005.


                                       7
<PAGE>

Average Balance Sheets

The following table sets forth average balance sheets, average yields and costs,
and certain other information for the years ended March 31, 2005, 2004 and 2003.
The table reflects the average yield on interest-earning  assets and the average
cost of  interest-bearing  liabilities  (derived by dividing  interest income or
expense   by  the  daily   average   balance  of   interest-earning   assets  or
interest-bearing  liabilities,  respectively),  as  well  as the  net  yield  on
interest-earning  assets. No tax-equivalent  yield adjustments were made, as the
effect  thereof  was  not  material.  Nonaccrual  loans  were  included  in  the
computation of average  balances and therefore have a zero yield. The yields set
forth below include the effect of deferred loan  origination fees and costs, and
purchase  discounts  and  premiums,  that are  amortized or accreted to interest
income.  Interest  income on loans for fiscal years 2005, 2004 and 2003 has been
reduced by  amortization  of net deferred  loan  origination  costs of $568,000,
$981,000  and  $633,000,   respectively.   Interest  income  on  mortgage-backed
securities  has been  reduced  by  amortization  of  purchase  premiums  (net of
discounts)  of $1.1  million,  $631,000  and $15,000  for those same  respective
years.

<TABLE>
<CAPTION>
                                                                     For the Years Ended March 31,
                                     -----------------------------------------------------------------------------------------------
                                                 2005                             2004                             2003
                                     -----------------------------------------------------------------------------------------------
                                       Average            Average      Average             Average      Average             Average
                                     Outstanding           Yield/    Outstanding            Yield/    Outstanding            Yield/
                                       Balance   Interest   Rate       Balance    Interest   Rate       Balance    Interest   Rate
                                     ----------- -------- -------    -----------  -------- -------    -----------  -------- -------
                                                                         (Dollars in thousands)
<S>                                   <C>         <C>       <C>       <C>          <C>       <C>       <C>          <C>       <C>
Interest - earning assets:
Loans (1)                             $ 521,558   29,430    5.64%     $ 442,466    26,819    6.06%     $ 433,824    29,906    6.89%
Mortgage-backed securities (2)          259,897    9,058    3.49%       243,952     8,909    3.65%       123,009     6,676    5.43%
Other securities (2)                     91,725    2,940    3.21%        85,868     2,629    3.06%        52,232     2,264    4.33%
Federal funds sold and other
overnight deposits (3)                   28,702      340    1.18%        30,283       240    0.79%        43,524       526    1.21%
Other (4)                                 5,850      132    2.26%         5,460       142    2.60%         4,320       206    4.77%
                                      ------------------              -------------------              -------------------
Total interest - earning assets         907,732   41,900    4.62%       808,029    38,739    4.79%       656,909    39,578    6.02%
                                                 -------                          -------                          -------
Non-interest - earning assets            44,608                          33,941                           38,728
                                      ---------                       ---------                        ---------
Total assets                          $ 952,340                       $ 841,970                        $ 695,637
                                      =========                       =========                        =========

Interest - bearing liabilities:
Savings and club accounts             $ 151,077      783    0.52%     $ 143,926       856    0.59%     $ 124,931     1,185    0.95%
Money market accounts                    46,216      372    0.80%        45,923       375    0.82%        38,828       453    1.17%
NOW accounts                             59,876      154    0.26%        53,420       172    0.32%        46,158       272    0.59%
Certificates of deposit                 503,695   12,659    2.51%       405,837     9,601    2.37%       342,011    10,098    2.95%
Borrowings                               37,268    1,489    4.00%        39,208     1,495    3.81%        34,977     1,630    4.66%
Subscription funds from stock
offering                                     --       --      --             --        --      --          4,150        31    0.75%
Mortgage escrow funds                     4,282       20    0.47%         3,800        48    1.26%         4,501        70    1.56%
                                      ------------------              -------------------              -------------------
Total interest - bearing liabilities    802,414   15,477    1.93%       692,114    12,547    1.81%       595,556    13,739    2.31%
                                                 -------                          -------                          -------
Non - interest-bearing liabilities       20,531                          13,910                           18,845
                                      ---------                       ---------                        ---------
Total liabilities                       822,945                         706,024                          614,401
Stockholders' equity                    129,395                         135,946                           81,236
                                      ---------                       ---------                        ---------
Total liabilities and
stockholders' equity                  $ 952,340                       $ 841,970                        $ 695,637
                                      =========                       =========                        =========
Net interest income                               26,423                           26,192                           25,839
                                                 =======                          =======                          =======
Average interest rate spread (5)                            2.69%                            2.98%                            3.71%
Net earning assets (6)                $ 105,318                       $ 115,915                        $  61,353
                                      =========                       =========                        =========
Net interest margin (7)                                     2.91%                            3.24%                            3.93%
Ratio of interest - earning assets
to interest - bearing liabilities         1.13x                           1.17x                            1.10x
</TABLE>

(1)   Balances are net of the allowance for loan losses.
(2)   Average outstanding balances are based on amortized cost. As a result, the
      average  balances  and yields do not include the effect of changes in fair
      value of securities available for sale.
(3)   Other overnight deposits represent an  interest-earning  demand account at
      the Federal Home Loan Bank of New York.
(4)   Consists primarily of Federal Home Loan Bank Stock.
(5)   Net interest rate spread  represents the  difference  between the yield on
      average interest-earning assets and the cost of average interest - bearing
      liabilities.
(6)   Net earning assets  represent  total  interest-  earning assets less total
      interest - bearing liabilities.
(7)   Net interest  margin  represents  net interest  income  divided by average
      total interest - earning assets.


                                       8
<PAGE>

Rate/Volume Analysis

The following table presents the dollar amount of changes in interest income and
interest  expense  for the  major  categories  of  interest-earning  assets  and
interest-bearing  liabilities.  Information  is  provided  for each  category of
interest-earning  assets and interest-bearing  liabilities,  with respect to (i)
changes  attributable to changes in volume (i.e., changes in balances multiplied
by the prior-period rate) and (ii) changes  attributable to rate (i.e.,  changes
in rate  multiplied  by  prior-period  balances).  For  purposes  of this table,
changes attributable to both rate and volume,  which cannot be segregated,  have
been allocated proportionately to the change due to volume and the change due to
rate.

<TABLE>
<CAPTION>
                                                                          For the Years Ended March 31,
                                                   ----------------------------------------------------------------------------
                                                              2005 vs. 2004                          2004 vs. 2003
                                                   -------------------------------------   ------------------------------------
                                                   Increase (Decrease) Due to   Total      Increase (Decrease) Due to  Total
                                                   --------------------------  Increase    -------------------------- Increase
                                                      Volume        Rate      (Decrease)    Volume        Rate       (Decrease)
                                                   -------------------------------------   ------------------------------------
                                                                                (In thousands)
<S>                                                   <C>         <C>           <C>           <C>         <C>          <C>
Interest-earning assets:
Loans                                                 $ 4,560     $(1,949)      $ 2,611       $   584     $(3,671)     $(3,087)
Mortgage-backed securities                                556        (407)          149         4,959      (2,726)       2,233
Other securities                                          181         130           311         1,162        (797)         365
Federal funds and other overnight deposits                (13)        113           100          (134)       (152)        (286)
Other                                                      10         (20)          (10)           45        (109)         (64)
                                                      -------     -------       -------       -------     -------      -------

Total interest-earning assets                           5,294      (2,133)        3,161         6,616      (7,455)        (839)
                                                      -------     -------       -------       -------     -------      -------

Interest-bearing liabilities:
Savings and club accounts                                  38        (111)          (73)          163        (492)        (329)
Money market accounts                                       3          (6)           (3)           74        (152)         (78)
NOW accounts                                               18         (36)          (18)           38        (138)        (100)
Certificates of deposit                                 2,456         602         3,058         1,690      (2,187)        (497)
Borrowings                                                (77)         71            (6)          183        (318)        (135)
Subscription funds from stock offering                     --          --            --           (31)         --          (31)
Mortgage escrow funds                                       5         (33)          (28)          (10)        (12)         (22)
                                                      -------     -------       -------       -------     -------      -------

Total interest-bearing liabilities                      2,443         487         2,930         2,107      (3,299)      (1,192)
                                                      -------     -------       -------       -------     -------      -------

Net interest income                                   $ 2,851     $(2,620)      $   231       $ 4,509     $(4,156)     $   353
                                                      =======     =======       =======       =======     =======      =======
</TABLE>


                                       9
<PAGE>

Comparison of Results of Operations for the Years Ended March 31, 2005 and 2004

      Net Income.  Net income  amounted to $5.5 million or diluted  earnings per
share of $0.46 for the year ended March 31, 2005, as compared to $6.6 million or
diluted  earnings  per  share of $0.52 for the year  ended  March  31,  2004,  a
decrease of 17.4% in net income.  The  decrease in net income for the year ended
March  31,  2005  is  primarily  attributable  to a  $2.5  million  increase  in
non-interest  expense,  partially offset by a $231,000  increase in net interest
income, a $406,000  increase in non-interest  income and a $701,000  decrease in
income tax expense.

      Interest  Income.  Interest income increased $3.2 million to $41.9 million
for the year ended March 31, 2005, as compared to $38.7 million for fiscal 2004.
The  increase  reflects a $99.7  million  increase  in average  interest-earning
assets to $907.7  million  during the year ended  March 31,  2005 as compared to
$808.0 million for the prior year, partially offset by a 17 basis point decrease
in the average yield on  interest-earning  assets to 4.62%.  The increase in the
average balance of interest-earning  assets was due primarily to a $79.1 million
increase  in  net  loans  to  $521.6  million,   a  $15.9  million  increase  in
mortgage-backed  securities to $259.9 million and a $5.9 million increase in the
average  balance of other  securities to $91.7 million.  The increase in average
interest-earning  assets was funded  principally by deposit growth in the Bank's
branches. The decrease in the average yield on interest-earning  assets reflects
the  origination  of loans at lower  rates  than  the  existing  portfolio,  the
purchase  of  securities  at lower  rates than the  existing  portfolio  and the
downward repricing of adjustable-rate  securities as a result of market interest
rates.

      Loans.  Interest  income on loans  increased $2.6 million or 9.7% to $29.4
million for the year ended  March 31, 2005 as compared to $26.8  million for the
prior  year.  This  increase is due to a $79.1  million  increase in the average
balance  of  loans to  $521.6  million,  partially  offset  by a 42 basis  point
decrease in the yield earned to 5.64%.  Loans  originated  during the year ended
March 31, 2005 amounted to $207.9  million.  The decrease in the yield earned is
primarily a result of loan originations during the first half of fiscal 2005 and
during  fiscal 2004 that were at rates lower than the average yield being earned
on the loan  portfolio  during those  periods.  Loans  originated  in the fourth
quarter of fiscal 2005 have  generally been at rates higher than the yield being
earned on the loan portfolio.  However,  as market interest rates increase,  the
volume of loans originated may decrease which would result in slower growth or a
decrease in the loan portfolio.

      Mortgage-Backed   and  Other  Securities.   Interest  on   mortgage-backed
securities  totaled $9.1 million for fiscal 2005,  an increase of $149,000  from
fiscal 2004.  This  increase is due to a $15.9  million  increase in the average
balance of mortgage-backed  securities to $259.9 million,  partially offset by a
16 basis decrease in the average yield to 3.49% for fiscal 2005.

      Interest on other securities increased $311,000 to $2.9 million for fiscal
2005, as compared to $2.6 million for fiscal 2004. The increase is due to a $5.9
million increase in the average balance of other securities to $91.7 million and
a 15 basis point increase in the average yield to 3.21%.

      Federal Funds Sold and Other Overnight Deposits. Interest on Federal funds
sold and other overnight  deposits  increased $100,000 to $340,000 during fiscal
2005,  reflecting  a 39  basis  point  increase  in the  average  yield to 1.18%
partially  offset by a $1.6  million  decrease in the  average  balance to $28.7
million.

      Other  Earning  Assets.  Other  earning  assets at March 31, 2005  consist
primarily of an  investment  of $5.7  million in FHLB of New York common  stock.
Dividends on FHLB of New York common stock  amounted to $126,000 for fiscal 2005
as compared to $142,000 for fiscal 2004.

      Interest  Expense.  Interest  expense  for the year ended  March 31,  2005
increased  $3.0 million to $15.5  million,  as compared to $12.5 million for the
year ended March 31, 2004. The average balance of  interest-bearing  liabilities
increased  $110.3  million to $802.4 million for fiscal 2005 from $692.1 million
for fiscal 2004,  and the average cost of these  liabilities  increased 12 basis
points to  1.93%.  The  increase  in the  average  balance  of  interest-bearing
liabilities  includes deposit growth in three new branches that opened in fiscal
2005, a new branch that opened in the second  quarter of fiscal 2004, and growth
in the existing  branches.  The increase in the average cost of liabilities is a
result of the rising  short-term  market  interest  rates in fiscal  2005 and an
increase  in  certificates  of  deposit   accounts  as  a  percentage  of  total
interest-bearing  liabilities.  The average  balance of  certificates of deposit
represented 62.8% of the


                                       10
<PAGE>

average  balance  of total  interest-bearing  liabilities  for fiscal  2005,  as
compared to 58.6% for fiscal 2004. Certificates of deposit are generally offered
at higher rates than savings accounts and we have used these accounts to attract
customers to the new branches.

      Interest  expense on certificates of deposit amounted to $12.7 million for
fiscal 2005 as compared to $9.6  million for fiscal  2004.  The  increase is due
primarily to a $97.9 million  increase in the average  balance to $503.7 million
from $405.8 million for fiscal 2004,  while the average cost of  certificates of
deposit increased 14 basis points to 2.51%.

      Interest on savings accounts  amounted to $783,000 for the current year as
compared to $856,000 for fiscal 2004.  This  decrease is the result of a 7 basis
point  decrease in the  average  cost of savings  accounts  to 0.52%,  partially
offset by a $7.2 million  increase in the average balance of savings accounts to
$151.1 million for fiscal 2005, as compared to $143.9 million for fiscal 2004.

      Interest expense on NOW and money market accounts amounted to $526,000 for
fiscal 2005 as compared to $547,000 for fiscal 2004.  The average cost decreased
5 basis points to 0.50% and the average balance of these accounts increased $6.8
million to $106.1 million.

      For fiscal 2005,  interest expense on borrowings amounted to $1.5 million,
unchanged from fiscal 2004. The average balance of borrowings decreased to $37.3
million for fiscal 2005 as  compared  to $39.2  million for the prior year.  The
average cost of  borrowings  increased 19 basis points to 4.00%,  as compared to
3.81% for fiscal 2004.

      Net Interest  Income.  Net interest  income  amounted to $26.4 million for
fiscal 2005 as compared to $26.2 million for fiscal 2004.  The net interest rate
spread was 2.69% and 2.98% and the net  interest  margin was 2.91% and 3.24% for
the respective  fiscal years.  The decreases in net interest rate spread and net
interest margin are primarily the result of the effect of mortgage  refinancings
and lower returns on our  investment  portfolio as interest  rates remained near
40-year lows.  During fiscal 2005, the Federal  Reserve raised the Federal funds
rate  by  175  basis  points  to  2.75%.   However,  long  term  rates  remained
substantially  unchanged,  resulting in a flattening  yield curve. As short-term
interest rates increased, the cost of our interest-bearing liabilities increased
faster than the yield on interest-earning assets which are primarily affected by
longer-term  interest  rates.  The decrease in net interest  rate spread and net
interest   margin  was  also  a  result  of  the   decrease   in  the  ratio  of
interest-earning assets to interest-bearing liabilities to 1.13x for fiscal 2005
from  1.17x  for  fiscal  2004,  reflecting  treasury  stock  purchases  and  an
investment in bank-owned life insurance ("BOLI").

      In December 2003, the Company  purchased a BOLI product for $10.0 million.
The BOLI purchase was funded from  interest-earning  assets;  however,  the BOLI
asset is classified separately from interest-earning  assets on the consolidated
balance sheet, resulting in a decrease in the ratio of average  interest-earning
assets  to  average  interest-bearing  liabilities.  The  changes  in  the  cash
surrender value of the BOLI are recognized as non-interest income.

      Provision for Loan Losses. Management regularly reviews the loan portfolio
and makes  provisions  for loan  losses in  amounts  required  to  maintain  the
allowance  for loan losses in  accordance  with  generally  accepted  accounting
principles.  The  allowance  consists  of  losses  that  are both  probable  and
estimable at the date of the financial statements. The allowance for loan losses
consists of amounts  allocated to specific  nonperforming  loans and to loans in
each major  portfolio  category.  Loan  categories  such as  one-to-four  family
residential  mortgage and home equity loans,  which  represented  86.1% of total
loans at March 31,  2005,  are  generally  evaluated  on an  aggregate or "pool"
basis. Our allowance for loan losses is predominately determined on a pool basis
by applying loss factors to the current balances of the various loan categories.
The loss factors are  determined  by  management  based on an  evaluation of our
historical  loss  experience,  delinquency  trends,  volume  and type of lending
conducted, and the impact of current economic conditions in our market area.

      The  provision for loan losses was $300,000 for fiscal 2005 as compared to
$275,000 for fiscal 2004.  Non-performing loans amounted to $580,000 or 0.10% of
total loans at March 31,  2005,  as  compared to $2.0  million or 0.41% of total
loans at March 31, 2004. The allowance for loan losses  amounted to $3.0 million
and $2.7 million at March 31, 2005 and 2004, respectively.  Charge-offs amounted
to $1,000 and $5,000 for fiscal years 2005 and 2004, respectively. There were no
recoveries for these  periods.  The increase in the allowance for


                                       11
<PAGE>

loan  losses  is   primarily   due  to  an  increase  in  the   origination   of
adjustable-rate  mortgage loans,  commercial mortgage loans and commercial loans
(not   secured  by  real   estate)  as  well  as   overall   portfolio   growth.
Adjustable-rate  mortgage loans can involve  greater credit risk than fixed-rate
loans  because as  interest  rates  increase,  the  underlying  payments  by the
borrower increase,  thus increasing the risk of default by the borrower.  At the
same time,  the  marketability  of the  underlying  collateral  may be adversely
affected by higher  interest  rates.  At March 31, 2005,  adjustable  rate loans
accounted for 37.8% of total loans as compared to 27.1% at March 31, 2004.

      Non-Interest  Income.  Non-interest income consists principally of service
charges on deposit  accounts,  fees earned on the sale of  investment  products,
late  charges  on loans,  various  other  service  fees and  changes in the cash
surrender  value of the BOLI.  Service  charges and fees  totaled  $953,000  and
$955,000 for fiscal years 2005 and 2004, respectively.  The increase in the cash
surrender  value of the BOLI  amounted  to  $379,000  and $86,000 for those same
respective  periods.  During fiscal 2005, the Company sold a parcel of land that
is contiguous to a branch location.  Management  determined that this parcel was
not going to be used in connection with the operation of the branch. The Company
recognized a $93,000 gain on the sale of the land.

      Non-Interest  Expense.  Non-interest  expense  totaled  $18.6  million for
fiscal 2005 as compared to $16.1  million for fiscal 2004.  This increase is due
to increases of $1.2 million in compensation and benefits, $426,000 in occupancy
and equipment  expense,  $193,000 in data  processing  service fees,  $99,000 in
advertising and promotion  expense and $532,000 in other  non-interest  expense.
The increases in  non-interest  expenses  include costs  attributable to the new
branches which opened during fiscal 2005.

      The increase in  compensation  and benefits  expense is due primarily to a
$787,000  increase  in expense  related to stock  awards  made  pursuant  to the
Company's  2004 Stock  Incentive  Plan and a $586,000  increase in  compensation
costs due primarily to  additional  staff to support the growth in the Company's
lending  operations  and the new  branches,  which opened during fiscal 2005. At
March 31, 2005, we had 138 full-time  equivalent employees as compared to 119 at
March 31, 2004.

      The adoption of Statement of Financial  Accounting  Standards ("SFAS") No.
123 (revised 2004),  Share-Based  Payment ("SFAS No. 123R"),  will result in the
recognition,  for the first  time,  of  compensation  costs  for  stock  options
beginning  in the  first  quarter  of  fiscal  2007.  See Note 2 of the Notes to
Consolidated Financial Statements for a discussion of SFAS No. 123R.

      Other  non-interest  expense for the year ended  March 31,  2005  included
$367,000  of costs  related  to the  Company's  implementation  of the  internal
controls and procedures provisions of the Sarbanes-Oxley Act of 2002. There were
no comparable costs in fiscal 2004.

      Income  Taxes.  For the years ended  March 31,  2005 and 2004,  income tax
expense amounted to $3.5 million and $4.2 million,  respectively.  The effective
tax rates for those same periods were 39.2% and 39.0%,  respectively.  The 16.6%
decrease in fiscal 2005 income tax expense primarily reflects the 17.0% decrease
in pre-tax income.


                                       12
<PAGE>

Comparison of Results of Operations for the Years Ended March 31, 2004 and 2003

      Net Income.  Net income  amounted to $6.6 million or diluted  earnings per
share of $0.52 for the year ended March 31, 2004, as compared to $8.5 million or
diluted  earnings  per share of $0.65 for the prior  year.  The  decrease in net
income for the year ended March 31, 2004 was due to an increase of $3.4  million
in  non-interest  expense,  partially  offset by  increases  of  $353,000 in net
interest income and $151,000 in  non-interest  income and a decrease of $985,000
in income tax expense.

      Interest Income.  Interest income totaled $38.7 million for the year ended
March 31, 2004, as compared to $39.6 million for the prior year. The decrease in
interest  income  reflects a 123 basis point  decrease  in the average  yield on
interest-earning  assets to 4.79% from 6.02%, partially offset by an increase of
$151.1 million in average  interest-earning assets to $808.0 million as compared
to $656.9  million for the prior year.  The  increase in the average  balance of
interest-earning  assets was due  primarily to  increases  of $154.6  million in
securities available for sale and $8.7 million in net loans, partially offset by
a $13.2 million decrease in federal funds sold and other overnight deposits. The
decrease  in  the  average  yield  on   interest-earning   assets  reflects  the
origination of loans at lower rates than the existing portfolio, the purchase of
securities at lower rates than the existing portfolio and the downward repricing
of adjustable-rate securities during recent periods of declining interest rates.

      Loans.  For the year  ended  March  31,  2004,  interest  income  on loans
amounted to $26.8 million as compared to $29.9 million for the prior year.  This
decrease was due to an 83 basis point decrease in the yield earned to 6.06% from
6.89%,  partially  offset by an $8.7 million  increase in the average balance to
$442.5 million from $433.8  million.  We originated  $186.7 million of new loans
during fiscal 2004. In addition,  $151.3 million of existing mortgage loans were
refinanced  with us. These loans were originated at rates lower than the average
yield being earned on the existing loan portfolio.  As a result,  the decline in
average yield earned on the loan portfolio continued during fiscal 2004.

      Mortgage-Backed   and  Other  Securities.   Interest  on   mortgage-backed
securities increased $2.2 million to $8.9 million for fiscal 2004 as compared to
$6.7  million for the prior year.  The increase was due to an increase of $120.9
million in the average balance to $244.0 million, partially offset by a decrease
of 178 basis  points in the average  yield to 3.65% from 5.43%.  The increase in
the average balance of mortgage-backed securities reflects the investment of the
net proceeds  from the  Company's  January 2003 stock  offering,  as well as the
investment of funds from deposit growth.  The decrease in the average yield is a
result of the downward repricing of adjustable-rate  mortgage-backed  securities
and the accelerated amortization of purchase premiums as a result of prepayments
on   mortgage-backed   securities.   In  addition,   fiscal  2004  purchases  of
mortgage-backed securities were at lower rates than the existing portfolio.

      Interest on other securities increased $365,000 to $2.6 million for fiscal
2004 as compared to $2.3  million for 2003.  The increase was due to an increase
of $33.6  million in the  average  balance to $85.9  million  for the year ended
March 31,  2004,  partially  offset  by a  decrease  of 127 basis  points in the
average yield to 3.06% from 4.33%.

      Federal Funds Sold and Other Overnight Deposits.  For the year ended March
31,  2004,  interest on federal  funds and other  overnight  deposits  decreased
$286,000 to $240,000,  reflecting a 42 basis point decrease in the average yield
to 0.79%  and a  decrease  of $13.2  million  in the  average  balance  to $30.3
million.  The decrease in the average  yield is the result of the  continued low
market interest rates.

      Other Earning  Assets.  Other earning assets consist  primarily of FHLB of
New York common stock.  The FHLB of New York suspended the October 2003 dividend
on this stock and  declared a  dividend  in January  2004


                                       13
<PAGE>

that was less than the amounts  previously  paid.  Dividends on FHLB of New York
common  stock  amounted  to  $141,000  in fiscal 2004 as compared to $195,000 in
fiscal 2003.

      Interest Expense.  For the year ended March 31, 2004,  interest expense on
interest-bearing  liabilities  decreased  $1.2  million  to  $12.5  million,  as
compared to $13.7  million for the year ended March 31,  2003.  The  decrease in
interest  expense  was due to a 50 basis point  decrease in the average  cost of
these liabilities to 1.81% from 2.31%,  partially offset by an increase of $96.6
million  in the  average  balance  of  interest-bearing  liabilities  to  $692.1
million.  The increase in the average  balance of  interest-bearing  liabilities
includes deposit growth in the Somers branch,  which opened in July 2002, and in
the Stamford  branch,  which opened in September  2003, as well as growth in the
existing branches. The decrease in the average cost of liabilities is the result
of declining market interest rates during recent periods.

      Interest  expense on certificates of deposit  amounted to $9.6 million for
fiscal 2004 as compared to $10.1  million for fiscal 2003.  The decrease was due
to a 58 basis point decrease in the average cost to 2.37%, partially offset by a
$63.8  million  increase in the average  balance of  certificates  of deposit to
$405.8 million as compared to $342.0 million for the prior year. The increase in
the average balance  includes growth at the Bank's new branch offices as well as
at our existing branches.

      Interest on savings accounts decreased $329,000 to $856,000 in fiscal 2004
as compared to $1.2 million in fiscal 2003. The average cost of savings accounts
decreased  36 basis  points to 0.59%,  partially  offset by an increase of $19.0
million in the average balance of savings accounts to $143.9 million.

      Interest expense on money market and NOW accounts amounted to $547,000 for
fiscal  2004 as compared to  $725,000  for the prior year.  The average  cost of
these  accounts  decreased  40 basis  points  to 0.73%,  partially  offset by an
increase  of $14.4  million in the  average  balance of these  accounts to $99.3
million.

      Interest  expense  on  borrowings  was $1.5  million  for  fiscal  2004 as
compared to $1.6 million for fiscal 2003.  The decrease in interest  expense was
due to an 85 basis points  decrease in the average cost of  borrowings to 3.81%,
partially offset by a $4.2 million increase in the average balance of borrowings
to $39.2 million.

      Net  Interest  Income.  For the year ended March 31,  2004,  net  interest
income  amounted to $26.2  million as  compared  to $25.8  million for the prior
year.  The interest rate spread was 2.98% and 3.71% and the net interest  margin
was 3.24% and 3.93% for the respective  fiscal years.  The decreases in interest
rate spread and net interest  margin are  primarily  the result of the effect of
mortgage  refinancings and lower returns on our investment portfolio as interest
rates remained at 40 year lows. The adverse effect on net interest income of the
decreases  in interest  rate spread and net  interest  margin was  substantially
offset by earning asset growth and an increase in the ratio of  interest-earning
assets to interest-bearing liabilities to 1.17 for the year ended March 31, 2004
from 1.10 for fiscal 2003.  The higher ratio in fiscal 2004 was due primarily to
the investment of net proceeds from the Company's stock offering.

      Provision for Loan Losses.  The provision for loan losses was $275,000 for
fiscal  years 2004 and 2003.  Non-performing  loans  amounted to $2.0 million or
0.41% of total  loans at March 31,  2004,  as  compared  to $477,000 or 0.11% of
total loans at March 31, 2003. The increase in non-performing loans is primarily
the result of the  delinquency of one borrower's  mortgage and home equity loans
which  totaled  $805,000  at March 31,  2004.  The loans are secured by a single
family home with a loan-to-value  ratio of less than 60%. The allowance for loan
losses  amounted  to $2.7  million or 0.57% of total loans at March 31, 2004 and
$2.4 million or 0.57% of total loans at March 31, 2003.  Charge-offs amounted to
$5,000 and $54,000  for the years  ended March 31, 2004 and 2003,  respectively.
The increase in the allowance for loan losses is primarily due to an increase in
the origination of adjustable rate mortgage loans, commercial mortgage loans and
commercial  loans  (not  secured by real  estate)  as well as overall  portfolio
growth.  Adjustable-rate  mortgage  loans can involve  greater  credit risk than
fixed-rate loans because as interest rates increase,  the underlying payments by
the borrower increase,  thus increasing the risk of default by the borrower.  At
the same time, the  marketability of the underlying  collateral may be adversely
affected by higher  interest  rates.  At March 31, 2004,  adjustable  rate loans
accounted for 27.1% of total loans as compared to 19.7% at March 31, 2003.


                                       14
<PAGE>

      Non-Interest  Income.  Non-interest income totaled $1.0 million for fiscal
2004 as compared to  $890,000  for fiscal  2003.  The  increase in  non-interest
income was  primarily  due to higher  levels of income from  service  charges on
deposit accounts, late charges on loans and various other service fees.

      Non-Interest  Expense.  For the year ended  March 31,  2004,  non-interest
expense increased $3.4 million to $16.1 million as compared to $12.7 million for
the prior year.  This increase was due primarily to increases of $2.2 million in
compensation  and  benefits,  $545,000 in occupancy  and  equipment  expense and
$457,000 in other non-interest expense.

      The increase in compensation  and benefits is primarily due to an $800,000
increase in compensation  expense and a $698,000  increase in expense related to
the Employee Stock Ownership Plan ("ESOP"). The increase in compensation expense
is due  primarily to normal  salary  increases and increases in staff to support
the growth in the Company's lending and branch  operations.  The Company had 119
full-time  equivalent  employees at March 31, 2004 as compared to 110  full-time
equivalent  employees at March 31, 2003.  The increase in ESOP expense  reflects
the increase in shares  committed to be released for  allocation  as a result of
the second-step conversion and the increase in the market value of those shares.
Compensation  expense  is  recognized  for the ESOP  equal to the fair  value of
shares  committed to be released for  allocation to  participant  accounts.  The
difference  between  the  fair  value  at  that  time  and the  ESOP's  original
acquisition  cost is charged or credited  to  stockholders'  equity.  For fiscal
2004, the difference  credited to  stockholders'  equity amounted to $727,000 as
compared to $261,000 for 2003.

      The increase in occupancy  and  equipment  expense is primarily due to new
branch  locations and the  Company's new corporate  office which opened in April
2003.

      Income  Taxes.  For the years ended  March 31,  2004 and 2003,  income tax
expense amounted to $4.2 million and $5.2 million,  respectively.  The effective
tax rates for those same periods were 39.0% and 38.0%,  respectively.  The 18.9%
decrease in fiscal 2004 income tax expense primarily reflects the 21.0% decrease
in pre-tax income.

Liquidity and Capital Resources

      Our  liquidity  management  objective  is to ensure  the  availability  of
sufficient  cash flows to meet all  financial  commitments  and to capitalize on
opportunities for expansion.  Liquidity management addresses our ability to meet
deposit withdrawals on demand or at contractual maturity, to repay borrowings as
they mature, and to fund new loans and investments as opportunities arise.

      Our primary  investing  activities are the  origination of mortgage loans,
and  the  purchase  of  short-term  investments,  government  agency  bonds  and
adjustable  rate  mortgage-backed   securities.   These  activities  are  funded
primarily by deposit growth and principal  repayments on loans,  mortgage-backed
securities  and other  investment  securities.  During fiscal 2005,  the Company
originated  loans of $207.9 million and purchased  securities of $113.3 million.
These were funded by $87.2 million in principal  payments,  maturities and calls
of securities,  $124.8  million in loan principal  repayments and an increase in
deposits of $123.4 million.

      At March 31, 2005, we had $113.6 million of outstanding  loan  origination
commitments  and unused  lines of credit  extended to  customers.  If we require
funds beyond our internal funding capabilities, borrowings other than securities
repurchase  agreements,  of up to $88.6 million are  available  from the Federal
Home Loan Bank of New York. At March 31, 2005,  approximately  $260.7 million in
certificates  of deposit  were  scheduled  to mature  within one year.  The Bank
anticipates that most of these  certificates of deposit maturing within one year
will remain with the Bank.  However,  should market  interest  rates continue to
increase,  the  Bank's  cost  of  funds  may  significantly  increase  or we may
experience a significant loss of deposits.

      The following table summarizes the contractual  obligations of the Company
by  contractual  payment  period  as of  March  31,  2005.  Further  information
concerning  borrowings,  loan  commitments and lease  commitments is included in
Notes 8 and 11 to the Consolidated Financial Statements.


                                       15
<PAGE>

<TABLE>
<CAPTION>
                                                              Payments Due In
                                               -------------------------------------------------------------
                                                Less Than            1-3              3 - 5        More Than
                               Total              1 Year            Years             Years         5 Years
                             -------------------------------------------------------------------------------
                                                                 (In thousands)
<S>                           <C>                <C>                <C>               <C>            <C>
Borrowings                    $ 38,000           $ 10,000           $23,000           $5,000         $   --
Loan commitments               113,597            113,597                --               --             --
Lease commitments                7,197              1,019             2,082            1,562          2,534
Securities purchases             2,513              2,513                --               --             --
                             ------------------------------------------------------------------------------
   Total                      $161,307           $127,129           $25,082           $6,562         $2,534
                             ==============================================================================
</TABLE>

      Office of Thrift  Supervision  regulations  require savings  associations,
such as Sound  Federal  Savings,  to meet three  minimum  capital  standards:  a
tangible capital ratio requirement of 1.5% of total assets as adjusted under the
Office of Thrift Supervision  regulations;  a leverage ratio requirement of 4.0%
of core capital to such adjusted  total assets;  and a risk-based  capital ratio
requirement  of 8.0% of core  and  supplementary  capital  to  total  risk-based
assets.  We satisfied  these  minimum  capital  standards at March 31, 2005 with
tangible and leverage  capital  ratios of 10.3% and a total  risk-based  capital
ratio of 23.6%,  and we were  classified as a  well-capitalized  institution for
regulatory  purposes.  In  determining  the amount of  risk-weighted  assets for
purposes of the risk-based capital requirement, a savings association multiplies
its assets and credit equivalent amounts for certain  off-balance sheet items by
risk-weights,  which range from 0% for cash and  obligations  issued by the U.S.
Government  or its agencies to 100% for assets such as consumer  and  commercial
loans,  as assigned  by the Office of Thrift  Supervision  capital  regulations.
These capital requirements,  which are applicable to Sound Federal Savings only,
do not consider additional capital retained by Sound Federal Bancorp, Inc.

Impact of Inflation and Changing Prices

      The Consolidated Financial Statements and related Notes have been prepared
in conformity with U.S. generally accepted accounting principles,  which require
the measurement of financial position and operating results without  considering
the change in the relative purchasing power of money over time due to inflation.
The impact of inflation is reflected in the  increased  cost of our  operations.
Unlike  industrial  companies,  nearly  all of our assets  and  liabilities  are
financial in nature. As a result, our net income is directly impacted by changes
in interest  rates,  which are  influenced  by  inflationary  expectations.  Our
ability  to match  the  interest  sensitivity  of our  financial  assets  to the
interest  sensitivity of our financial  liabilities as part of our interest rate
risk  management  program may reduce the effect that  changes in interest  rates
have on our net income. Changes in interest rates do not necessarily move to the
same extent as changes in prices of goods and services.  In the current interest
rate  environment,  liquidity  and the  maturity  structure  of our  assets  and
liabilities are critical to the maintenance of acceptable  levels of net income.
Management  believes that by maintaining a significant  portion of our assets in
short-term   investments,   adjustable  rate   mortgage-backed   securities  and
adjustable  rate loans,  we are in a better position to manage our interest rate
risk in a rising rate environment.

Accounting Standards

      See  Note  2 of the  Notes  to  Consolidated  Financial  Statements  for a
discussion  of SFAS No.  123R,  which will  result in a change in the  Company's
accounting for stock options beginning April 1, 2006.

      On September 30, 2004, the Financial  Accounting  Standards Board ("FASB")
issued Staff Position No. EITF Issue 03-1-1, "Effective Date of Paragraphs 10-20
of EITF Issue No. 03-1, The Meaning of  Other-Than-Temporary  Impairment and Its
Application  to Certain  Investments,"  which delays the effective  date for the
impairment  measurement  and recognition  guidance  contained in Emerging Issues
Task Force  ("EITF") Issue No. 03-1.  EITF Issue No. 03-1 provides  guidance for
evaluating  whether an  investment  is  other-than-temporarily  impaired and was
originally to be effective for impairment  evaluations made in reporting periods
beginning  after June 15, 2004 (July 1, 2004 for the Company).  The delay in the
effective date for the measurement and  recognition  guidance  contained in EITF
Issue   No.   03-1   does   not   suspend   the    requirement    to   recognize
other-than-temporary   impairments   as  required   by  existing   authoritative
literature.  The disclosure  guidance in paragraphs 21 and 22 of EITF Issue 03-1
remains  effective.  The FASB also issued a proposal,  Staff


                                       16
<PAGE>

Position No. EITF Issue 03-1-a,  to provide  implementation  guidance on matters
such as  impairment  evaluations  for  declines in value  caused by increases in
interest rates and/or sector spreads.  Subsequently,  the FASB announced that it
would  begin a full  reconsideration  of  authoritative  literature  relating to
other-than-temporary    impairment   of   securities.   The   impact   of   this
reconsideration on the Company's  financial  condition and results of operations
cannot be predicted at the present time.


                                       17
<PAGE>

Management Report on Internal Control Over Financial Reporting

      Management of the Company is responsible for  establishing and maintaining
effective  internal  control over financial  reporting.  The Company's system of
internal controls is designed to provide  reasonable  assurance to the Company's
management  and  board  of  directors   regarding  the   preparation   and  fair
presentation of published financial statements.

      All internal control systems have inherent  limitations.  Therefore,  even
those systems  determined to be effective can provide only reasonable  assurance
with  respect  to  financial  statement  preparation  and  presentation.   Also,
projections of any evaluation of  effectiveness to future periods are subject to
the risk that controls may become  inadequate  because of changes in conditions,
or  that  the  degree  of  compliance   with  the  policies  or  procedures  may
deteriorate.

      Management   assessed  the  Company's   internal  control  over  financial
reporting  as of March 31,  2005.  This  assessment  was based on  criteria  for
effective  internal  control over  financial  reporting  established in Internal
Control-   Integrated   Framework   issued  by  the   Committee  of   Sponsoring
Organizations  of the Treadway  Commission.  Based on this  assessment,  we have
concluded  that,  as of March 31, 2005,  the Company's  disclosure  controls and
procedures and internal control over financial reporting are effective.

      The Company's independent  registered public accounting firm has issued an
audit report on our assessment of, and the effective operation of, the Company's
internal control over financial reporting. This report appears on page 19.


                                       18
<PAGE>

            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Sound Federal Bancorp, Inc.:

We have audited management's assessment, included in the accompanying Management
Report on Internal Control Over Financial Reporting, that Sound Federal Bancorp,
Inc. and subsidiary (the "Company")  maintained  effective internal control over
financial  reporting  as of March 31,  2005,  based on criteria  established  in
Internal  Control--Integrated  Framework  issued by the  Committee of Sponsoring
Organizations of the Treadway Commission  ("COSO").  The Company's management is
responsible for maintaining  effective internal control over financial reporting
and for its assessment of the  effectiveness  of internal control over financial
reporting.   Our  responsibility  is  to  express  an  opinion  on  management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.

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

A company's  internal control over financial  reporting is a process designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (i) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions of the assets of the company;  (ii)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company;  and (iii) provide  reasonable  assurance  regarding  prevention or
timely  detection  of  unauthorized  acquisition,  use,  or  disposition  of the
company's assets that could have a material effect on the financial statements.

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

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


                                       19
<PAGE>

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the consolidated balance sheets of
Sound Federal  Bancorp,  Inc. and  subsidiary as of March 31, 2005 and 2004, and
the related consolidated  statements of income, changes in stockholders' equity,
and cash flows for each of the years in the  three-year  period  ended March 31,
2005,  and our report dated June 10, 2005  expressed an  unqualified  opinion on
those consolidated financial statements.

/s/ KPMG LLP

Stamford, Connecticut
June 10, 2005


                                       20
<PAGE>

            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Sound Federal Bancorp, Inc.:

We have audited the  accompanying  consolidated  balance sheets of Sound Federal
Bancorp,  Inc. and subsidiary (the "Company") as of March 31, 2005 and 2004, and
the related consolidated  statements of income, changes in stockholders' equity,
and cash flows for each of the years in the  three-year  period  ended March 31,
2005. These  consolidated  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  financial  position of Sound  Federal
Bancorp,  Inc. and  subsidiary as of March 31, 2005 and 2004, and the results of
their  operations  and their cash flows for each of the years in the  three-year
period  ended  March  31,  2005,  in  conformity  with U.S.  generally  accepted
accounting principles.

We have also  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the effectiveness of the Company's
internal control over financial reporting as of March 31, 2005 based on criteria
established in Internal Control-Integrated  Framework issued by the Committee of
Sponsoring  Organizations of the Treadway Commission,  and our report dated June
10, 2005 expressed an unqualified opinion on management's assessment of, and the
effective operation of, internal control over financial reporting.

/s/ KPMG LLP

Stamford, Connecticut
June 10, 2005


                                       21
<PAGE>

                   SOUND FEDERAL BANCORP, INC. AND SUBSIDIARY
                          Consolidated Balance Sheets

<TABLE>
<CAPTION>
(In thousands, except share and per share data)              March 31,        March 31,
                                                               2005             2004
                                                            -----------       ---------
<S>                                                         <C>               <C>
Assets
Cash and due from banks                                     $    11,512       $  10,455
Federal funds sold and other overnight deposits                  31,095          20,756
                                                            -----------       ---------
     Total cash and cash equivalents                             42,607          31,211
                                                            -----------       ---------
Securities:
   Available for sale, at fair value (including
       $37,831 and $38,000 pledged as collateral
       for borrowings under repurchase agreements
       at March 31, 2005 and 2004, respectively)
       (Notes 3 and 8)                                          276,154         337,730
   Held to maturity, at amortized cost (fair value
       of $78,728) (Note 4)                                      79,489              --
                                                            -----------       ---------
            Total securities                                    355,643         337,730
                                                            -----------       ---------
Loans, net (Note 5):
  Mortgage loans                                                558,662         477,771
  Consumer and commercial loans                                   5,100           3,396
  Allowance for loan losses                                      (3,011)         (2,712)
                                                            -----------       ---------
            Total loans, net                                    560,751         478,455
                                                            -----------       ---------

 Accrued interest receivable                                      4,277           3,623
 Federal Home Loan Bank stock                                     5,738           5,303
 Premises and equipment, net (Note 6)                             6,214           5,630
 Goodwill                                                        13,970          13,970
 Bank-owned life insurance                                       10,464          10,085
 Prepaid pension costs (Note 10)                                  3,057           2,547
 Deferred income taxes (Note 9)                                   2,236              --
 Other assets                                                     1,993           1,987
                                                            -----------       ---------
            Total assets                                    $ 1,006,950       $ 890,541
                                                            ===========       =========

Liabilities and Stockholder' Equity
Liabilities:
  Deposits (Note 7)                                         $   831,768       $ 708,330
  Borrowings (Note 8)                                            38,000          35,000
  Mortgagors' escrow funds                                        5,264           4,522
  Due to brokers for securities purchased                         2,513           4,000
  Accrued expenses and other liabilities (Note 10)                2,245           1,630
                                                            -----------       ---------
            Total liabilities                                   879,790         753,482
                                                            -----------       ---------
Commitments and contingencies (Note 11)
Stockholders' equity:
   Preferred stock ($0.01 par value; 1,000,000
       shares authorized; none issued and
       outstanding)                                                  --              --
   Common stock ($0.01 par value; 24,000,000
       shares authorized; 13,636,170 shares issued)                 136             136
   Additional paid-in capital                                   103,728         102,637
   Treasury stock, at cost (1,258,964 and
      459,297 shares at March 31, 2005 and
      March 31, 2004, respectively)                             (18,131)         (7,150)
   Common stock held by Employee Stock
      Ownership Plan ("ESOP") (Note 10)                          (6,053)         (6,556)
   Unearned stock awards (Note 10)                               (4,435)         (5,618)
   Retained earnings                                             54,638          52,908
   Accumulated other comprehensive (loss)
      income, net of taxes (Note 13)                             (2,723)            702
                                                            -----------       ---------
            Total stockholders' equity                          127,160         137,059
                                                            -----------       ---------
            Total liabilities and stockholders' equity      $ 1,006,950       $ 890,541
                                                            ===========       =========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       22
<PAGE>

                   SOUND FEDERAL BANCORP, INC. AND SUBSIDIARY
                       Consolidated Statements of Income

<TABLE>
<CAPTION>
                                                                Years Ended March 31,
                                                          ---------------------------------
(In thousands, except per share data)                       2005         2004         2003
                                                          -------      -------      -------
<S>                                                       <C>          <C>          <C>
Interest and Dividend Income
 Loans                                                    $29,430      $26,819      $29,906
 Mortgage-backed and other securities                      11,998       11,538        8,940
 Federal funds sold and other overnight deposits              340          240          526
 Other earning assets                                         132          142          206
                                                          -------      -------      -------
 Total interest and dividend income                        41,900       38,739       39,578
                                                          -------      -------      -------
Interest Expense
 Deposits (Note 7)                                         13,968       11,004       12,008
 Borrowings                                                 1,489        1,495        1,630
  Other interest-bearing liabilities                           20           48          101
                                                          -------      -------      -------
 Total interest expense                                    15,477       12,547       13,739
                                                          -------      -------      -------

 Net interest income                                       26,423       26,192       25,839
 Provision for loan losses (Note 5)                           300          275          275
                                                          -------      -------      -------
 Net interest income after provision for loan losses       26,123       25,917       25,564
                                                          -------      -------      -------
Non-Interest Income
 Service charges and fees                                     953          955          831
 Income on bank-owned life insurance                          379           86           --
  Gain on sale of land                                         93           --           --
 Gain on sales of mortgage loans                               22           --           --
 Other non-interest income                                     --           --           59
                                                          -------      -------      -------
  Total non-interest income                                 1,447        1,041          890
                                                          -------      -------      -------
Non-Interest Expense
 Compensation and benefits (Note 10)                        9,945        8,733        6,540
 Occupancy and equipment                                    2,717        2,291        1,746
 Data processing service fees                               1,218        1,025          959
 Advertising and promotion                                  1,119        1,020          884
 Other                                                      3,569        3,037        2,580
                                                          -------      -------      -------
 Total non-interest expense                                18,568       16,106       12,709
                                                          -------      -------      -------

 Income before income tax expense                           9,002       10,852       13,745
 Income tax expense (Note 9)                                3,533        4,234        5,219
                                                          -------      -------      -------
 Net income                                               $ 5,469      $ 6,618      $ 8,526
                                                          =======      =======      =======

Earnings per share (Note 14):
   Basic                                                  $  0.47      $  0.54      $  0.67
   Diluted                                                   0.46         0.52         0.65
                                                          =======      =======      =======
</TABLE>

See accompanying notes to consolidated financial statements.


                                       23
<PAGE>

                   SOUND FEDERAL BANCORP INC. AND SUBSIDIARY
           Consolidated Statements of Changes in Stockholders' Equity
               For the Years Ended March 31, 2005, 2004 and 2003
                (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                                            Accumulated
                                                                             Common                            Other        Total
                                                     Additional              Stock     Unearned             Comprehensive   Stock-
                                          Common      Paid-in    Treasury    Held by    Stock      Retained    (Loss)       holders'
                                           Stock      Capital      Stock      ESOP      Awards     Earnings    Income       Equity
                                          -------    ----------  --------    -------   --------    -------- -------------   -------
<S>                                       <C>        <C>          <C>        <C>        <C>        <C>         <C>        <C>
Balance at March 31, 2002                 $   522    $  22,525    $(4,350)   $(1,105)   $  (244)   $ 42,566    $ 1,101    $  61,015
Net income                                     --           --         --         --         --       8,526         --        8,526
Other comprehensive loss (Note 13)             --           --         --         --         --          --     (1,085)      (1,085)
                                                                                                                          ---------
  Total comprehensive income                7,441
Dividends paid ($0.14 per share)               --           --         --         --         --      (1,155)        --       (1,155)
Issuance of common stock for exercise
   of stock options                            --          188         --         --         --          --         --          188
Reorganization and related stock
   offering (Note 1):
   Merger of Sound Federal, MHC              (281)         647         --         --         --          --         --          366
   Treasury stock retired                     (44)      (4,306)     4,350         --         --          --         --           --
   Exchange of common stock (1,967,782
        shares exchanged for 5,444,263
        shares)                              (143)         141         --         --         --          --         --           (2)
   Proceeds from stock offering, net
        of related costs
        (7,780,737 shares issued)              78       75,832         --         --         --          --         --       75,910
   Common stock acquired by ESOP
     (622,458 shares)                          --           --         --     (6,225)        --          --         --       (6,225)
Vesting of stock awards and related
   tax benefits                                --          107         --         --        144          --         --          251
ESOP shares committed to be released
   for allocation                              --          261         --        271         --          --         --          532
                                          -------    ---------    -------    -------    -------    --------    -------    ---------
Balance at March 31, 2003                     132       95,395         --     (7,059)      (100)     49,937         16      138,321

Net income                                     --           --         --         --         --       6,618         --        6,618
Other comprehensive income (Note 13)           --           --         --         --         --          --        686          686
                                                                                                                          ---------
   Total comprehensive income               7,304
Dividends paid ($0.22 per share)               --           --         --         --         --      (2,648)        --       (2,648)
Common stock issued for grants of
   stock awards                                 4        5,909         --         --     (5,913)         --         --           --
Purchases of treasury stock
   (540,482 shares)                            --           --     (8,417)        --         --          --         --       (8,417)
Reissuance of treasury stock for
   exercise of stock options
   (81,185 shares)                             --           --      1,267         --         --        (999)        --          268
Tax benefit from exercise of
   stock options                               --          373         --         --         --          --         --          373
Vesting of stock awards and
   related tax benefits                        --          153         --         --        395          --         --          548
ESOP shares committed to be
   released for allocation                     --          727         --        503         --          --         --        1,230
 Tax benefit for dividends on
   unallocated ESOP shares                     --           80         --         --         --          --         --           80
                                          -------    ---------    -------    -------    -------    --------    -------    ---------
Balance at March 31, 2004                     136      102,637     (7,150)    (6,556)    (5,618)     52,908        702      137,059
</TABLE>


                                       24
<PAGE>

                   SOUND FEDERAL BANCORP, INC. AND SUBSIDIARY
           Consolidated Statements of Changes in Stockholders' Equity
               For the Years Ended March 31, 2005, 2004 and 2003
                (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                                            Accumulated
                                                                             Common                            Other        Total
                                                     Additional              Stock     Unearned             Comprehensive   Stock-
                                          Common      Paid-in    Treasury    Held by    Stock      Retained    (Loss)       holders'
                                           Stock      Capital      Stock      ESOP      Awards     Earnings    Income       Equity
                                          -------    ----------  --------    -------   --------    -------- -------------   -------
<S>                                       <C>        <C>          <C>        <C>        <C>        <C>         <C>        <C>
Balance at March 31, 2004                 $  136     $ 102,637    $ (7,150)  $(6,556)   $(5,618)   $ 52,908    $   702    $ 137,059
Net income                                    --            --          --        --         --       5,469         --        5,469
Other comprehensive loss
  (Note 13)                                   --            --          --        --         --          --     (3,425)      (3,425)
                                                                                                                          ---------
  Total comprehensive income                  --            --          --        --         --          --         --        2,044
Dividends paid ($0.24 per share)              --            --          --        --         --      (2,891)        --       (2,891)
Purchases of treasury stock
   (877,332 shares)                           --            --     (12,087)       --         --          --         --      (12,087)
Reissuance of treasury stock
   for exercise of stock
   options (77,665 shares)                    --            --       1,106        --         --        (848)        --          258
Tax benefit from exercise
   of stock options                           --           340          --        --         --          --         --          340
Vesting of stock awards                       --           (19)         --        --      1,183          --         --        1,164
ESOP shares committed to be
   released for allocation                    --           702          --       503         --          --         --        1,205
Tax benefit for dividends on
   unallocated ESOP shares                    --            68          --        --         --          --         --           68
                                          ------     ---------    --------   -------    -------    --------    -------    ---------
Balance at March 31, 2005                 $  136     $ 103,728    $(18,131)  $(6,053)   $(4,435)   $ 54,638    $(2,723)   $ 127,160
                                          ======     =========    ========   =======    =======    ========    =======    =========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       25
<PAGE>

                   SOUND FEDERAL BANCORP, INC. AND SUBSIDIARY
                     Consolidated Statements of Cash Flows
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                               Years Ended March 31,
                                                                                      ---------------------------------------------
                                                                                        2005               2004              2003
                                                                                      ---------         ---------         ---------
<S>                                                                                   <C>               <C>               <C>
Operating Activities
  Net income                                                                          $   5,469         $   6,618         $   8,526
  Adjustments to reconcile net income to net
      cash provided by operating activities:
      Provision for loan losses                                                             300               275               275
      Depreciation, amortization and accretion                                            2,570             2,549             1,458
      ESOP and stock award expense                                                        2,388             1,625               676
      Income taxes                                                                          348              (800)            1,095
      Origination of loans held for sale                                                 (1,066)               --                --
      Proceeds from sales of loans held for sale                                          1,088                --                --
      Gain on sales of mortgage loans                                                       (22)               --                --
      Gain on sale of land                                                                  (93)               --                --
     Pension costs                                                                         (510)               81            (2,612)
      Other adjustments, net                                                               (448)             (777)             (414)
                                                                                      ---------         ---------         ---------
          Net cash provided by operating activities                                      10,024             9,571             9,004
                                                                                      ---------         ---------         ---------
Investing Activities

 Purchases of securities:
     Available for sale                                                                 (31,015)         (198,707)         (229,693)
     Held to maturity                                                                   (82,297)               --                --
 Proceeds from payments, maturities and calls of securities:
     Available for sale                                                                  81,894           146,415            96,724
     Held to maturity                                                                     5,274                --                --
 Net disbursements for loan originations and principal repayments                       (83,164)          (52,027)          (10,395)
 Purchases of Federal Home Loan Bank stock                                                 (435)           (1,162)               --
 Purchase of bank-owned life insurance                                                       --           (10,000)               --
 Proceeds from sale of land                                                                 174                --                --
 Purchases of premises and equipment                                                     (1,519)             (968)             (714)
 Proceeds from sales of real estate owned                                                    --                --               344
                                                                                      ---------         ---------         ---------
           Net cash used in investing activities                                       (111,088)         (116,449)         (143,734)
                                                                                      ---------         ---------         ---------

Financing Activities
 Net increase in deposits                                                               123,438           104,070            84,355
 Proceeds from borrowings                                                                 9,000            47,000             7,000
 Repayment of borrowings                                                                 (6,000)          (47,000)           (7,082)
 Net  increase (decrease) in mortgagors' escrow funds                                       742               (81)             (418)
 Purchases of treasury stock                                                            (12,087)           (8,417)               --
 Proceeds from stock offering, net of related costs                                          --                --            70,051
 Proceeds from exercise of stock options                                                    258               268               100
 Payment of cash dividends on common stock                                               (2,891)           (2,648)           (1,155)
 Cash payment in lieu of fractional shares in reorganization                                 --                --                (2)
                                                                                      ---------         ---------         ---------
        Net cash provided by financing activities                                       112,460            93,192           152,849
                                                                                      ---------         ---------         ---------

  Increase (decrease) in cash and cash equivalents                                       11,396           (13,686)           18,119
  Cash and cash equivalents at beginning of year                                         31,211            44,897            26,778
                                                                                      ---------         ---------         ---------
  Cash and cash equivalents at end of year                                            $  42,607         $  31,211         $  44,897
                                                                                      =========         =========         =========

Supplemental Information
  Interest paid                                                                       $  15,415         $  12,711         $  13,699
  Income taxes paid                                                                       3,145             4,921             4,104
  Loans transferred to real estate owned                                                     --                --               171
  (Decrease) increase in  due to brokers for securities purchased                        (1,487)           (6,495)           10,495
                                                                                      =========         =========         =========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       26
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

(1)   Reorganization and Stock Offerings

      On October 8, 1998,  Sound  Federal  Bancorp  issued  shares of its common
      stock in connection with a Plan of Reorganization ("the  "Reorganization")
      and related  Subscription and Community  Offering.  In the Reorganization,
      Sound  Federal  Savings and Loan  Association  converted  from a federally
      chartered  mutual  savings  association  to a  federally  chartered  stock
      savings association. Sound Federal Savings and Loan Association became the
      wholly-owned  subsidiary  of  Sound  Federal  Bancorp,  which  became  the
      majority-owned  subsidiary  of Sound  Federal,  MHC (the  "Mutual  Holding
      Company").

      On January 6, 2003,  Sound Federal  Bancorp and the Mutual Holding Company
      completed a conversion to a fully-public  holding  company  structure (the
      "Conversion").  At that time, the Mutual Holding Company merged into Sound
      Federal Savings and Loan Association,  and no longer exists. Sound Federal
      Bancorp was  succeeded by a new Delaware  corporation  named Sound Federal
      Bancorp, Inc. (the "Holding Company"). Shares of common stock representing
      the  ownership  interest  of the  Mutual  Holding  Company  were sold in a
      subscription  offering  and a community  offering.  Shares owned by public
      shareholders  (shareholders  other than the Mutual  Holding  Company) were
      converted  into the right to receive new shares of Holding  Company common
      stock  determined  pursuant  to  an  exchange  ratio.  As  part  of  these
      transactions,  Sound Federal Savings and Loan Association changed its name
      to  Sound  Federal  Savings  (the  "Bank"),  which  is now a  wholly-owned
      subsidiary of the Holding  Company.  The Bank and the Holding  Company are
      referred to herein as "the Company".

      The Holding  Company sold  7,780,737  shares of common stock at $10.00 per
      share in the offering, including 622,458 shares purchased by the Company's
      Employee  Stock  Ownership  Plan  ("ESOP").  In  addition,   each  of  the
      outstanding  shares of common stock of Sound  Federal  Bancorp  (1,967,782
      shares,  net of 444,926  treasury shares) was converted into 2.7667 shares
      of the Holding Company resulting in 5,444,263  outstanding shares. A total
      of  13,225,000  shares were  outstanding  as a result of the  offering and
      share exchange.

      Net cash proceeds from the offering were as follows (in thousands):

      Total cash proceeds (7,780,737 shares)                     $ 77,807
      Offering costs                                               (1,897)
                                                                 --------
         Net offering proceeds                                     75,910
      Assets received from the Mutual Holding Company                 366
                                                                 --------
      Increase in common stock and additional paid-in capital      76,276
      Shares purchased by the ESOP (622,458 shares)                (6,225)
                                                                 --------
      Net cash proceeds                                          $ 70,051
                                                                 ========

      The Conversion and related  transactions  were accounted for at historical
      cost,  with no  resulting  change in the  historical  carrying  amounts of
      assets and liabilities. Consolidated stockholders' equity increased by the
      net cash  proceeds  from the  offering.  Share and per share  data for all
      periods have been adjusted to reflect the additional shares outstanding as
      a result of the offering and share exchange.

(2)   Summary of Significant Accounting Policies

      The  Bank  is a  community-oriented  savings  institution  whose  business
      primarily  consists of accepting deposits from customers within its market
      area and investing  those funds in mortgage  loans secured by  one-to-four
      family  residences  and in  mortgage-backed  and  other  securities.  To a
      significantly  lesser extent,  funds are invested in commercial  mortgage,
      construction  and  consumer  loans.  The  Bank's  primary  market  area is
      Westchester  and  Putnam  Counties  in  New  York  and  Fairfield  County,
      Connecticut. A full-service office is also located in Rockland County, New
      York.


                                       27
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

      Deposits  are  insured  up to  applicable  limits of the  Federal  Deposit
      Insurance  Corporation   ("FDIC").   As  a   federally-chartered   savings
      association,  the  Bank's  primary  regulator  is  the  Office  of  Thrift
      Supervision  ("OTS").  The Holding  Company is also subject to supervision
      and regulation by the OTS.

      Basis of Presentation

      The consolidated  financial statements include the accounts of the Holding
      Company, the Bank, Sound REIT, First Federal REIT and Mamaroneck Advisors,
      Inc. Sound REIT and First Federal REIT are real estate  investment  trusts
      that hold a portion of the Company's  mortgage-related assets.  Mamaroneck
      Advisors,  Inc.  is a  wholly-owned  subsidiary  of the Bank that  offered
      investment  products  and services to the Bank's  customers.  Beginning in
      December 2003,  these  services are provided to customers  directly by the
      Bank. All significant  intercompany  accounts and  transactions  have been
      eliminated in consolidation.

      The  consolidated  financial  statements  have been prepared in conformity
      with U.S.  generally  accepted  accounting  principles.  In preparing  the
      consolidated   financial  statements,   management  is  required  to  make
      estimates  and  assumptions  that affect the  reported  amounts of assets,
      liabilities, income and expense. Actual results could differ significantly
      from these estimates. A material estimate that is particularly susceptible
      to near-term  change is the allowance for loan losses,  which is discussed
      below.

      Certain  reclassifications have been made to prior year amounts to conform
      to the current year  presentation.  For purposes of reporting  cash flows,
      cash  equivalents  consist  of  federal  funds  sold and  other  overnight
      deposits.

      Securities

      The   Company   may   classify   its   securities   as   held-to-maturity,
      available-for-sale  or trading.  Securities classified as held to maturity
      are  limited to debt  securities  for which the  entity  has the  positive
      intent and ability to hold to maturity.  Trading  securities  are debt and
      equity  securities that are bought  principally for the purpose of selling
      them in the near term. All other debt and equity securities are classified
      as available for sale.

      Management determines the appropriate  classification of securities at the
      purchase date.  Securities held to maturity are carried at amortized cost.
      Trading  securities are carried at fair value,  with unrealized  gains and
      losses recognized in earnings.  Securities  available for sale are carried
      at fair value, with unrealized gains and losses excluded from earnings and
      reported on a net-of-tax  basis as a separate  component of  stockholders'
      equity (accumulated other comprehensive income or loss).

      Premiums and discounts on debt securities are amortized to interest income
      on a level-yield  basis over the terms of the  securities.  Realized gains
      and losses on sales of securities  are  determined  based on the amortized
      cost of the specific securities sold.  Unrealized losses on securities are
      charged to earnings when the decline in fair value of a security is judged
      to be other than temporary.

      Allowance  for Loan  Losses

      The allowance  for loan losses is increased by provisions  for loan losses
      charged to  income.  Losses are  charged  to the  allowance  when all or a
      portion  of a loan is  deemed  to be  uncollectible.  Recoveries  of loans
      previously  charged-off are credited to the allowance for loan losses when
      realized. Management's periodic determination of the allowance is based on
      continuing  reviews  of  the  portfolio,   using  a   consistently-applied
      methodology.  The  allowance  for loan losses  consists of losses that are
      both probable and estimable at the date of the  financial  statements.  In
      determining the allowance for loan losses,  management  considers  factors
      such as the  Company's  past  loan  loss  experience,  known  risks in the
      portfolio, adverse situations affecting a borrower's ability to repay, the
      estimated value of underlying collateral, and current economic conditions.

      Determining the allowance for loan losses involves significant  management
      judgments  utilizing the best information  available.  Those judgments are
      subject to further  review by various  sources,  including  the  Company's
      regulators.  Changes in the allowance may be necessary in the future based
      on changes in economic and real estate


                                       28
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

      market conditions, new information obtained regarding known problem loans,
      the identification of additional problem loans and other factors,  certain
      of which are outside of management's control.

      A loan is considered to be impaired when, based on current information and
      events,  it is  probable  that the  Company  will be unable to collect all
      principal and interest  contractually  due. The Company  reviews loans for
      impairment  that  are  individually   evaluated  for   collectibility   in
      accordance with the Company's normal loan review  procedures  (principally
      loans in the  multi-family,  commercial  mortgage  and  construction  loan
      portfolios).   Smaller-balance  homogeneous  loans,  such  as  residential
      mortgage and consumer loans,  are  collectively  evaluated for impairment.
      The  measurement  of an impaired loan is based on (i) the present value of
      expected  future cash flows  discounted at the loan's  effective  interest
      rate, (ii) the loan's  observable  market price or (iii) the fair value of
      the collateral if the loan is collateral  dependent.  If the measure of an
      impaired loan is less than its recorded investment,  an impairment loss is
      recognized as part of the allowance for loan losses.

      Loans

      Loans are reported at amortized  cost less the  allowance for loan losses,
      except for mortgage loans held for sale which are reported at the lower of
      cost or estimated market value in the aggregate. Gains and losses on sales
      of loans are  recorded at  settlement  using the  specific  identification
      method.

      Interest is accrued monthly based on outstanding principal balances unless
      management considers the collection of interest to be doubtful (generally,
      when loans are contractually past due ninety days or more). When loans are
      placed on  nonaccrual  status,  unpaid  interest  is  reversed by charging
      interest  income and  crediting an  allowance  for  uncollected  interest.
      Interest payments received on nonaccrual loans (including  impaired loans)
      are recognized as income unless future collections are doubtful. Loans are
      returned to accrual  status when  collectibility  is no longer  considered
      doubtful (generally, when all payments have been brought current).

      Loan  origination  fees and  certain  direct  loan  origination  costs are
      deferred and the net fee or cost is amortized  to interest  income,  using
      the level-yield  method,  over the  contractual  term of the related loan.
      Unamortized  fees and costs are recognized in interest  income when a loan
      is sold or prepaid.

      Federal Home Loan Bank Stock

      As a member of the Federal Home Loan Bank  ("FHLB") of New York,  the Bank
      is  required  to hold a  certain  amount  of FHLB  stock.  This  stock  is
      considered to be a  non-marketable  equity security and,  accordingly,  is
      carried at cost.

      Goodwill

      Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and
      Other Intangible Assets, requires that goodwill and intangible assets with
      indefinite useful lives no longer be amortized,  but instead be tested for
      impairment  at  least  annually  using a  fair-value-based  approach.  The
      Company did not  recognize  any  impairment  of goodwill  during the years
      ended March 31, 2005, 2004 and 2003.

      Real Estate Owned

      Real estate properties acquired through foreclosure are recorded initially
      at fair value less  estimated  sales costs,  with the resulting  writedown
      charged to the  allowance  for loan losses.  Thereafter,  an allowance for
      losses on real  estate  owned is  established  by a charge to  expense  to
      reflect any subsequent  declines in fair value.  Fair value  estimates are
      based on recent appraisals and other available information. Costs incurred
      to develop or improve properties are capitalized,  while holding costs are
      charged to expense.

      Premises and Equipment

      Land  is  carried  at  cost.   Buildings   and   improvements,   leasehold
      improvements,  and  furniture  and  equipment  are  carried  at cost  less
      accumulated   depreciation  and  amortization.   Depreciation  expense  is
      recognized on a straight-


                                       29
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

      line basis over the estimated  useful lives of the related  assets,  which
      are 40 years for buildings and improvements and 3 to 7 years for furniture
      and equipment.  Amortization of leasehold  improvements is recognized on a
      straight-line basis over the shorter of the terms of the respective leases
      or the  estimated  useful lives of the assets,  resulting in  amortization
      periods  ranging from 5 to 20 years.  Costs  incurred to improve or extend
      the life of existing assets are  capitalized.  Repairs and maintenance are
      charged to expense.

      Securities Repurchase Agreements

      The Company is a party to securities  repurchase agreements with the FHLB.
      These agreements  provide for the transfer of securities to the FHLB under
      an agreement to repurchase  the  identical  securities at a fixed price in
      the future. These agreements are accounted for as secured financings.  The
      proceeds  from the  transaction  are  recorded as  borrowed  funds and the
      underlying securities are included in the Company's securities portfolio.

      Income Taxes

      Income  taxes are  accounted  for under  the asset and  liability  method.
      Deferred  taxes  are  recognized  for the  estimated  future  tax  effects
      attributable to "temporary  differences"  between the financial  statement
      carrying  amounts of existing assets and liabilities and their  respective
      tax bases.  Deferred tax assets and liabilities are measured using enacted
      tax rates expected to apply to taxable income in future years.  The effect
      on deferred tax assets and liabilities of an enacted change in tax laws or
      rates is  recognized in income tax expense in the period that includes the
      enactment date of the change.

      Deferred tax liabilities are recognized for all temporary differences that
      will result in future taxable  income.  Deferred tax assets are recognized
      for all temporary  differences  that will result in future tax deductions,
      subject to  reduction  of the assets by a valuation  allowance  in certain
      circumstances.  This  valuation  allowance is  recognized  if, based on an
      analysis of  available  evidence,  management  determines  that it is more
      likely than not that a portion or all of the  deferred tax assets will not
      be realized.  The valuation  allowance is subject to  adjustment  based on
      changes in  circumstances  that  affect  management's  judgment  about the
      realizability  of the  deferred  tax  assets.  Adjustments  to increase or
      decrease the valuation allowance are charged or credited, respectively, to
      income tax expense.

      Bank-Owned Life Insurance

      The cash surrender value of bank-owned life insurance ("BOLI") is recorded
      on the Company's  consolidated balance sheet as an asset and the change in
      the cash surrender value is recorded as non-interest income. The amount by
      which any death benefits  received exceeds a policy's cash surrender value
      is recorded in non-interest  income at the time of receipt.  BOLI policies
      were purchased in  consideration  of the Company's  obligations  under the
      supplemental  executive retirement plan and the Directors Retirement Plan,
      which are described in Note 10.

      Stock-Based Compensation Plans

      Compensation expense is recognized for the ESOP equal to the fair value of
      shares  committed to be released for allocation to  participant  accounts.
      Any difference between the fair value at that time and the ESOP's original
      acquisition   cost  is  charged  or  credited  to   stockholders'   equity
      (additional paid-in capital).  The cost of unallocated ESOP shares (shares
      not yet committed to be released) is deducted from stockholders' equity.

      SFAS No. 123, Accounting for Stock-Based Compensation,  encourages the use
      of a fair-value-based method of accounting for employee stock compensation
      plans, but permits the continued use of the  intrinsic-value-based  method
      of accounting  prescribed by Accounting  Principles  Board ("APB") Opinion
      No.  25.  Under  SFAS No.  123,  the  grant-date  fair value of options is
      recognized as compensation  expense over the vesting  period.  The Company
      has elected to continue to apply APB Opinion No. 25 and  disclose  the pro
      forma information required by SFAS No. 123. In accordance with APB Opinion
      No. 25, compensation  expense is not recognized for fixed stock options if
      the exercise  price of the option equals the fair value of the  underlying
      stock on the date of the grant.  The fair value of stock awards,  measured
      at the grant date,  is recognized  as unearned  compensation  (a deduction
      from  stockholders'  equity) and amortized to compensation  expense as the
      shares become vested.


                                       30
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

      Had  stock-based  compensation  expense been recognized in accordance with
      SFAS No. 123, the  Company's  net income and earnings per share would have
      been adjusted to the following pro forma amounts for the years ended March
      31:

                                                2005         2004        2003
                                              --------     --------   ---------
                                           (In thousands, except per share data)
Net income, as reported                       $  5,469     $  6,618   $   8,526
Add stock award expense included
   in reported net income, net
   of related tax effects                          723          242          89
Deduct stock award and stock
   option expense determined
   under the fair-value-based
   method, net of related tax
   effects                                      (1,188)        (768)       (168)
                                              --------     --------   ---------
Pro forma net income                          $  5,004     $  6,092   $   8,447
                                              ========     ========   =========

Earnings per share:
   Basic, as reported                         $   0.47     $   0.54   $    0.67
                                              ========     ========   =========
   Basic, pro forma                           $   0.43     $   0.49   $    0.66
                                              ========     ========   =========

   Diluted, as reported                       $   0.46     $   0.52   $    0.65
                                              ========     ========   =========
   Diluted, pro forma                         $   0.42     $   0.48   $    0.64
                                              ========     ========   =========

      The per-share  fair value of stock options was estimated on the grant date
      using the  Black-Scholes  option pricing  model.  Stock option grants were
      made in fiscal 2004 (none in fiscal 2005 and 2003).  The fair value of the
      options  granted in fiscal  2004 was $4.19 per share,  computed  using the
      Black-Scholes option pricing model and the following assumptions: dividend
      yield of 1.6%,  volatility rate of approximately  21%,  risk-free interest
      rate of 4.7% and expected option life of 7 years.

      In December 2004, the Financial  Accounting  Standards  Board (the "FASB")
      issued  SFAS No. 123  (revised  2004),  "Share-Based  Payment"  ("SFAS No.
      123R"),  which requires  entities to measure the cost of employee services
      received  in  exchange  for an award of  equity  instruments  based on the
      grant-date fair value of the award (with limited exceptions).  The cost is
      recognized  as an expense  over the period  during  which the  employee is
      required to provide  service in exchange  for the award,  which is usually
      the vesting  period.  The scope of SFAS No. 123R  includes  the  Company's
      Incentive  Stock  Benefit Plan (the "ISB Plan")  which  provides for stock
      awards and stock option  grants.  For stock awards under the ISB Plan, the
      grant-date  fair value of the shares will be  recognized  as  compensation
      expense on a straight-line basis over the applicable vesting period, which
      is the same accounting  previously  required under APB Opinion No. 25. For
      options  granted  under the ISB  Plan,  the  Company  will  recognize  the
      grant-date   fair  value  of  options   as   compensation   expense  on  a
      straight-line  basis over the applicable  vesting period.  This accounting
      treatment  differs  significantly  from the previous  accounting for fixed
      stock options under APB Opinion No. 25. As required by SFAS No. 123R,  the
      Company will  estimate the fair value of stock options on each grant date,
      using an appropriate  valuation approach such as the Black-Scholes  option
      pricing model. SFAS No. 123R did not change existing accounting principles
      applicable to employee stock ownership plans.

      SFAS No. 123R applies to all awards  granted after its effective  date and
      to awards  modified,  repurchased,  or cancelled after that date. SFAS No.
      123R is effective as of the beginning of the first annual reporting period
      beginning after June 15, 2005 (i.e.,  the Company's  fiscal year beginning
      April 1, 2006). The standard permits  different  transition  methods.  The
      Company expects to adopt SFAS No. 123R by recognizing compensation expense
      for (i) all stock options granted after April 1, 2006 and (ii) the portion
      of previously  granted  stock options for which the requisite  service had
      not been rendered as of April 1, 2006,  based on the grant-date fair value
      of  those  options  calculated  for  purposes  of SFAS No.  123 pro  forma
      disclosures.  The additional  annual  compensation  cost for the


                                       31
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

      Company's stock options  outstanding at March 31, 2005 that is expected to
      be recognized in the fiscal year  beginning  April 1, 2006, as a result of
      the adoption of SFAS No. 123R, is approximately $557,000 before taxes.

      Earnings Per Share

      Basic  earnings  per share  ("EPS") is  computed  by  dividing  net income
      applicable to common stock by the weighted average number of common shares
      outstanding  for the period.  Unearned  stock  awards are not  included in
      outstanding shares until they become vested.  Diluted EPS is computed in a
      manner  similar to basic EPS,  except that the weighted  average number of
      common shares outstanding is increased to include the number of additional
      common shares that would have been outstanding if all potentially dilutive
      common  shares  (such as stock  options and  unearned  stock  awards) were
      issued or became  vested  during the  reporting  period.  For  purposes of
      computing  both  basic  and  diluted  EPS,   outstanding   shares  exclude
      unallocated  ESOP  shares that have not been  committed  to be released to
      participants.

      Segment Information

      SFAS No. 131,  Disclosures  about  Segments of an  Enterprise  and Related
      Information,   requires  public  companies  to  report  certain  financial
      information about significant  revenue-producing  segments of the business
      for  which  such  information  is  available  and  utilized  by the  chief
      operating decision maker. As a community-oriented  financial  institution,
      substantially all of the Company's operations involve the delivery of loan
      and deposit products to customers.  Management  makes operating  decisions
      and assesses  performance  based on an ongoing  review of these  community
      banking operations,  which constitute the Company's only operating segment
      for financial reporting purposes.


                                       32
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

(3)   Securities Available for Sale

      The following are summaries of securities available for sale:

<TABLE>
<CAPTION>
                                                                                             Gross Unrealized
                                                                       Amortized          -----------------------            Fair
                                                                          Cost            Gains           Losses             Value
                                                                       ---------          ------          -------           --------
                                                                                               (In thousands)
<S>                                                                     <C>               <C>             <C>               <C>
March 31, 2005
--------------
Pass-through securities issued by:
    Ginnie Mae                                                          $ 69,759          $  267          $  (221)          $ 69,805
    Fannie Mae                                                            33,896             138             (650)            33,384
    Freddie Mac                                                           13,032              94             (164)            12,962

Collateralized mortgage obligations
    issued by:
    Ginnie Mae                                                             5,358              --              (89)             5,269
    Fannie Mae                                                            32,621               4           (1,062)            31,563
    Freddie Mac                                                           48,097              --           (1,335)            46,762
                                                                        --------          ------          -------           --------
          Total mortgage-backed securities                               202,763             503           (3,521)           199,745
U.S. Government and agency securities                                     55,058               1           (1,415)            53,644
Municipal securities                                                         860             120               --                980
Mutual fund shares                                                        22,007              23             (245)            21,785
                                                                        --------          ------          -------           --------
          Total securities                                              $280,688          $  647          $(5,181)          $276,154
                                                                        ========          ======          =======           ========
March 31, 2004
--------------
Pass-through securities issued by:
    Ginnie Mae                                                          $ 89,213          $  464          $  (349)          $ 89,328
    Fannie Mae                                                            44,359             426             (133)            44,652
    Freddie Mac                                                           18,626             241              (28)            18,839

Collateralized mortgage obligations
    issued by:
    Ginnie Mae                                                             8,815              27              (38)             8,804
    Fannie Mae                                                            36,824             127             (316)            36,635
    Freddie Mac                                                           57,350             426             (181)            57,595
                                                                        --------          ------          -------           --------
          Total mortgage-backed securities                               255,187           1,711           (1,045)           255,853
U.S. Government and agency securities                                     59,546             277              (42)            59,781
Municipal securities                                                         854             148               --              1,002
Mutual fund shares                                                        21,000             177              (83)            21,094
                                                                        --------          ------          -------           --------
          Total securities                                              $336,587          $2,313          $(1,170)          $337,730
                                                                        ========          ======          =======           ========
</TABLE>

      Debt  securities  available  for  sale at  March  31,  2005  consisted  of
      adjustable  rate securities and fixed rate securities with amortized costs
      of $108.2 million and $150.5 million, and weighted average yields of 4.36%
      and 3.72%,  respectively.  Debt securities available for sale at March 31,
      2004 consisted of adjustable  rate  securities  and fixed rate  securities
      with amortized  costs of $141.1 million and $174.5  million,  and weighted
      average yields of 2.92% and 3.60%, respectively.

      There  were no sales of  securities  available  for sale  during the years
      ended March 31, 2005, 2004 and 2003.


                                       33
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

      The following table  summarizes,  for all securities in an unrealized loss
      position at March 31, 2005, the aggregate fair values and gross unrealized
      losses  by  length  of time  those  securities  had  been in a  continuous
      unrealized loss position:

<TABLE>
<CAPTION>
                                                        Less Than 12 Months        12 Months or Longer             Total
----------------------------------------------------------------------------------------------------------------------------------
                                                        Fair      Unrealized      Fair     Unrealized       Fair      Unrealized
(In thousands)                                         Value        Losses        Value       Losses        Value       Losses
----------------------------------------------------------------------------------------------------------------------------------

<S>                                                   <C>          <C>          <C>          <C>          <C>          <C>
Pass-through securities issued by:
     Ginnie Mae                                       $ 13,254     $   (66)     $ 26,973     $  (155)     $ 40,227     $  (221)
     Fannie Mae                                         15,305        (228)       10,775        (422)       26,080        (650)
     Freddie Mac                                         5,433         (74)        2,959         (90)        8,392        (164)
Collateralized mortgage obligations
     issued by:
     Ginnie Mae                                          2,670         (37)        2,599         (52)        5,269         (89)
     Fannie Mae                                         17,337        (387)       13,231        (675)       30,568      (1,062)
     Freddie Mac                                        28,511        (588)       18,251        (747)       46,762      (1,335)
U.S. Government and agency securities                   40,997        (980)       12,341        (435)       53,338      (1,415)
Mutual fund shares                                          --          --        15,756        (245)       15,756        (245)
                                                      ------------------------------------------------------------------------
     Total temporarily-impaired securities            $123,507     $(2,360)     $102,885     $(2,821)     $226,392     $(5,181)
                                                      ========================================================================
</TABLE>

      The Company  invests  primarily in  mortgage-backed  securities  issued by
      Ginnie Mae,  Fannie Mae and Freddie  Mac, as well as U.S.  Government  and
      Agency securities.  The unrealized losses on these securities at March 31,
      2005 were caused by increases  in market  yields  subsequent  to purchase.
      There were no  individual  securities  with  unrealized  losses  that were
      significant  dollar  amounts at March 31, 2005. A total of 174  securities
      were in a continuous unrealized loss position for less than 12 months, and
      134 securities for 12 months or longer. There were no debt securities past
      due or  securities  for which the  Company  currently  believes  it is not
      probable that it will collect all amounts due according to the contractual
      terms  of the  security.  Because  the  Company  has the  ability  to hold
      securities  with unrealized  losses until a market price recovery  (which,
      for debt securities may be until  maturity),  the Company did not consider
      these securities to be other-than-temporarily impaired at March 31, 2005.

      The  following is a summary of the  amortized  cost and fair value of debt
      securities  available  for sale at March 31, 2005,  with amounts  shown by
      remaining  term  to  contractual   maturity  for  categories   other  than
      mortgage-backed  securities.  Actual  maturities  may  differ  from  these
      amounts  because  certain  issuers  have the right to call or redeem their
      obligations prior to contractual maturity.

                                                    Amortized          Fair
                                                       Cost            Value
                                                    ---------          -----
                                                          (In thousands)
      Mortgage-backed securities                     $202,763         $199,745
      U.S. Government and agency
          securities due:
          Less than one year                            1,000              984
          Over one to five years                       42,369           41,224
          Over five to ten years                        4,626            4,549
          Over ten years                                7,063            6,887
      Municipal securities due:
          Over five to ten years                          210              237
          Over ten years                                  650              743
                                                     --------         --------
          Total debt securities                      $258,681         $254,369
                                                     ========         ========


                                       34
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

(4)   Securities Held to Maturity

      The  following  is a summary of  securities  held to maturity at March 31,
      2005:

<TABLE>
<CAPTION>
                                                                                         Gross Unrealized
                                                                  Amortized          ------------------------            Fair
                                                                     Cost             Gains           Losses             Value
                                                                  -=-------          -------          -------           -------
                                                                                         (In thousands)
<S>                                                                <C>              <C>              <C>               <C>
Mortgage-backed securties issued by:
    Ginnie Mae                                                     $35,268          $    62          $  (250)          $35,080
    Fannie Mae                                                       2,339                8               (3)            2,344
    Freddie Mac                                                      1,577               --              (21)            1,556

Collateralized mortgage obligations issued by:
    Fannie Mae                                                       8,796               --             (126)            8,670
    Freddie Mac                                                     11,797               --             (210)           11,587
                                                                   -------          -------          -------           -------
          Total mortgage-backed securities                          59,777               70             (610)           59,237
U.S. Government and agency securities                               19,712               --             (221)           19,491
                                                                   -------          -------          -------           -------

       Total                                                       $79,489          $    70             (831)          $78,728
                                                                   =======          =======          =======           =======
</TABLE>

      At  March  31,  2005,  these  securities   consisted  of  adjustable  rate
      securities and fixed rate securities with amortized costs of $39.2 million
      of  $40.3  million,  and  weighted  average  yields  of 4.63%  and  3.86%,
      respectively.

      There were no sales of securities  held to maturity during the years ended
      March 31, 2005, 2004 and 2003.

      The following table  summarizes,  for all securities in an unrealized loss
      position at March 31, 2005, the aggregate fair values and gross unrealized
      losses  by  length  of time  those  securities  had  been in a  continuous
      unrealized loss position:

<TABLE>
<CAPTION>
                                                     Less Than 12 Months    12 Months or Longer        Total
--------------------------------------------------------------------------------------------------------------------
                                                   Fair       Unrealized    Fair    Unrealized   Fair     Unrealized
(In thousands)                                     Value        Losses      Value     Losses     Value      Losses
--------------------------------------------------------------------------------------------------------------------
<S>                                              <C>          <C>          <C>      <C>       <C>          <C>
Pass-through securities issued by:
     Ginnie Mae                                  $ 19,627     $   (250)    $  --    $   --    $ 19,627     $   (250)
     Fannie Mae                                       674           (3)       --        --         674           (3)
     Freddie Mac                                    1,556          (21)       --        --       1,556          (21)
Collateralized mortgage obligations
     issued by:
     Fannie Mae                                     8,670         (126)       --        --       8,670         (126)
     Freddie Mac                                   11,587         (210)       --        --      11,587         (210)
U.S. Government and agency securities              17,491         (221)       --        --      17,491         (221)
                                                 ------------------------------------------------------------------
     Total temporarily-impaired securities       $ 59,605     $   (831)    $  --    $   --    $ 59,605     $   (831)
                                                 ==================================================================
</TABLE>


                                       35
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

      The Company  invests  primarily in  mortgage-backed  securities  issued by
      Ginnie Mae,  Fannie Mae and Freddie  Mac, as well as U.S.  Government  and
      Agency securities.  The unrealized losses at March 31, 2005 were caused by
      increases  in  market  yields  subsequent  to  purchase.   There  were  no
      individual  securities with unrealized losses that were significant dollar
      amounts at March 31, 2005. A total of 49  securities  were in a continuous
      unrealized  loss  position  for less than 12  months.  There  were no debt
      securities past due or securities for which the Company currently believes
      it is not probable  that it will collect all amounts due  according to the
      contractual terms of the security. Because the Company has the ability and
      intent to hold  securities  with  unrealized  losses until  maturity,  the
      Company did not consider  these  securities  to be  other-than-temporarily
      impaired at March 31, 2005.

      The  following  is a  summary  of the  amortized  cost and  fair  value of
      securities  held to maturity at March 31, 2005,  with  information on U.S.
      Government  and agency  securities  shown by remaining term to contractual
      maturity.  Actual maturities may differ from these amounts because certain
      issuers  have  the  right to call or  redeem  their  obligations  prior to
      contractual maturity.

                                                      Amortized     Fair
                                                         Cost       Value
                                                      ---------    -------
                                                         (In thousands)

      Mortgage-backed securities                       $59,777     $59,237
      U.S. Government and agency securities:
               Over one to five years                   16,850      16,675
               Over five to ten years                      999         975
               Over ten years                            1,863       1,841
                                                       -------     -------

               Total                                   $79,489     $78,728
                                                       =======     =======


                                       36
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

(5)   Loans

      Loans are summarized as follows:

                                                         March 31,
                                                  ------------------------
                                                     2005          2004
                                                  ---------      ---------
                                                       (In thousands)
      Mortgage loans:
         Residential properties:
             One-to-four family                   $ 441,655     $ 375,714
             Home equity lines of credit             42,052        35,185
             Multi-family                             9,807         8,472
         Commercial properties                       45,645        43,153
         Construction loans                          17,416        13,723
                                                  ------------------------
                                                    556,575       476,247
                                                  ------------------------
      Consumer loans:
         Secured personal loans                       1,164         2,293
         Other loans                                  1,004           305
      Commercial loans                                2,932           798
                                                  ------------------------
                                                      5,100         3,396
                                                  ------------------------
            Total loans                             561,675       479,643

      Deferred loan origination costs, net            2,087         1,524
      Allowance for loan losses                      (3,011)       (2,712)
                                                  ------------------------
            Total loans, net                      $ 560,751     $ 478,455
                                                  ========================

      Gross  principal  balances at March 31, 2004 consisted of fixed rate loans
      of $349.1  million  and  adjustable  rate  loans of $212.5  million,  with
      weighted average yields of 6.05% and 5.10%,  respectively.  Fixed rate and
      adjustable  rate loans at March 31, 2004 totaled $349.5 million and $130.1
      million,  with weighted  average yields of 6.25% and 5.05%,  respectively.
      There were no loans held for sale at March 31, 2005 and 2004.

      The  Company  primarily  originates  mortgage  loans  secured by  existing
      single-family   residential   properties.   The  Company  also  originates
      multi-family and commercial mortgage loans, construction loans, commercial
      loans and consumer loans. Substantially all of the mortgage loan portfolio
      is secured by real estate  properties  located in  Westchester  and Putnam
      Counties in New York, and Fairfield  County,  Connecticut.  The ability of
      the  Company's  borrowers  to make  principal  and  interest  payments  is
      dependent upon, among other things, the level of overall economic activity
      and the real estate  market  conditions  prevailing  within the  Company's
      concentrated lending area.


                                       37
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

      Activity in the allowance for loan losses is summarized as follows for the
      years ended March 31:

                                             2005       2004       2003
                                             ----       ----       ----
                                                   (In thousands)
      Balance at beginning of year          $ 2,712    $ 2,442    $ 2,221
      Provision for loan losses                 300        275        275
      Charge-offs                                (1)        (5)       (54)
                                            -----------------------------
      Balance at end of year                $ 3,011    $ 2,712    $ 2,442
                                            =============================

      The principal balances of nonaccrual loans past due ninety days or more at
      March 31 are as follows:

                                                 2005      2004      2003
                                                 ----      ----      ----
                                                      (In thousands)
      Mortgage loans:
         One-to-four family                     $  510    $1,359    $  449
         Home equity lines of credit                70       617        18
      Consumer loans                                --         5        10
                                                --------------------------
         Total nonaccrual loans                 $  580    $1,981    $  477
                                                ==========================

      Gross  interest  income  that would have been  recorded  if the  foregoing
      nonaccrual loans had remained current in accordance with their contractual
      terms totaled $40,000,  $124,000 and $43,000 for the years ended March 31,
      2005,  2004 and 2003,  respectively,  compared to interest income actually
      recognized of $16,000, $71,000 and $20,000, respectively.

      The Company  had no  impaired  loans at March 31, 2005 and 2004 within the
      scope of SFAS No. 114,  Accounting by Creditors for  Impairment of a Loan.
      The average recorded investment in impaired loans was $54,000 for the year
      ended  March 31,  2003 (none in fiscal  years 2005 and 2004).  No interest
      income was recognized on impaired  loans while such loans were  considered
      to be impaired.

      Provisions  for losses and other  activity in the  allowance for losses on
      real  estate  owned were  insignificant  during the years  ended March 31,
      2005, 2004 and 2003.


                                       38
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

(6)   Premises and Equipment

      A summary of premises and equipment at March 31 follows:

                                                         2005        2004
                                                         ----        ----
                                                          (In thousands)

      Land                                             $    592    $    592
      Buildings and improvements                          4,313       4,313
      Leasehold improvements                              3,217       2,364
      Furniture and equipment                             3,508       2,842
                                                       --------------------
                                                         11,630      10,111

      Less accumulated depreciation and amortization     (5,416)     (4,481)
                                                       --------------------

             Premises and equipment, net               $  6,214    $  5,630
                                                       ====================

(7)   Deposits

      The following is a summary of deposit balances and weighted average stated
      interest rates at March 31:

<TABLE>
<CAPTION>
                                                                          2005              2004
--------------------------------------------------------------------------------------------------------
                                                                     Rate     Amount    Rate     Amount
--------------------------------------------------------------------------------------------------------
                                                                            (Dollars in thousands)
<S>                                                                  <C>     <C>        <C>     <C>
Savings and club accounts                                            0.51%   $150,455   0.51%   $148,231
Money market accounts                                                0.97      52,881   0.73      47,338
NOW accounts                                                         0.35      61,357   0.24      54,616
Commercial checking                                                    --      14,201     --      12,404
--------------------------------------------------------------------------------------------------------
Total                                                                0.54     278,894   0.47     262,589
--------------------------------------------------------------------------------------------------------

Certificates of deposit by remaining
 term to contractual maturity:
  Within one year                                                    2.30     260,659   1.87     321,473
  After one but within two years                                     3.15     199,952   2.66      40,517
  After two but within three years                                   3.60      59,822   3.09      56,753
  After three years                                                  4.23      32,441   4.24      26,998
--------------------------------------------------------------------------------------------------------
Total                                                                2.86     552,874   2.24     445,741
--------------------------------------------------------------------------------------------------------
Total deposits                                                       1.90%   $831,768   1.58%   $708,330
========================================================================================================
</TABLE>

      Certificates  of deposit  with  denominations  of $100,000 or more totaled
      $138.7   million   and  $108.8   million  at  March  31,  2005  and  2004,
      respectively.


                                       39
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

      Interest  expense on deposits is summarized as follows for the years ended
      March 31:

                                                 2005         2004         2003
                                               -------      -------      -------
                                                        (In thousands)
      Savings and club accounts                $   783      $   856      $ 1,185
      Money market and NOW accounts                526          547          725
      Certificates of deposit                   12,659        9,601       10,098
                                               -------      -------      -------
            Total                              $13,968      $11,004      $12,008
                                               =======      =======      =======

(8)   Borrowings

      Borrowings  under  securities  repurchase  agreements  with  the  FHLB are
      summarized as follows:

                                                             March 31,
                                             Coupon     --------------------
      Maturity Date                           Rate        2005        2004
      -------------                          ------     -------      -------
                                                      (Dollars in thousands)
      January 2008 (1)                        5.42%     $10,000      $10,000
      December 2008 (1)                       4.72        5,000        5,000
      March 2005                              4.22           --        6,000
      June 2005                               2.47        3,000           --
      March 2006                              2.27        7,000        7,000
      March 2007                              2.65        7,000        7,000
      March 2008                              4.13        6,000           --
                                                        -------      -------
      Total borrowings                                  $38,000      $35,000
                                                        =======      =======
      Weighted average interest rate                       3.80%        3.93%
      Accrued interest payable                          $   165      $   131

      (1)   Callable quarterly.

      The securities  transferred to the FHLB in repurchase  agreements  include
      U.S.  Government and agency securities and  mortgage-backed  securities of
      $14.1 million and $23.7  million,  respectively,  at March 31, 2005 ($14.1
      million  and $23.9  million,  respectively,  at March 31,  2004).  Accrued
      interest  receivable on these securities  totaled $258,000 and $225,000 at
      March 31, 2005 and 2004, respectively.

      In  addition  to  securities  repurchase  agreements,  the  Bank  may have
      outstanding  borrowings from the FHLB of up to approximately $88.6 million
      at March 31, 2005, in a combination  of term advances and overnight  funds
      secured by the Bank's  investment in FHLB stock and by a blanket  security
      agreement.  This  agreement  requires  the Bank to maintain as  collateral
      certain qualifying assets (such as one-to-four family residential mortgage
      loans)  with a fair  value,  as  defined,  at  least  equal to 110% of any
      outstanding advances.  There were no such borrowings  outstanding at March
      31, 2005 and 2004.


                                       40
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

(9)   Income Taxes

      Income tax expense  consists  of the  following  components  for the years
      ended March 31:

                                          2005          2004         2003
                                        -------       -------      -------
                                                  (In thousands)
      Federal:
           Current                      $ 3,129       $ 3,627      $ 3,553
           Deferred                         (39)           11        1,033
                                        -------       -------      -------
                                          3,090         3,638        4,586
                                        -------       -------      -------
      State:
           Current                          458           575          436
           Deferred                         (15)           21          197
                                        -------       -------      -------
                                            443           596          633
                                        -------       -------      -------
      Total:
           Current                        3,587         4,202        3,989
           Deferred                         (54)           32        1,230
                                        -------       -------      -------
                                        $ 3,533       $ 4,234      $ 5,219
                                        =======       =======      =======

      The following is a  reconciliation  of expected  income taxes (computed at
      the applicable  Federal statutory tax rate) to the Company's actual income
      tax expense for the years ended March 31:

                                                  2005        2004        2003
                                                -------     -------     -------
                                                     (Dollars in thousands)
      Taxes at Federal statutory rate           $ 3,061     $ 3,690     $ 4,811
      State tax expense, net of
          Federal tax benefit                       292         390         411
      Nondeductible ESOP expense                    239         248          72
      Increase in cash surrender
          value of BOLI                            (129)        (29)         --
      Other reconciling items, net                   70         (65)        (75)
                                                -------     -------     -------
      Actual income tax expense                 $ 3,533     $ 4,234     $ 5,219
                                                =======     =======     =======
      Effective income tax rate                    39.2%       39.0%       38.0%


                                       41
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

      The tax effects of temporary  differences  that give rise to the Company's
      deferred tax assets and liabilities are as follows at March 31:

<TABLE>
<CAPTION>
                                                                                  2005                 2004
                                                                                  ----                 ----
<S>                                                                               <C>                 <C>
                                                                                        (In thousands)
Deferred tax assets:
     Net unrealized loss on securities available for sale                         $1,811              $   --
     Allowance for loan losses                                                     1,204               1,085
     Deferred compensation                                                           571                 494
     Director retirement plan                                                        340                 259
     Accrued pension costs                                                           173                 133
     Purchase accounting adjustments on loans and securities                          41                 125
     Other deductible temporary differences                                          300                  50
                                                                                  ======              ======
           Total deferred tax assets                                               4,440               2,146
                                                                                  ======              ======

Deferred tax liabilities:
     Prepaid pension costs                                                         1,223               1,015
     Deferred loan costs                                                             835                 609
     Net unrealized gain on securities available for sale                             --                 441
     Purchase accounting adjustment on buildings                                     146                 151
                                                                                  ======              ======
           Total deferred tax liabilities                                          2,204               2,216
                                                                                  ======              ======
Net deferred tax asset (liability)                                                $2,236              $  (70)
                                                                                  ======              ======
</TABLE>

      In assessing the realizability of the Company's total deferred tax assets,
      management  considers whether it is more likely than not that some portion
      or all of those  assets  will not be  realized.  Based  upon  management's
      consideration of historical and anticipated future pre-tax income, as well
      as the  reversal  period for the items  giving  rise to the  deferred  tax
      assets and liabilities,  a valuation allowance for deferred tax assets was
      not considered necessary at March 31, 2005 and 2004.

      As a thrift institution,  the Bank is subject to special provisions in the
      Federal and New York State tax laws  regarding  its allowable tax bad debt
      deductions   and  related  tax  bad  debt   reserves.   These   deductions
      historically  were determined  using methods based on loss experience or a
      percentage of taxable income.  Tax bad debt reserves  represent the excess
      of allowable deductions over actual bad debt losses, and include a defined
      base-year  amount.  SFAS No. 109  requires  recognition  of  deferred  tax
      liabilities with respect to reserves in excess of the base-year amount, as
      well as any  portion of the  base-year  amount  that is expected to become
      taxable (or "recaptured") in the foreseeable future.

      The Bank's  base-year  tax bad debt  reserves  totaled  $9.0  million  for
      Federal tax  purposes at both March 31, 2005 and 2004,  and $14.0  million
      and $12.3  million  for New York State tax  purposes at March 31, 2005 and
      2004,  respectively.  In  accordance  with  SFAS  No.  109,  deferred  tax
      liabilities have not been recognized with respect to these reserves, since
      the Company does not expect that these amounts will become  taxable in the
      foreseeable  future.  Under  the tax laws,  events  that  would  result in
      taxation of these reserves  include (i) redemptions of the Bank's stock or
      certain excess  distributions by the Bank to the Holding Company, and (ii)
      failure of the Bank to maintain a  specified  qualifying  assets  ratio or
      meet other thrift  definition  tests for New York State tax purposes.  The
      unrecognized deferred tax liabilities with respect to the Bank's base-year
      reserves totaled $3.9 million at March 31, 2005 and 2004.


                                       42
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

(10)  Employee Benefit and Stock-Based Compensation Plans

      Pension Plans

      The Company maintains two  non-contributory  defined benefit pension plans
      that cover  substantially all full-time employees who meet certain age and
      service  requirements.  Benefits  are  based  on the  employee's  years of
      accredited  service and  average  compensation  for the three  consecutive
      years that produce the highest average. The Company's funding policy is to
      contribute  the  amounts  required  by  applicable  regulations,  although
      additional  amounts  may be  contributed  from time to time.  The  Company
      expects to contribute $150,000 to the plans in fiscal 2006.

      Plan assets are invested in the Guaranteed Deposit Fund ("GDF") which is a
      group annuity insurance product issued by Prudential  Retirement Insurance
      and Annuity  Company  ("PRIAC").  Deposits to the GDF are  deposited  into
      PRIAC's general account.  Payment  obligations  under the GDF represent an
      insurance claim  supported by all general  account  assets.  The guarantee
      from  PRIAC is based on the  claims-paying  ability  of PRIAC  and not the
      value of  securities  held in the GDF.  As such,  the GDF does not operate
      like a mutual fund, annuity product or other similar  investment.  The GDF
      is an  intermediate-term,  high-grade fixed income portfolio consisting of
      commercial  mortgages,  private  placement  bonds,  publicly  traded  debt
      securities and asset-backed  securities.  The underlying securities in the
      GDF have an average life of 5.6 years.

      The investment goal is to achieve a long-term rate of return sufficient to
      provide  for  benefit   obligations,   including   the  effect  of  future
      compensation levels, while minimizing investment risks such as credit risk
      and interest rate risk.

      The expected long-term rate of return on plan assets used to determine net
      periodic  benefit  expense was based  principally on the actual  long-term
      historical yield earned on the GDF.


                                       43
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

      The following table  summarizes  changes in the plans'  projected  benefit
      obligations  and the fair  value of the  plans'  assets.  The  table  also
      provides a  reconciliation  of the funded  status to the  prepaid  pension
      costs  recognized in the consolidated  balance sheets.  The Company uses a
      measurement date of December 31 for accounting and disclosure purposes.

                                                           2005         2004
                                                         --------     --------
                                                             (In thousands)
      Change in projected benefit obligations:
           Beginning of year                             $ 10,451     $  9,807
           Service cost                                       366          341
           Interest cost                                      638          623
           Actuarial loss                                     747          147
           Benefits paid                                     (510)        (467)
                                                         --------     --------
           End of year                                     11,692       10,451
                                                         --------     --------
      Change in fair value of plan assets:
           Beginning of year                               10,239        7,098
           Actual return on plan assets                       246          746
           Employer contributions                           1,065        2,862
           Benefits paid                                     (510)        (467)
                                                         --------     --------
           End of year                                     11,040       10,239
                                                         --------     --------
      Funded status at the measurement date                  (652)        (212)
      Employer contributions after the measurement date       150          488
      Unrecognized net actuarial loss (1)                   3,520        2,227
      Unrecognized past service liability                      39           44
                                                         --------     --------
      Prepaid pension costs at March 31                  $  3,057     $  2,547
                                                         ========     ========

      (1)   Unrecognized  net actuarial gains and losses in excess of 10% of the
            greater of the  projected  benefit  obligation  or the fair value of
            plan assets are amortized over the average  remaining service period
            of active plan participants.

      The plans'  accumulated  benefit  obligations  were $10.1 million and $9.1
      million at March 31, 2005 and 2004, respectively.

      Pension benefits  expected to be paid for the fiscal years ending March 31
      are  $610,000  in 2006,  $620,000 in 2007,  $634,000 in 2008,  $649,000 in
      2009,  $669,000 in 2010,  and a total of $3.7 million in 2011-2015.  These
      amounts  are based on the same  assumptions  used to measure  the  benefit
      obligation  at  March  31,  2005 and  include  estimated  future  employee
      service.


                                       44
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

      The  components of the net periodic  pension  expense and the  significant
      actuarial assumptions were as follows:

                                                 2005        2004        2003
                                                -----       -----       -----
                                                    (Dollars in thousands)
      Service cost                              $ 366       $ 341       $ 259
      Interest cost                               638         623         589
      Expected return on plan assets             (900)       (700)       (600)
      Recognized net actuarial loss               108         111          59
      Amortization of prior service
         cost and net transition obligation         5           5          10
                                                -----       -----       -----
         Net periodic pension expense           $ 217       $ 380       $ 317
                                                =====       =====       =====

      Weighted-average assumptions used
       to determine projected benefit
       obligations at March 31:
          Discount rate                          6.00%       6.25%       6.50%
          Rate of compensation increase          3.50%       3.50%       4.00%

      Weighted-average assumptions
       used to determine net periodic
       benefit expense for the years
       ended March 31:
         Discount rate                           6.25%       6.50%       7.00%
         Expected long-term rate of
              return on plan assets              8.50%       8.50%       9.00%
         Rate of compensation increase           3.50%       4.00%       4.25%

      The Company also has a supplemental  executive  retirement plan which is a
      non-qualified  plan  providing  benefits  to certain  key  employees.  The
      supplemental  benefits  represent the  difference  between the pension and
      ESOP  benefits  the  executive  would be entitled  to receive  under those
      plans,  without considering the applicable  limitations under the tax law,
      and the actual benefits after  considering such  limitations.  The accrued
      liability for the supplemental plan was $431,000 and $333,000 at March 31,
      2005 and 2004,  respectively,  and the  related  expense  was  $98,000 and
      $38,000 for the years then ended.

      Director Retirement Plan

      The Company maintains a non-qualified,  unfunded Director  Retirement Plan
      which is an amendment  and  restatement  of the former  Director  Emeritus
      Plan. Under the Director Retirement Plan, any person who was a director on
      January 1, 2004,  who  retires or dies after age 70 and who  completes  15
      years of continuous  service as a director  becomes  entitled to an annual
      retirement  benefit for the longer of 20 years or his/her lifetime,  equal
      to the amount of annual fees paid for attendance at regular  monthly board
      meetings  during  the  preceeding  twelve  months,  plus the amount of any
      annual stipend paid to such director in that year. The Director Retirement
      Plan  also  provides  for  benefits  in the event of early  retirement  or
      disability.  In the  event  of a  change  in  control,  directors  will be
      credited  with  years of service  as if they had  remained  members of the
      Board of Directors  until age 70 and be entitled to benefits  payable in a
      lump sum, at the time of the change in control.  A retired  director  will
      receive the present value of the remaining benefit,  paid in a lump sum at
      the time of a change in control.


                                       45
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

      Under the former Director  Emeritus Plan,  benefit  payments would be made
      for a period not to exceed 15 years or to age 85 or until the death of the
      director  emeritus,  whichever  came first.  Directors  would  qualify for
      emeritus  status  upon  attaining  age 70 with at  least 15 years of board
      service. The effect of adopting the Director Retirement Plan during fiscal
      2004 was an increase of $1.1 million in the projected benefit obligation.

      The following table  summarizes  changes in the plan's  projected  benefit
      obligation.  The table also provides a reconciliation of the funded status
      to the accrued benefit cost recognized in the consolidated balance sheets.

                                                         2005            2004
                                                        -------        -------
                                                             (In thousands)
      Change in projected benefit obligation:
           Beginning of year                            $ 1,633        $   796
           Service cost                                      48             11
           Interest cost                                    104             48
           Actuarial (gain) loss                            282           (261)
           Plan amendments                                   --          1,082
           Benefits paid                                    (43)           (43)
                                                        -------        -------
           End of year                                    2,024          1,633

      Fair value of plan assets                              --             --
                                                        -------        -------

      Funded status                                      (2,024)        (1,633)
      Unrecognized net actuarial loss                       (92)          (325)
      Unrecognized prior service cost                     1,265          1,398
                                                        -------        -------
      Accrued benefit cost at end of year               $  (851)       $  (560)
                                                        =======        =======

      The  components of the net periodic  expense for the plan and the discount
      rates used to determine the projected benefit obligation were as follows:

                                                     2005       2004      2003
                                                     ----       ----      ----
                                                       (Dollars in thousands)
      Service cost                                  $  48      $  11     $   9
      Interest cost                                   104         48        52
      Recognized net actuarial gain                   (40)        --        (3)
      Amortization of prior service cost              133         79        79
                                                    -----      -----     -----
           Net periodic expense                     $ 245      $ 138     $ 137
                                                    =====      =====     =====

      Discount rate used to determine the
        projected benefit obligation at March 31     5.75%      5.75%     6.25%


      Savings Plan

      The Company maintains an employee savings plan under Section 401(k) of the
      Internal Revenue Code.  Eligible  employees are able to make contributions
      to the plan of up to 10% of their compensation. Prior to February 1, 1999,
      the Company made matching  contributions equal to 50% of the participant's
      contributions  to the plan. The Company ceased its matching  contributions
      effective February 1, 1999.


                                       46
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

      Employee Stock Ownership Plan

      In connection with the initial stock offering in October 1998, the Company
      established  an ESOP  for  eligible  employees  who meet  certain  age and
      service requirements. In fiscal 1999, the ESOP borrowed approximately $1.9
      million from Sound Federal Bancorp and used the funds to purchase  531,563
      shares of common stock sold in the Offering.  This loan has a 10-year term
      and bears  interest at the prime rate. In fiscal 2003,  the ESOP purchased
      622,458  shares of common  stock in the  second-step  conversion  with the
      proceeds of a $6.2 million loan from the Company, which has a 20-year term
      and bears interest at 6.0%. The Bank makes periodic  contributions  to the
      ESOP sufficient to satisfy the debt service requirements of the loans. The
      ESOP uses these  contributions  and any dividends  received by the ESOP on
      unallocated  shares to make principal and interest  payments on the loans,
      which had total unpaid principal balances of $6.4 million and $6.8 million
      at March 31, 2005 and 2004, respectively.

      Shares  purchased  by the ESOP are held in a suspense  account by the plan
      trustee until allocated to participant accounts.  Shares released from the
      suspense  account  are  allocated  to  participants  on the basis of their
      relative  compensation  in the  year of  allocation.  Participants  become
      vested in the allocated shares over a period not to exceed five years. Any
      forfeited  shares  are  allocated  to  other   participants  in  the  same
      proportion as contributions.

      ESOP  expense was $1.2  million,  $1.2  million and $532,000 for the years
      ended March 31, 2005,  2004 and 2003,  respectively.  The cost of the ESOP
      shares that have not yet been  allocated  or  committed  to be released to
      participants  is deducted from  stockholders'  equity  (698,606 shares and
      782,944 shares at March 31, 2005 and 2004,  respectively).  The fair value
      of these shares was approximately $10.8 million and $11.5 million at March
      31, 2005 and 2004, respectively.

      Stock Options

      In October 1999, the stockholders  approved the Sound Federal Bancorp 1999
      Stock Option Plan (the "Stock  Option  Plan") and option  grants were made
      for 583,048 shares at an exercise price of $3.298 per share. These options
      have a 10-year term and are fully  vested at March 31,  2005.  Each option
      entitles  the holder to purchase  one share of common stock at an exercise
      price equal to the fair market value of the stock on the grant date.

      On February 4, 2004, the stockholders  approved the Sound Federal Bancorp,
      Inc.  Incentive  Stock  Benefit Plan (the "ISB Plan").  A total of 700,266
      shares of authorized but unissued  common stock were reserved for issuance
      under this plan. On February 5, 2004,  initial  grants were made under the
      ISB Plan for  665,253  shares at an  exercise  price of $15.20  per share,
      resulting in 35,013 shares  available for future  option  grants.  Options
      have a  10-year  term and may be either  non-qualified  stock  options  or
      incentive stock options. The options vest at a rate of 20% on each of five
      annual vesting dates,  with the first vesting  occurring in February 2004.
      Each option  entitles  the holder to purchase one share of common stock at
      an exercise price equal to the fair market value of the stock on the grant
      date.

      Options granted under both plans include a reload  feature,  limited stock
      appreciation  rights upon a change in control (as  defined),  and dividend
      equivalent  rights upon the declaration of an  extraordinary  dividend (as
      defined).


                                       47
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

      Stock option activity is summarized below:

                             Options Outstanding         Options Exercisable
                            ----------------------      ---------------------
                                          Weighted                  Weighted
                                           Average                  Average
                                          Exercise                  Exercise
                               Number      Price         Number       Price
                            -----------   --------      --------    --------

      At March 31, 2002        560,915    $ 3.298        348,723      $3.298
      Exercised                (30,433)     3.298
                             ---------
      At March 31, 2003        530,482      3.298        428,818       3.298
      Granted                  665,253     15.200
      Exercised                (81,185)     3.298
                             ---------
      At March 31, 2004      1,114,550     10.402        582,347       6.014
      Exercised                (77,665)     3.298
                             ---------
      At March 31, 2005      1,036,885     10.934        637,724       8.264
                             =========

      Additional  information for  outstanding and exercisable  options at March
      31, 2005 follows:

                                      Options              Options
             Exercise Price         Outstanding          Exercisable
             --------------         -----------          -----------
                 $ 3.298               371,632             371,632
                  15.200               665,253             266,092
                                     ---------             -------
                                     1,036,885             637,724
                                     =========             =======

      Stock Awards

      The Company granted stock awards pursuant to the Recognition and Retention
      Plan (the "RRP")  established in October 1999 and the ISB Plan established
      in February  2004.  The purpose of both plans is to provide  officers  and
      directors of the Company with a  proprietary  interest in the Company in a
      manner  designed to encourage their  retention.  Through March 31, 2005, a
      total of 389,037 and 291,524  shares have been awarded  under the ISB Plan
      and RRP,  respectively.  The awards  vest at a rate of 20% on each of five
      annual vesting dates.  The shares awarded pursuant to the RRP became fully
      vested  during the year ended March 31, 2004.  The first  vesting date for
      shares  awarded  under  the ISB Plan was in  November  2004.  The  expense
      recognized  for  stock  awards  amounted  to $1.2  million,  $395,000  and
      $144,000 for the years ended March 31, 2005, 2004 and 2003, respectively.

(11)  Commitments and Contingencies

      Off-Balance Sheet Financial Instruments

      The Company's  off-balance  sheet financial  instruments at March 31, 2005
      and 2004 were limited to loan origination commitments of $66.0 million and
      $34.0 million, respectively, and unused lines of credit (principally fixed
      rate home equity  lines)  extended to customers of $47.6 million and $40.9
      million, respectively. Substantially all of these commitments and lines of
      credit  have been  provided  to  customers  within the  Company's  primary
      lending area  described in Note 5. Loan  origination  commitments at March
      31, 2005 consisted of adjustable rate and fixed rate  commitments of $34.9
      million and $31.1 million,  respectively,  with weighted average yields of


                                       48
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

      5.79% and 6.15%,  respectively.  Loan origination commitments at March 31,
      2004  consisted of  adjustable  rate and fixed rate  commitments  of $23.0
      million and $11.0 million,  respectively,  with weighted average yields of
      4.63% and 6.07%, respectively.

      Loan   origination   commitments  and  lines  of  credit  are  contractual
      agreements to lend to customers  within specified time periods at interest
      rates and on other terms  specified  in the  agreements.  These  financial
      instruments  involve  elements  of credit risk and  interest  rate risk in
      addition to the amounts for funded loans  recognized  in the  consolidated
      balance sheets. The contractual amounts of commitments and lines of credit
      represent  the  Company's  maximum  potential   exposure  to  credit  loss
      (assuming that the  agreements are fully funded and any collateral  proves
      to  be  worthless),   but  do  not  necessarily   represent   future  cash
      requirements  since  certain  agreements  may expire  without  being fully
      funded. Loan commitments generally have fixed expiration dates (ranging up
      to three months) or other termination  clauses and may require the payment
      of a fee by the customer.  Commitments  and lines of credit are subject to
      the same credit approval process applied in the Company's  general lending
      activities,   including  a  case-by-case   evaluation  of  the  customer's
      creditworthiness and related collateral requirements.

      Operating Lease Commitments

      The Company is obligated  under  non-cancelable  operating  leases for ten
      branch  offices and the  Company's  corporate  office.  Rent expense under
      operating  leases was $1.0  million,  $808,000  and $433,000 for the years
      ended March 31, 2005, 2004 and 2003, respectively.  At March 31, 2005, the
      future minimum rental payments under  operating  lease  agreements for the
      fiscal years  ending  March 31 are $1.0  million in 2006,  $1.0 million in
      2007,  $1.1  million in 2008,  $906,000 in 2009,  $656,000 in 2010,  and a
      total of $2.5 million for 2011 and thereafter.

      Legal Proceedings

      In the normal  course of  business,  the  Company is  involved  in various
      outstanding  legal  proceedings.  In  the  opinion  of  management,  after
      consultation  with legal  counsel,  the outcome of such legal  proceedings
      should not have a material  effect on the Company's  financial  condition,
      results of operations or liquidity.

(12)  Regulatory Matters

      Regulatory Capital Requirements

      OTS regulations  require savings  institutions to maintain a minimum ratio
      of tangible  capital to total adjusted  assets of 1.5%, a minimum ratio of
      Tier I (core)  capital  to total  adjusted  assets of 4.0%,  and a minimum
      ratio of Total (core and supplementary) capital to risk-weighted assets of
      8.0%.

      Under its prompt  corrective  action  regulations,  the OTS is required to
      take  certain  supervisory  actions  with  respect to an  undercapitalized
      institution.  Such  actions  could  have a direct  material  effect on the
      institution's financial statements.  The regulations establish a framework
      for the  classification  of depository  institutions into five categories:
      well capitalized, adequately capitalized, undercapitalized,  significantly
      undercapitalized,   and   critically   undercapitalized.   Generally,   an
      institution  is  considered  well  capitalized  if it has a Tier I  (core)
      capital  ratio of at least 5.0%, a Tier I risk-based  capital  ratio of at
      least 6.0%, and a Total risk-based capital ratio of at least 10.0%.

      The foregoing  capital  ratios are based in part on specific  quantitative
      measures of assets,  liabilities  and certain  off-balance  sheet items as
      calculated  under  regulatory  accounting  practices.  Capital amounts and
      classifications are also subject to qualitative judgments by the OTS about
      capital  components,  risk  weightings  and other  factors.  These capital
      requirements  apply  only  to the  Bank,  and do not  consider  additional
      capital retained by the Holding Company.

      Management  believes that, as of March 31, 2005 and 2004, the Bank met all
      capital adequacy  requirements to which it was subject.  Further, the most
      recent  OTS  notification  categorized  the  Bank  as  a  well-capitalized


                                       49
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

      institution  under the prompt corrective  action  regulations.  There have
      been no  conditions  or events  since that  notification  that  management
      believes have changed the Bank's capital classification.

      The  following  is a summary  of the Bank's  actual  capital  amounts  and
      ratios,  compared to the OTS requirements for minimum capital adequacy and
      for classification as a well-capitalized  institution.  In accordance with
      the applicable  regulatory  requirements,  the Bank's actual  tangible and
      Tier 1 capital amounts  exclude  goodwill and the after-tax net unrealized
      gain or loss on securities  available for sale, while the Total risk-based
      capital amounts include the allowance for loan losses.

<TABLE>
<CAPTION>
                                                                              OTS Requirements
                                                           --------------------------------------------------------
                                                                                           Classification as Well
                                     Bank Actual            Minimum Capital Adequacy             Capitalized
                             -------------------------     --------------------------     -------------------------
                               Amount           Ratio         Amount          Ratio         Amount          Ratio
                               ------           -----         ------          -----         ------          -----
                                                             (Dollars in thousands)
<S>                            <C>               <C>           <C>              <C>        <C>                 <C>
March 31, 2005
Tangible capital              $101,814           10.3%       $ 14,888           1.5%
Tier I (core) capital          101,814           10.3          39,703           4.0        $ 49,627            5.0%
Risk-based capital:
      Tier I                   101,814           22.9          17,729           4.0          26,591            6.0
      Total                    104,825           23.6          35,455           8.0          44,319           10.0

March 31, 2004
Tangible capital              $ 95,143           10.9%       $ 13,071           1.5%
Tier I (core) capital           95,143           10.9          34,858           4.0        $ 43,571            5.0%
Risk-based capital:
      Tier I                    95,143           24.3          15,689           4.0          23,533            6.0
      Total                     97,855           25.0          31,377           8.0          39,221           10.0
</TABLE>

      Dividend Limitations

      Under OTS regulations, savings associations such as the Bank generally may
      declare  annual cash dividends up to an amount equal to net income for the
      current  year  plus  retained  net  income  for the two  preceding  years.
      Dividends in excess of this amount require OTS approval.  Unlike the Bank,
      the Holding  Company is not subject to OTS  regulatory  limitations on the
      payment of dividends to its shareholders.

      Stock Repurchase Program

      In June 2004, the Company  announced a program to repurchase up to 658,844
      shares of its common  stock.  Through  March 31,  2005, a total of 250,000
      shares had been  purchased  at an average  price of $15.05 per share.  The
      repurchase program has no expiration date.

      Liquidation Rights

      Upon  completion of the  second-step  conversion in January 2003, the Bank
      established  a  special  "liquidation  account"  in  accordance  with  OTS
      regulations.  The  account  was  established  for the  benefit of Eligible
      Account Holders and  Supplemental  Eligible Account Holders (as defined in
      the plan of  conversion)  in an  amount  equal to the  greater  of (i) the
      Mutual Holding  Company's  ownership  interest in the retained earnings of
      Sound Federal Bancorp as of the date of its latest balance sheet contained
      in the prospectus,  or (ii) the retained  earnings of the Bank at the time
      that the Bank  reorganized  into the Mutual Holding  Company in 1998. Each
      Eligible  Account  Holder and  Supplemental  Eligible  Account Holder that
      continues  to  maintain  his or her  deposit  account at the Bank would be
      entitled,  in the event of a complete  liquidation  of the Bank,  to a pro
      rata  interest  in the  liquidation  account  prior to any  payment to the
      stockholders of the Holding  Company.  The liquidation  account is reduced
      annually on December 31 to the extent that  Eligible  Account  Holders and
      Supplemental  Eligible  Account  Holders  have  reduced  their  qualifying
      deposits as of each anniversary date.  Subsequent increases in deposits do
      not restore such account holder's interest in the liquidation account. The
      Bank may not pay cash dividends or make other capital distributions if the
      effect  thereof  would be to reduce  its  stockholder's  equity  below the
      amount of the liquidation account.


                                       50
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

(13)  Comprehensive Income (Loss)

      Comprehensive  income (loss) represents the sum of net income and items of
      "other  comprehensive  income  or loss"  that  are  reported  directly  in
      stockholders'  equity,  such  as  the  change  during  the  period  in the
      after-tax net unrealized gain or loss on securities available for sale and
      minimum pension liability adjustments.  The Company has reported its total
      comprehensive  income  in  the  consolidated   statements  of  changes  in
      stockholders' equity.

      The Company's other  comprehensive  (loss) income is summarized as follows
      for the years ended March 31:

                                                2005        2004        2003
                                               -------     -------     -------
                                                       (In thousands)
      Net unrealized holding (loss) gain
           arising during the period on
           securities available for sale       $(5,677)    $(2,352)    $ 1,533
      Additional minimum pension liability          --       3,468      (3,298)
      Related deferred income tax effect         2,252        (430)        680
                                               -------     -------     -------
      Other comprehensive (loss) income        $(3,425)    $   686     $(1,085)
                                               =======     =======     =======

      The Company's  accumulated  other  comprehensive  (loss) income,  which is
      included in stockholders' equity, is summarized as follows at March 31:

                                                          2005          2004
                                                         -------      -------
                                                             (In thousands)
      Net unrealized holding (loss) gain
          on securities available for sale               $(4,534)     $ 1,143
      Related deferred income taxes                        1,811         (441)
                                                         -------      -------
      Accumulated other comprehensive (loss) income      $(2,723)     $   702
                                                         =======      =======



                                       51
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

(14)  Earnings Per Share

      The  following  is  a  summary  of  the   Company's   earnings  per  share
      calculations.  For purposes of computing basic EPS, net income  applicable
      to common stock equaled net income for each year presented.


                                                  Years Ended March 31,
                                           -------------------------------------
                                                2005       2004       2003
                                              -------    -------    -------
                                           (In thousands, except per share data)
      Net income                              $ 5,469    $ 6,618    $ 8,526
                                              =======    =======    =======
      Weighted average common shares
           outstanding for computation
            of basic EPS (1)                   11,651     12,367     12,801
      Common-equivalent shares for the
           dilutive effect of stock
           options and stock awards (2)           267        346        312
                                              -------    -------    -------
      Weighted average common shares for
           computation of diluted EPS          11,918     12,713     13,113
                                              =======    =======    =======
      Earnings per common share:
           Basic                              $  0.47    $  0.54    $  0.67
           Diluted                               0.46       0.52       0.65
                                              =======    =======    =======

      (1)   Excludes  shares  under  stock  awards  that  have  not  vested  and
            unallocated  ESOP shares that have not been released or committed to
            be released to participants.

      (2)   Represents  an  incremental  number of  shares,  computed  using the
            treasury stock method, with respect to outstanding stock options and
            unvested stock awards.


                                       52
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

(15)  Fair Values of Financial Instruments

      SFAS No.  107,  Disclosures  about  Fair Value of  Financial  Instruments,
      requires disclosures for financial instruments for which it is practicable
      to estimate fair value. The definition of a financial  instrument includes
      many  of  the  assets  and   liabilities   recognized   in  the  Company's
      consolidated  balance sheets, as well as certain  off-balance sheet items.
      Fair value is  defined in SFAS No. 107 as the amount at which a  financial
      instrument  could be exchanged in a current  transaction  between  willing
      parties, other than in a forced sale or liquidation.

      Quoted  market  prices are used to estimate  fair values when those prices
      are  available.  However,  active  markets  do not exist for many types of
      financial  instruments.  Consequently,  fair values for these  instruments
      must be estimated by management  using  techniques such as discounted cash
      flow analysis and comparison to similar  instruments.  Estimates developed
      using these methods are highly subjective and require judgments  regarding
      significant matters such as the amount and timing of future cash flows and
      the  selection of discount  rates that  appropriately  reflect  market and
      credit risks.  Changes in these  judgments often have a material effect on
      the fair value estimates.  Since these estimates are made as of a specific
      point in time, they are susceptible to material  near-term  changes.  Fair
      values  disclosed  in  accordance  with SFAS No.  107 do not  reflect  any
      premium or discount that could result from the sale of a large volume of a
      particular  financial  instrument,   nor  do  they  reflect  possible  tax
      ramifications or estimated transaction costs.

      The  following is a summary of the  carrying  amounts and  estimated  fair
      values of the Company's  financial  assets and liabilities  (none of which
      were held for trading purposes) at March 31:

<TABLE>
<CAPTION>
                                                             2005                                2004
                                               ----------------------------------  ----------------------------------
                                                  Carrying            Fair            Carrying            Fair
                                                   Amount             Value            Amount             Value
                                               ----------------  ----------------  ----------------  ----------------
                                                                           (In millions)
<S>                                                <C>               <C>               <C>               <C>
Financial assets:
    Cash and cash equivalents                      $   42.6          $   42.6          $   31.2          $   31.2
    Securities available for sale                     276.2             276.2             337.7             337.7
    Securities held to maturity                        79.5              78.7              --                --
    Loans, net                                        560.8             563.0             478.5             484.4
    Accrued interest receivable                         4.3               4.3               3.6               3.6
    FHLB stock                                          5.7               5.7               5.3               5.3
Financial liabilities:
    Savings certificate accounts                      552.9             552.9             445.7             448.8
    Other deposit accounts                            278.9             278.9             262.6             262.6
    Borrowings                                         38.0              37.9              35.0              36.2
    Mortgagors' escrow funds                            5.3               5.3               4.5               4.5
                                                   ========          ========          ========          ========
</TABLE>

      The  following  is a  description  of the  valuation  methods  used by the
      Company to estimate the fair values of its financial instruments:

      Securities

      The fair  values  of  securities  were  based on  market  prices or dealer
      quotes.


                                       53
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

      Loans

      For  valuation  purposes,  the  loan  portfolio  was  segregated  into its
      significant  categories,  such as residential  mortgage loans and consumer
      loans.  These categories were further analyzed,  where  appropriate,  into
      components based on significant financial  characteristics such as type of
      interest rate (fixed or adjustable).  Generally, management estimated fair
      values by discounting the  anticipated  cash flows at current market rates
      for loans with similar terms to borrowers of similar credit quality.

      Deposit Liabilities

      The fair values of savings certificate accounts represent contractual cash
      flows  discounted  using interest rates currently  offered on certificates
      with similar  characteristics  and remaining  maturities (but are not less
      than the net amount at which depositors  could settle their accounts).  In
      accordance  with SFAS No. 107, the fair values of other  deposit  accounts
      (those  with  no  stated  maturity,  such as  passbook  and  money  market
      accounts) are equal to the carrying amounts payable on demand.  These fair
      values  do not  include  the  value  of core  deposit  relationships  that
      comprise a significant  portion of the Company's deposit base.  Management
      believes  that  these  core  deposit  relationships  provide a  relatively
      stable, low-cost funding source that has a substantial  unrecognized value
      separate from the deposit balances.

      Borrowings

      The fair value of securities repurchase agreements represents  contractual
      repayments   discounted  using  interest  rates  currently   available  on
      borrowings with similar characteristics and remaining maturities.

      Other Financial Instruments

      The remaining  financial  assets and  liabilities  listed in the preceding
      table have fair values that approximate the respective carrying amounts in
      the  consolidated  balance sheets because the  instruments  are payable on
      demand or have  short-term  maturities  and present  relatively low credit
      risk  and  interest  rate  risk.  Fair  values  of  the  loan  origination
      commitments and unused lines of credit described in Note 11 were estimated
      based on an analysis of the interest rates and fees  currently  charged to
      enter into similar  transactions,  considering  the remaining terms of the
      instruments and the creditworthiness of the potential borrowers.  At March
      31, 2005 and 2004, the fair values of these  instruments  approximated the
      related carrying amounts.


                                       54
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

(16)  Parent Company Condensed Financial Statements

      Set forth below are condensed financial statements of the Holding Company:


                                                               March 31,
                                                         ---------------------
Condensed Balance Sheets                                   2005         2004
                                                         --------     --------
                                                             (In thousands)
      Assets
      Interest-bearing deposits at subsidiary bank       $ 10,416     $ 21,711
      Loans receivable from ESOP                            6,448        6,818
      Investment in subsidiary bank                       113,065      109,820
      Due from subsidiary bank                                826        4,190
      Other assets                                          2,504        1,102
                                                         --------     --------
         Total assets                                    $133,259     $143,641
                                                         ========     ========
      Liabilities                                        $  6,099     $  6,582
      Stockholders' Equity                                127,160      137,059
                                                         --------     --------
         Total liabilities and stockholders' equity      $133,259     $143,641
                                                         ========     ========


                                                     Years Ended March 31,
                                                 -----------------------------
      Condensed Statements of Income               2005       2004       2003
                                                 -------    -------    -------
                                                         (In thousands)
      Interest income                            $   339    $   499    $   167
      Other expenses                                (381)      (397)      (251)
                                                 -------    -------    -------
       Income (loss) before income taxes and
           equity in undistributed earnings of
           subsidiary bank                           (42)       102        (84)
      Income tax expense (benefit)                   (12)        90        (14)
                                                 -------    -------    -------
      Income (loss) before equity in
           undistributed earnings of
           subsidiary bank                           (30)        12        (70)
      Equity in undistributed earnings of
           subsidiary bank                         5,499      6,606      8,596
                                                 -------    -------    -------
      Net income                                 $ 5,469    $ 6,618    $ 8,526
                                                 =======    =======    =======


                                       55
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                                   Years Ended March 31,
                                                                        ---------------------------------------------
Condensed Statements of Cash Flows                                         2005              2004              2003
                                                                         --------          --------          --------
                                                                                        (In thousands)
<S>                                                                      <C>               <C>               <C>
Operating Activities
Net income                                                               $  5,469          $  6,618          $  8,526
Adjustments to reconcile net income to
     net cash provided by (used in) operating activities:
        Equity in undistributed earnings of
           subsidiary bank                                                 (5,499)           (6,606)           (8,596)
        Decrease (increase) in due from subsidiary bank                     3,364            (3,581)              (94)
        Other                                                                (279)             (158)              (60)
                                                                         --------          --------          --------
           Net cash provided by (used in)
              operating activities                                          3,055            (3,727)             (224)
                                                                         --------          --------          --------
Investing Activities
Cash contributed to subsidiary bank                                            --                --           (38,323)
ESOP loan repayments                                                          370               367               192
                                                                         --------          --------          --------
           Net cash provided by (used in)
              investing activities                                            370               367           (38,131)
                                                                         --------          --------          --------
Financing Activities
Purchases of treasury stock                                               (12,087)           (8,417)               --
Proceeds from stock offering, net                                              --                --            70,051
Proceeds from exercise of stock options                                       258               268               100
Payment of cash dividends on common stock                                  (2,891)           (2,648)           (1,155)
Cash payment in lieu of fractional shares                                      --                --                (2)
                                                                         --------          --------          --------
           Net cash (used in) provided by financing
              activities                                                  (14,720)          (10,797)           68,994
                                                                         --------          --------          --------
Net  (decrease) increase in cash and cash equivalents                     (11,295)          (14,157)           30,639
Cash and cash equivalents at beginning of year                             21,711            35,868             5,229
                                                                         --------          --------          --------
Cash and cash equivalents at end of year                                 $ 10,416          $ 21,711          $ 35,868
                                                                         ========          ========          ========
</TABLE>


                                       56
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

(17)  Quarterly Results of Operations (Unaudited)

      The  following is a condensed  summary of quarterly  results of operations
      for the years ended March 31, 2005 and 2004:

<TABLE>
<CAPTION>
                                                    First            Second             Third             Fourth
                                                    Quarter          Quarter           Quarter           Quarter
                                                   -------           -------           -------           -------
                                                               (In thousands, except per share data)
<S>                                                <C>               <C>               <C>               <C>
Year Ended March 31, 2005
Interest and dividend income                       $ 9,769           $10,485           $10,728           $10,918
Interest expense                                     3,311             3,779             4,053             4,334
                                                   -------           -------           -------           -------
Net interest income                                  6,458             6,706             6,675             6,584
Provision for loan losses                               75                75                75                75
Non-interest income                                    352               310               382               403
Non-interest expense                                 4,292             4,601             4,600             5,075
                                                   -------           -------           -------           -------
Income before income tax expense                     2,443             2,340             2,382             1,837
Income tax expense                                     946               909               956               722
                                                   -------           -------           -------           -------
Net income                                         $ 1,497           $ 1,431           $ 1,426           $ 1,115
                                                   =======           =======           =======           =======
Basic earnings per common share                    $  0.13           $  0.12           $  0.12           $  0.10
Diluted earnings per common share                     0.12              0.12              0.12              0.10
                                                   =======           =======           =======           =======
Year Ended March 31, 2004
Interest and dividend income                       $ 9,791           $ 9,272           $ 9,873           $ 9,803
Interest expense                                     3,261             3,067             3,186             3,033
                                                   -------           -------           -------           -------
Net interest income                                  6,530             6,205             6,687             6,770
Provision for loan losses                               50                75                75                75
Non-interest income                                    285               228               252               276
Non-interest expense                                 3,984             3,648             3,936             4,538
                                                   -------           -------           -------           -------
Income before income tax expense                     2,781             2,710             2,928             2,433
Income tax expense                                   1,064             1,060             1,133               977
                                                   -------           -------           -------           -------
Net income                                         $ 1,717           $ 1,650           $ 1,795           $ 1,456
                                                   =======           =======           =======           =======
Basic earnings per common share                    $  0.14           $  0.13           $  0.15           $  0.12
Diluted earnings per common share                     0.14              0.13              0.14              0.12
                                                   =======           =======           =======           =======
</TABLE>


                                       57
<PAGE>

Corporate Information

Headquarters
1311 Mamaroneck Avenue
White Plains, New York 10605
914-761-3636

Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
1-800-866-1340

Annual Meeting
August 11, 2005 4:00 p.m.
Sound Federal Bancorp, Inc.
Corporate Headquarters
1311 Mamaroneck Avenue
White Plains, NY 10605

Common Stock Information

The Company's  common stock is traded on the
Nasdaq  National  Market  under  the  symbol
"SFFS." At March 31, 2005,  the common stock
was held by 1,936  stockholders  of  record.
Market   prices   and   dividends   for  the
indicated fiscal quarter were as follows:


                         Market Price
                         ------------

    Quarter Ended          High         Low       Dividends
    -------------         ------      ------      ---------
June 30, 2003             $14.05      $12.53        $0.05
September 30, 2003         16.42       13.10         0.05
December 31, 2003          17.35       14.44         0.06
March 31, 2004             16.26       14.52         0.06
June 30, 2004              15.00       12.51         0.06
September 30, 2004         14.78       12.67         0.06
December 31, 2004          16.25       13.99         0.06
March 31, 2005             16.23       14.75         0.06


General Counsel
James Staudt, Esquire

Special Counsel
Luse Gorman Pomerenk & Schick, P.C.
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, DC 20015

Independent Registered Public Accounting Firm
KPMG LLP
3001 Summer Street
Stamford, Connecticut 06905

Investor Relations
Anthony J. Fabiano
Senior Vice-President, Chief Financial Officer
   and Corporate Secretary
Sound Federal Bancorp, Inc.
1311 Mamaroneck Avenue
White Plains, New York 10605
914-761-3636

Annual Report on Form 10-K

A copy of the Company's  Form 10-K, as filed
with the Securities and Exchange Commission,
is  available   without  charge  by  written
request to Investor Relations at the address
set forth above.


                                       58
<PAGE>

Directors of the Company and the Bank

Bruno J. Gioffre, Chairman of the Board
Richard P. McStravick, President and Chief
   Executive Officer
Roberta I. Bernhardt
Joseph Dinolfo
Donald H. Heithaus
Joseph A. Lanza
Eldorus Maynard
James Staudt
Samuel T. Telerico

Directors Emeriti

Paul F. Starck, Chairman Emeritus
George W. Brown
Arthur C. Phillips

Officers of the Company and the Bank

Richard P. McStravick, President and
Chief Executive Officer

Anthony J. Fabiano, Senior Vice-President,
Chief   Financial Officer and Corporate
Secretary

Officers of the Bank

Accounting
Frank Rossi, Vice President and Controller
Terri Anne Stollmer, Assistant Vice President
Mark Madoff, Assistant Vice President

Branches

Michael Bulgia, Assistant Vice-President
Doreen Leonard, Assistant Vice-President
Arthur Murphy, Assistant Vice-President
Heather Smeriglio, Assistant Vice-President
Marie Stacy, Assistant Vice-President
John Anderson, Assistant Treasurer
Sylvia Astrologo, Assistant Treasurer
Henry Benvenuto, Assistant Treasurer
Thomas W. Burns, Assistant Treasurer
Debra Caffrey, Assistant Treasurer
Lisa Greco, Assistant Treasurer
Maria Jose, Assistant Treasurer
Debra LoBello, Assistant Treasurer
Marianne Lubbers, Assistant Treasurer
Patricia Soravilla, Assistant Treasurer
Lynne Vaughn, Assistant Treasurer

Branch Operations
Sheila V. Torpey, Vice-President
Sara Ricci, Assistant Vice-President

Business Development
William J. LaCalamito, Vice-President
Richard Bruce, Assistant Vice-President
Richard L. Perna, Assistant Vice-President

Commercial Lending
Vito LaRusso, Vice-President

Compliance
Michael J. Ceruzzi, Vice-President

Executive Secretary
Linda Lunapiena, Assistant Vice-President

Human Resources
Judy E. Malinowski, Vice-President

Lending
Joseph Filanowski, Vice-President
Mary K. Harrison, Vice-President
Timothy Murphy, Vice-President
Lorenzo Aperocho, Assistant Vice-President
Janice Holiday, Assistant Treasurer
Mary A. Maida, Assistant Secretary
Jennifer Penrod, Assistant Vice-President

Information Technology
Jean Degl, Vice-President

Marketing
Robert V. Galante Jr., Vice-President

Audit
Charles Zivian, Vice-President

Branch Locations

Mamaroneck
300 Mamaroneck Avenue
Mamaroneck, New York 10543
914-698-6400

Harrison
389 Halstead Avenue
Harrison, New York 10528
914-835-0500

Rye Brook
115 South Ridge Street
Rye Brook, New York 10573
914-939-0100

New City
180 South Main Street
New City, New York 10956
845-639-3400

Cos Cob
100 East Putnam Avenue
Cos Cob, Connecticut 06807
203-862-8400

Peekskill
1019 Park Street
Peekskill, New York 10566
914-737-2777


                                       59
<PAGE>

Yorktown Heights
1961 Commerce Street
Yorktown Heights, New York 10598
914-962-3883

Cortlandt Town Center
Route 6
Cortlandt, New York 10547
914-528-1117

New Rochelle
88 Fourth Street
New Rochelle, New York 10801
914-633-0345

Somers
302 Somers Commons
Baldwin Place, New York 10589
914-621-2111

Stamford
599 Newfield Avenue
Stamford, Connecticut 06905
203-348-8800

Brookfield
247 Federal Road
Brookfield, Connecticut 06804
203-744-1200

Carmel
190 Gleneida Avenue
Carmel, New York 10512
845-228-0008

Bethel
146 Greenwood Avenue
Bethel, Connecticut 06801
203-792-2500


                                       60