<PAGE>




                                   EXHIBIT 13


                       2002 ANNUAL REPORT TO STOCKHOLDERS



<PAGE>

To Our Stockholders:


          We are pleased to present to you our fiscal 2002 Annual Report. A
     great deal has happened since our last Annual Report. Our Nation has
     experienced a downturn in general economic conditions, the general sense of
     economic euphoria so prevalent during the past decade has given way to a
     sobering appraisal of the stock market and we have experienced a
     devastating attack upon our homeland. Our sympathies and prayers go out to
     our colleagues and to those who have suffered a loss in the tragic events
     of 2001. As we look back, we reflect with greater pride than ever on the
     strength, resilience and loyalty of our communities and our Country.

          In the midst of all the turmoil of 2001, Sound Federal not only stayed
     the course, we enjoyed a record-breaking year. We reported earnings of $5.8
     million or $1.23 per share for the year ended March 31, 2002 as compared to
     $2.7 million or $0.56 per share for the year ended March 31, 2001. The
     growth in earnings has been derived primarily from growth of our net
     interest rate spread, which increased to 3.31% from 2.96% in the prior
     year. Fiscal 2002 was a year in which interest rates were at levels not
     seen in forty years. These extraordinarily low interest rates resulted in
     high levels of refinancing and made home purchases much more affordable.
     For Sound Federal, the result was record loan originations of $220.4
     million in fiscal 2002 as compared to $88.7 million in fiscal 2001. Our
     loan portfolio has grown 42% to $418.4 million since March 31, 2001. Total
     assets have grown by 13% to $624.0 million over the same period. If
     interest rates rise, we expect that our net interest margin will decrease
     and that we will be challenged to provide earnings growth. To mitigate the
     decrease in net interest margin, we realize that we must manage Sound
     Federal as efficiently in the future as we have in the past. We are happy
     to note that our efficiency ratio decreased to 52.7% in fiscal 2002 from
     64.8% in fiscal 2001, a very favorable indicator.

          Our goal is to grow the value of your Company by continuing the growth
     of the Company's business and franchise. To support this growth, the Board
     of Directors of Sound Federal, MHC adopted a plan to convert the Mutual
     Holding Company to a capital stock corporation in a transaction commonly
     referred to as the Second Step. Upon conversion, shares of the Company's
     common stock held by the public will be exchanged for shares of a Delaware
     holding company which will become the Bank's parent company. In addition,
     shares of the Delaware holding company will be offered for sale to the
     Bank's eligible depositors in a subscription offering. The shares to be
     sold in the subscription offering represent the ownership interest of the
     Mutual Holding Company. The conversion and offering are expected to close
     in the fourth quarter of calendar 2002. We believe that this change in our
     corporate structure is beneficial to our existing stockholders and, with
     the new capital to be raised, will enable us to continue to grow the
     business in an orderly and well-planned manner. Once we have received the
     necessary regulatory approvals, a prospectus and other information will be
     mailed to our stockholders and eligible depositors.

          We are energized by the prospects for 2003. We remain focused on our
     core business of residential and commercial mortgage lending and retail
     banking services. Our market area is dominated by large super-regional
     banks - and we thrive in this environment. We embrace, as we always have,
     the small-bank principles of service, courtesy and commitment to our
     community. The personal service that Sound Federal is known for has
     provided us with a niche. We have found that customers prefer to do
     business with a local bank that can provide most of the services of a large
     institution, yet have access to Senior Management and the Board of
     Directors. While we have retained this small-bank culture, we continue to
     grow. In fact, we are

                                        1

<PAGE>

     the largest thrift institution headquartered in Westchester County (based
     on deposit market share). Be assured that this growth is planned, measured
     and managed. We constantly monitor operating efficiencies and have
     purposely remained "agile". The growth experienced since our initial public
     offering has not resulted in a large corporate infrastructure. We believe
     that becoming a "bureaucracy" can be expensive and rob the Company of its
     ability to react quickly and effectively to risks and opportunities.

          All of our achievements in fiscal 2002 and plans for 2003 are driven
     by the goal of growing the value of your Company. We will be opening our
     Somers branch (our tenth retail location) in July 2002. In addition, we are
     constantly evaluating possible future locations so that we can fill in the
     gaps in our current market area and expand our reach outward. Patience and
     prudence have rewarded us thus far. The New Rochelle branch, which we
     opened in December 2001, had deposits of $15.3 million as of March 31,
     2002. The Somers branch, which has not yet opened, has already generated
     loan business! We are resolved to do our best to grow not only the
     franchise, but also earnings per share.

          As always, we thank you for your investment in Sound Federal. It is
     our pleasure to serve you, our stockholders and customers. Remember, "We'll
     do more `cause its our town too". We hope to see you at the Annual Meeting
     and we welcome any comments or suggestions you may have.

          Richard P. McStravick                      Bruno J. Gioffre

                                        2

<PAGE>

Selected Consolidated Financial Information
(In thousands)

<TABLE>
<CAPTION>
                                                           At or for the Year Ended March 31,
                                         --------------------------------------------------------------------------------------
                                               2002            2001(1)           2000               1999            1998
                                         --------------------------------------------------------------------------------------
<S>                                      <C>               <C>              <C>                 <C>             <C>
Results of Operations:
Net interest income ...................  $       18,906    $       14,568   $      10,668       $      9,312    $        8,875
Provision for loan losses .............             175               208             100                272               155
Non-interest income ...................             731               382             294                171               186
Contribution of common stock to
    Charitable Foundation (2) .........              --                --              --              1,022                 -
Other non-interest expense ............          10,316            10,033           7,027              4,898             3,956
                                         --------------    --------------   -------------       ------------    --------------
Income before income tax expense ......           9,146             4,709           3,835              3,291             4,950
Income tax expense ....................           3,376             2,050           1,443              1,350             2,065
                                         --------------    --------------   -------------       ------------    --------------
Net income ............................  $        5,770    $        2,659   $       2,392       $      1,941    $        2,885
                                         ==============    ==============   =============       ============    ==============


Financial Condition:
Total assets ..........................  $      623,985    $      552,934   $     332,344       $    295,311    $      254,749
Loans, net ............................         418,368           293,807         180,932            143,536           128,558
Mortgage-backed securities:
    Available for sale ................         104,134           115,931          24,980             16,531                 -
    Held to maturity ..................              --            25,177          32,210             41,739            53,421
Other securities:
    Available for sale ................          46,097            41,595          37,385             22,871             2,994
    Held to maturity ..................              --             3,038           3,448              3,851            11,477
Deposits ..............................         519,905           473,546         275,772            237,279           219,913
Equity ................................          61,015            56,929          52,689             54,984            31,901
</TABLE>

                                        3

<PAGE>

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

<TABLE>
<CAPTION>
                                                                    At or for the Year Ended March 31,
                                         -------------------------------------------------------------------------------------------
                                                   2002             2001(1)             2000           1999             1998
                                         -------------------------------------------------------------------------------------------
<S>                                             <C>                 <C>                 <C>           <C>               <C>
Performance Ratios:
Return on average assets ................          1.01%              0.56%              0.77%           0.70%            1.16%
Return on average equity ................          9.85               4.89               4.48            4.53             9.47
Average interest rate spread (3).........          3.31               2.96               2.99            3.01             3.29
Net interest margin (4)..................          3.51               3.26               3.55            3.51             3.69
Efficiency ratio (5) ....................         52.72              64.80              62.19           51.65            43.66

Per Common Share Data:
Basic earnings per share (6) ............   $      1.24      $        0.56      $        0.48    $       0.10               --
Diluted earnings per share ..............          1.23               0.56               0.48            0.10               --
Diluted earnings per share before
goodwill amortization ...................          1.23               0.72               0.48            0.10               --
Book value per share (7) ................         12.78              11.83              10.53           10.55               --
Tangible book value per share ...........          9.85               8.93              10.53           10.55               --
Dividends per share .....................          0.28               0.28               0.28               --              --

Capital Ratios:
Equity to total assets (consolidated) ...          9.78%             10.30%             15.85%          18.62%           12.52%
Tier 1 leverage capital (Bank only) .....          6.54%              6.35%             13.72%          14.76%           12.52%

Asset Quality Data:
Total non-performing loans ............     $       755      $         933      $         969    $      1,091       $    1,958
Total non-performing assets ...........     $       869      $       1,130      $       1,024    $      1,379       $    2,087
</TABLE>
----------------------------------
(1)  Information at or for the year ended March 31, 2001 includes the
     acquisition of Peekskill Financial Corporation which was completed in July
     2000. At the time of the acquisition, Peekskill had total assets of $201.5
     million and total deposits of $152.4 million.
(2)  Represents the expense recognized for the fair value of common shares
     contributed to establish the Sound Federal Savings and Loan Association
     Charitable Foundation.
(3)  Represents the difference between the weighted-average yield on
     interest-earning assets and the weighted-average cost of interest-bearing
     liabilities
(4)  Represents net interest income as a percent of average interest-earning
     assets.
(5)  Computed by dividing non-interest expense (other than the special charges
     described in (2) above) by the sum of net interest income and non-interest
     income.
(6)  Amount for fiscal 1999 was computed for the six-month period following the
     stock offering based on net income of $529,000 for that period and
     5,041,690 average common shares. Excluding the after-tax impact of the
     contribution to the charitable foundation, earnings per common share would
     have been $0.22 for the six-month period.
(7)  Computed based on total common shares issued, less treasury shares.

                                        4

<PAGE>

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

General

     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 (the "Offering"). In the Reorganization,
Sound Federal Savings and Loan Association (the "Bank") converted from a
federally-chartered mutual savings association to a federally-chartered stock
savings association (the "Conversion"). The Bank became the wholly-owned
subsidiary of Sound Federal Bancorp, which became the majority-owned subsidiary
of Sound Federal, MHC (the "Mutual Holding Company"). Sound Federal Bancorp
issued a total of 5,212,218 shares of its common stock in the Reorganization and
Offering, consisting of 2,810,510 shares (or 53.92%) issued to the Mutual
Holding Company and 2,401,708 shares (or 46.08%) issued to other stockholders.
At March 31, 2002, stockholders other than the Mutual Holding Company held
1,964,782 shares, or 41.1% of outstanding shares.

     The Bank was organized as a New York-chartered savings bank in 1891 and
became a federally-chartered savings association in 1934. The Bank is a
community-oriented savings institution, providing banking services to
individuals, families and small businesses from its main office in Mamaroneck
and branch offices in Harrison, Rye Brook, Peekskill, Yorktown, Mohegan Lake,
New Rochelle and New City and Cos Cob, Connecticut. Historically, the Bank has
emphasized residential mortgage lending. Collectively, Sound Federal Bancorp and
the Bank are referred to herein as "the Company."

     The Company's results of operations depend primarily upon its net interest
income, which is the difference between income earned on interest-earning
assets, such as loans and securities, and the interest expense paid on deposits.
The Company's operations are affected to a much lesser degree 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.
The Company's principal operating expenses, aside from interest expense, are
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. The Company's results of operations
also are 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.

Recent Developments

     In June 2002, the Mutual Holding Company adopted a plan to convert to a
capital stock corporation. Upon conversion, shares of the Company's common stock
held by the public will be exchanged for shares of a Delaware holding company
which will become the Bank's parent company. In addition, shares of the Delaware
holding company will be offered for sale to the Bank's depositors in a
subscription offering. The shares to be sold in the subscription offering
represent the ownership interest of the Mutual Holding Company. The conversion
and offering are expected to close in the fourth quarter of calendar 2002.

Acquisition

     On July 18, 2000, the Company completed its acquisition of Peekskill
Financial Corporation ("Peekskill"). Peekskill and its wholly-owned subsidiary,
First Federal Savings Bank, merged with and into the Bank, with the Bank as the
surviving entity (the "Acquisition"). As further described in Note 2 to the
consolidated financial statements, the

                                       5

<PAGE>

acquisition has been accounted for using the purchase method of accounting and,
accordingly, related operating results are included in the Company's
consolidated financial statements for periods after the acquisition date.

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 are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical results and those presently
anticipated or projected. Among others, these risks and uncertainties include
changes in economic conditions in the Company's market area, changes in policies
by regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area, and competition. 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. The Company does not undertake, and specifically
declines any obligation, to publicly release the result of any revisions that
may be made to any forward-looking statements to reflect events or circumstances
after the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.

Management of Market Risk--Interest Rate Risk

     The Company's most significant form of market risk is interest rate risk,
as the majority of its assets and liabilities are sensitive to changes in
interest rates. The mortgage loan portfolio, consisting primarily of loans
secured by residential real property located in Westchester County, New York and
Fairfield County, Connecticut is subject to risks associated with the local
economy. The Company's 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. The Company's assets consist primarily of fixed
rate mortgage loans which have longer maturities than its liabilities which
consist primarily of deposits. The Company does not own any trading assets and
has not engaged in hedging transactions such as interest rate swaps and caps.

     A principal part of the Company's business strategy is to manage interest
rate risk and to minimize the exposure of earnings to changes in market interest
rates. In recent years, the Company has followed the following strategies to
manage interest rate risk: (i) purchasing adjustable rate mortgage-backed
securities guaranteed by Fannie Mae or Ginnie Mae and (ii) maintaining a high
level of liquid interest-earning assets such as short-term federal funds sold.
By investing in short-term, liquid securities, the Company believes it is better
positioned to react to increases in market interest rates. However, investments
in shorter term securities generally bear lower yields than longer term
investments. Thus, these strategies may result in lower levels of interest
income than would be obtained by investing in longer term fixed rate loans.
Management believes that maintaining a significant portion of the Company's
assets in short-term investments 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
which estimates the change in the Bank's net portfolio value ("NPV") 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 NPV model. The model
estimates the effect on NPV of instantaneous and permanent 100 to 300 basis
point increases and a 100 basis point decrease in market interest rates, with no
effect given to any steps that management might take to counter the effect of
interest rate movements. The Bank historically estimated the effect on NPV of
100 to 300 basis point decreases in interest rates. However, given the current
low level of market interest rates, the Bank did not calculate NPV for interest
rate decreases of greater than 100 basis points.

                                       6

<PAGE>

The table below sets forth, as of March 31, 2002, the estimated changes in the
Bank's NPV that would result from the designated instantaneous changes in
interest rates.

<TABLE>
<CAPTION>
                        Changes in                                               Estimated Increase
                      Interest Rates                    Estimated               (Decrease) in NPV/(1)/
                                                                                ----------------------
                      (basis points)                       NPV                 Amount          Percent
                      --------------                    ---------              ------          -------
                                                     (Dollars in thousands)
                      
                            <C>                      <C>              <C>

                           +300                      $   35,800            $  (36,611)           (51)%
                           +200                          48,550               (23,861)           (33)
                           +100                          61,032               (11,379)           (16)
                              0                          72,411                    --             --
                           -100                          79,063                 6,652              9
</TABLE>
--------------------
(1)  Represents the increase (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, 2002, in the event of a 100
basis point decrease in interest rates, the Bank would be expected to experience
a 9% increase in NPV. In the event of a 200 basis point increase in interest
rates, the Bank would be expected to experience a 33% decrease in NPV. Since
March 31, 2002, there have been no significant changes in the Bank's interest
rate risk exposures or how those exposures would be managed.

     Certain shortcomings are inherent in the NPV methodology. Modeling changes
in NPV 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
management may undertake in response to changes in interest rates. In this
regard, the NPV 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 NPV table provides an indication of interest rate risk exposure at a
particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
the Company's net interest income, and will differ from actual results.
Additionally, the interest rate risk guidelines established by the Board of
Directors are not strict limitations. While a goal of the Asset/Liability
Management Committee and the Board of Directors is to limit projected NPV
changes within the Board's guidelines, the Company will not necessarily limit
projected changes in NPV if the required action would present a disproportionate
risk to continued profitability.

Critical Accounting Policies

The Company's significant accounting policies are summarized in Note 3 to the
consolidated financial statements. Accounting policies considered particularly
critical to the Company's financial results include the allowance for loan
losses and goodwill. The methodology for assessing the appropriateness of 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 goodwill to
be a critical accounting policy because goodwill must be tested for impairment
at least annually using a "two-step" approach that

                                       7

<PAGE>

involves the identification of reporting units and the estimation of fair
values. The estimation of fair values involves a high degree of judgment and
subjectivity in the assumptions utilized.

Comparison of Financial Condition at March 31, 2002 and 2001

The Company's assets totaled $624.0 million at March 31, 2002 as compared to
$552.9 million at March 31, 2001. Net loans increased $124.6 million or 42.4% to
$418.4 million at March 31, 2002 as compared to March 31, 2001. This increase
was funded principally by a $35.5 million decrease in securities to $150.2
million, a $46.4 million increase in total deposits to $519.9 million and a
$20.2 million increase in borrowings. Total stockholders' equity increased $4.1
million to $61.0 million at March 31, 2002 as compared to $56.9 million at March
31, 2001. The increase in total assets was a result of the increased loan
production. We originated $220.4 million in loans during fiscal 2002. The
increase in deposits was due primarily to the New Rochelle branch which opened
in December 2001, as well as growth in other branches due to certificate of
deposit promotions.

                                       8

<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, 2002, 2001 and 2000.
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 monthly average balance of interest-earning assets or
interest-bearing liabilities, respectively), as well as the net yield on
interest-earning assets. Management believes that the use of monthly average
balances rather than daily average balances did not have a material effect on
the data presented. No tax-equivalent adjustments were made, as the effect
thereof was not material. Nonaccrual loans were included in the computation of
average balances, but have been included in the table as loans having a zero
yield. The yields set forth below include the effect of deferred origination
fees and costs, and purchase discounts and premiums that are amortized or
accreted to interest income.

<TABLE>
<CAPTION>
                                                                                For the Years Ended March 31,
                                                     ------------------------------------------------------------------------------
                                                                      2002                                2001
                                                     -----------------------------------   ----------------------------------------
                                                        Average                                Average
                                                     Outstanding                Average      Outstanding                   Average
                                                       Balance   Interest     Yield/Rate       Balance      Interest     Yield/Rate
                                                       -------   --------     ----------       -------      --------     ----------
                                                                                                     (Dollars in thousands)
<S>                                                  <C>         <C>          <C>            <C>            <C>          <C>
Interest-earning assets:
  Loans/(1)/ ......................................   $342,447   $ 25,560       7.46%         $253,320       $ 19,837      7.83%
  Mortgage-backed securities/(2)/ .................    120,307      8,629       7.17           114,185          8,194      7.18
  Other securities/(2)/ ...........................     42,357      2,209       5.22            42,864          3,143      7.33
  Federal funds and other overnight deposits/(3)/ .     28,537        777       2.72            25,769          1,577      6.12
  Certificates of deposit .........................        865         43       4.97             5,836            437      7.47
  Other ...........................................      3,716        227       6.11             5,440            388      7.13
                                                      --------   --------                     --------       --------
    Total interest-earning assets .................    538,229     37,445       6.96           447,414       $ 33,576      7.50
                                                                 --------                                    --------
Noninterest earning assets ........................     32,907                                  28,225
                                                      --------                                --------
   Total assets ...................................   $571,136                                $475,639
                                                      ========                                ========

Interest-bearing liabilities:
  Passbook and club accounts ......................   $109,469   $  1,609       1.47%         $ 94,032       $  2,420      2.57%
  Money market accounts ...........................     36,126        674       1.87            26,849            631      2.35
  NOW accounts ....................................     38,954        360       0.92            32,658            470      1.44
  Certificates of deposit .........................    302,786     14,760       4.87           249,145         14,487      5.81
  Borrowings ......................................     16,348      1,065       6.51            12,030            927      7.71
  Other ...........................................      4,314         71       1.64             3,508             73      2.08
                                                      --------   --------                     --------       --------
    Total interest-bearing liabilities ............    507,997     18,539       3.65           418,222         19,008      4.54
                                                                 --------                                    --------
Noninterest bearing liabilities ...................      4,545                                   3,109
                                                      --------                                --------
    Total liabilities .............................    512,542                                 421,331
Equity ............................................     58,594                                  54,308
                                                      --------                                --------
    Total liabilities and equity ..................   $571,136                                $475,639
                                                      ========                                ========
Net interest income ...............................              $ 18,906                                    $ 14,568
                                                                 ========                                    ========
Average interest rate spread/(4)/ .................                             3.31 %                                     2.96%
Net earning assets/(5)/ ...........................   $ 30,232                                $ 29,192
                                                      ========                                ========
Net interest margin/(6)/ ..........................                             3.51 %                                     3.26%
Ratio of interest-earning assets to
  interest-bearing liabilities ....................       1.06x                                   1.07x

<CAPTION>
                                                     ------------------------------------
                                                                     2000
                                                     ------------------------------------
                                                      Average
                                                     Outstanding                 Average
                                                      Balance       Interest   Yield/Rate
                                                      -------       --------   ----------
<S>                                                  <C>            <C>        <C>
Interest-earning assets:
  Loans/(1)/ ......................................  $162,753      $ 12,427        7.64%
  Mortgage-backed securities/(2)/ .................    56,951         3,353        5.89
  Other securities/(2)/ ...........................    38,628         2,443        6.32
  Federal funds and other overnight deposits/(3)/ .    27,855         1,472        5.28
  Certificates of deposit .........................    11,316           654        5.78
  Other ...........................................     3,033           187        6.17
                                                     --------      --------
    Total interest-earning assets .................   300,536      $ 20,536        6.83
                                                                   --------
Noninterest earning assets ........................    11,161
                                                     --------
   Total assets ...................................  $311,697
                                                     ========

Interest-bearing liabilities:
  Passbook and club accounts ......................  $ 60,144      $  1,245        2.07%
  Money market accounts ...........................    18,929           510        2.69
  NOW accounts ....................................    24,232           370        1.53
  Certificates of deposit .........................   151,511         7,696        5.08
  Borrowings ......................................        86             8        9.30
  Other ...........................................     2,069            39        1.89
                                                     --------      --------
    Total interest-bearing liabilities ............   256,971      $  9,868        3.84
                                                                   --------
Noninterest bearing liabilities ...................     1,366
                                                     --------
    Total liabilities .............................   258,377
Equity ............................................    53,360
                                                     --------
    Total liabilities and equity ..................  $311,697
                                                     ========
Net interest income                                                $ 10,668
                                                                   ========
Average interest rate spread/(4)/ .................                                2.99%
Net earning assets/(5)/ ...........................  $ 43,565
                                                     ========
Net interest margin/(6)/ ..........................                                3.55%
Ratio of interest-earning assets to
  interest-bearing liabilities ....................      1.17x
</TABLE>

________________

(1) Balances are net of construction loans in process and the allowance for loan
    losses.
(2) Average outstanding balances are based on amortized cost.
(3) Other overnight deposits represent the Bank's interest-earning demand
    account at the Federal Home Loan Bank of New York.
(4) Net interest rate spread represents the difference between the yield on
    average interest-earning assets and the cost of average interest-bearing
    liabilities.
(5) Net earning assets represent total interest-earning assets less total
    interest-bearing liabilities.
(6) Net interest margin represents net interest income divided by average total
    interest-earning assets.

                                       9

<PAGE>

Rate/Volume Analysis

The following table presents the dollar amount of changes in interest income and
interest expense for the major categories of the Bank's 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>
                                                                             Year Ended March 31,
                                                       -------------------------------------------------------------------
                                                                  2002 vs. 2001                    2001 vs. 2000
                                                       ---------------------------------  --------------------------------
                                                        Increase (Decrease)     Total      Increase (Decrease)     Total
                                                              Due to           Increase         Due to            Increase
                                                       --------------------               --------------------
                                                        Volume       Rate     (Decrease)   Volume       Rate     (Decrease)
                                                       --------    --------   ----------  --------     -------   ---------
                                                                                (In thousands)
<S>                                                    <C>         <C>        <C>         <C>          <C>       <C>
Interest-earning assets:
    Loans...........................................   $  6,698    $   (975)  $   5,723   $  7,093     $   317    $  7,410
    Mortgage-backed securities......................        446         (11)        435      3,974         867       4,841
    Other securities................................        (37)       (897)       (934)       285         415         700
    Federal funds and other overnight deposits......        154        (954)       (800)      (116)        221         105
    Certificates of deposit.........................       (282)       (112)       (394)      (373)        156        (217)
    Other...........................................       (111)        (50)       (161)       169          32         201
                                                       --------    --------   ---------   --------     -------    --------

       Total interest-earning assets................      6,868      (2,999)      3,869     11,032       2,008      13,040
                                                       --------    --------   ---------   --------     -------    --------

Interest-bearing liabilities:
    Passbook and club accounts......................        349      (1,160)       (811)       822         353       1,175
    Money market accounts...........................        183        (140)         43        191         (70)        121
    NOW and Super NOW accounts......................         83        (193)       (110)       123         (23)        100
    Certificates of deposit.........................      2,830      (2,557)        273      5,553       1,238       6,791
    Other...........................................        297        (161)        136        730         223         953
                                                       --------    --------   ---------   --------     -------    --------

       Total interest-bearing liabilities...........      3,742      (4,211)       (469)     7,419       1,721       9,140
                                                       --------    --------   ---------   --------     -------    --------

Net interest income.................................   $  3,126    $  1,212   $   4,338   $  3,613     $   287    $  3,900
                                                       ========    ========   =========   ========     =======    ========
</TABLE>

Comparison of Results of Operations for the Years Ended March 31, 2002 and 2001

Net Income

      Net income amounted to $5.8 million, or diluted earnings per share of
$1.23 for the year ended March 31, 2002 as compared to $2.7 million, or $0.56
per share for the prior year. This increase is due primarily to a $4.3 million
increase in net interest income and a $349,000 increase in non-interest income
partially offset by a $283,000 increase in non-interest expense and a $1.3
million increase in income tax expense.

      The Company completed the acquisition of Peekskill Financial Corporation
(the "Acquisition") in July 2000. Accordingly, the results for the year ended
March 31, 2001 includes the related operating results for period after the
acquisition date.

Net Interest Income

      Net interest income amounted to $18.9 million for the year ended March 31,
2002 as compared to $14.6 million for 2001. The interest rate spread was 3.31%
and 2.96% and the net interest margin was 3.51% and 3.26% for the respective
years. The increase in interest rate spread and net interest margin are a result
of decreasing market interest rates during calendar 2001. The decrease in market
interest rates reduced the cost of our interest-

                                       11

<PAGE>

bearing liabilities faster than the rates on our interest-earning assets such as
loans or securities. However, if market interest rates decrease further,
interest rate spread and net interest margin may decrease since competitive
factors could prohibit lowering further interest rates on deposit accounts. In
addition, as interest rates increase, the cost of interest-bearing liabilities
will increase faster than the rates on our interest-earning assets, also causing
decreases in net interest rate spread and net interest margin.

Interest Income

         Interest income totaled $37.4 million for the year ended March 31, 2002
as compared to $33.6 million for the prior year. This increase is due to a $90.8
million increase in average interest-earning assets to $538.2 million as
compared to $447.4 million for the prior year, partially offset by a 54 basis
point decrease in the average yield on interest-earning assets to 6.96%. The
increase in the average balance of interest-earning assets was due primarily to
growth in the loan portfolio which was funded by deposits. The increase in the
average balance of interest-earning assets is also due to the Acquisition which
closed on July 18, 2000. As a result, the average balances for fiscal 2001
include balances for Peekskill from that date. The decrease in the average yield
on interest-earning assets reflects declining market interest rates during 2001.

         Loans. Interest income on loans increased $5.7 million or 28.9% to
$25.6 million during fiscal 2002 as compared to $19.8 million for 2001. This
increase is due to an $89.1 million increase in the average balance of loans to
$342.4 million, partially offset by a 37 basis point decrease in the average
yield earned to 7.46%.

          The growth of the loan portfolio is principally a result of the lowest
mortgage interest rates in forty years. The low market interest rates created a
robust housing market and also compelled many consumers to refinance existing
mortgage loans. The Company originated $220.4 million of loans during the year
ended March 31, 2002 as compared to $88.7 million in the prior year. These loans
were originated at rates lower than the yields being earned on the existing loan
portfolio. As a result, the average yield earned on the loan portfolio decreased
during fiscal 2002. The yield on the loan portfolio may decrease further until
market interest rates begin to increase.

         Mortgage-Backed Securities. Interest on mortgage-backed securities
amounted to $8.6 million for the year ended March 31, 2002 as compared to $8.2
million for the prior year. The average balance of mortgage-backed securities
increased $6.1 million to $120.3 million and the average yield remained
virtually unchanged at 7.17%. The increase in the average balance was a result
of the securities acquired in the Acquisition. The balance of mortgage-backed
securities at March 31, 2002 was $104.1 million as compared to $141.2 million at
March 31, 2001. This decrease was due to principal repayments.

         Other Securities. Interest on other securities decreased $934,000 to
$2.2 million for the year ended March 31, 2002, as compared to $3.1 million for
the prior year, due to a $507,000 decrease in the average balance of other
securities to $42.4 million and a 211 basis point decrease in the average yield
earned to 5.22%. The decreases in average balance and average yield earned in
the current year reflect the issuer redemptions of securities as interest rates
decreased during fiscal 2002. The proceeds from these redemptions were used to
fund loan originations.

         Federal Funds and Other Overnight Deposits. For the year ended March
31, 2002, interest on Federal funds and other overnight deposits decreased
$800,000 to $777,000, reflecting a 340 basis point decrease in the average yield
earned to 2.72%, partially offset by an $2.8 million increase in the average
balance to $28.5 million. Other overnight deposits consist of the Bank's demand
deposit at the Federal Home Loan Bank of New York, which is earning interest at
a rate approximating the Federal funds rate. The decrease in the average yield
earned reflects the declining interest rate environment during 2001.

Interest Expense

         Interest expense for the year ended March 31, 2002 totaled $18.5
million, as compared to $19.0 million for the year ended March 31, 2001. The
average balance of interest-bearing liabilities increased $89.8 million to
$508.0 million for the year ended March 31, 2002 from $418.2 million for the
prior year and the average cost of

                                       12

<PAGE>

these liabilities decreased 89 basis points to 3.65%. The decrease in the cost
of interest-bearing liabilities is a result of declining market interest rates.
The increase in average interest-bearing liabilities is due primarily to the
Acquisition and to deposits received at the New Rochelle branch which opened in
December 2001.

         Interest expense on time deposits totaled $14.8 million for the current
year as compared to $14.5 million for the prior year. The increase is due
primarily to a $53.7 million increase in the average balance of time deposits to
$302.8 million for the year ended March 31, 2002 as compared to $249.1 million
for the prior year. This increase was partially offset by a 94 basis point
decrease in the average cost to 4.87%. The decrease in the average cost is due
to a decrease in market interest rates during 2001. The increase in the average
balance of time deposits is primarily a result of the Acquisition and the new
branch which opened in December 2001. Time deposits amounted to $312.3 million
at March 31, 2002 as compared to $295.7 million at March 31, 2001.

Interest expense on savings accounts amounted to $1.6 million for the year ended
March 31, 2002 as compared to $2.4 million for the year ended March 31, 2001.
The average balance of savings accounts increased $15.4 million to $109.5
million and the average cost decreased 110 basis points to 1.47%. The increase
in the average balance of savings accounts is primarily a result of the
Acquisition and increases in the number of savings accounts. The decrease in the
average cost is due to decreases in market interest rates during 2001. Savings
accounts amounted to $118.6 million at March 31, 2002 as compared to $108.4
million at March 31, 2001.

  Interest expense on other deposits (NOW and money market accounts) amounted to
$1.0 million for the year ended March 31, 2002 as compared to $1.1 million for
the prior year. The average balance of these accounts increased $15.6 million to
$75.1 million and the average cost decreased 47 basis points to 1.38%. Other
deposits amounted to $89.0 million at March 31, 2002 as compared to $69.4
million at March 31, 2001.

         For the year ended March 31, 2002, interest paid on borrowings amounted
to $1.1 million as compared to $927,000 in the prior year. The average balance
of borrowings for fiscal 2002 was $16.3 million and the average cost was 6.51%.
For the year ended March 31, 2001, the average balance of borrowings was $12.0
million and the average cost was 7.71%. The increase in borrowings consists of
FHLB advances that were a component of Peekskill's capital management strategy
and that were assumed in the Acquisition as well as FHLB advances used by the
Company to fund loan originations during fiscal 2002. Borrowings amounted to
$34.9 million at March 31, 2002 and have a weighted average coupon of 4.17%. The
average cost of the borrowings is higher than the average coupon as a result of
purchase accounting adjustments made to the carrying values of the borrowings
assumed from Peekskill.

Provision for Loan Losses

         The provision for loan losses is a charge to income which is made in
order to maintain the allowance for loan losses at an adequate level to cover
probable losses inherent in the existing loan portfolio. Management regularly
reviews the Company's loan portfolio and makes provisions for loan losses in
order to maintain the adequacy of the allowance for loan losses. The allowance
for loan losses consists of amounts specifically allocated to nonperforming
loans and potential problem loans (if any), as well as allowances determined for
each major loan category. Loan categories such as single-family residential
mortgage loans, which represent 91.1% of total loans at March 31, 2002, are
generally evaluated on an aggregate or "pool" basis. The Company's 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 historical loss experience,
delinquency trends, volume and type of lending conducted, and the impact of
current economic conditions in the Company's market area.

The provision for loan losses was $175,000 for the year ended March 31, 2002 as
compared to $208,000 for the prior year. Non-performing loans amounted to
$755,000 or 0.18% of total loans at March 31, 2002, as compared to $933,000 or
0.32% of total loans at March 31, 2001. The allowance for loan losses amounted
to $2.2 million and

                                       13

<PAGE>

$2.0 million at March 31, 2002 and 2001, respectively. Charge-offs, net of
recoveries, amounted to $1,000 for the year ended March 31, 2002 as compared to
$133,000 for the year ended March 31, 2001.

Non-Interest Income

         Non-interest income totaled $731,000 and $382,000 for the years ended
March 31, 2002 and 2001, respectively. Non-interest income consists principally
of service charges on deposit accounts, late charges on loans and various other
service fees. Service fees amounted to $662,000 for the year ended March 31,
2002 as compared to $354,000 for fiscal 2001. The increase in service fees was
due to increased levels of service charges on deposit accounts, fees earned from
the sale of investment products and various other service fees. The Company
began selling investment products during fiscal 2002. Non-interest income for
the year ended March 31, 2002 included a gain of $69,000 on the sale of real
estate owned as compared to $28,000 for fiscal 2001.

Non-Interest Expense

         Non-interest expense totaled $10.3 million for the year ended March 31,
2002 as compared to $10.0 million for the year ended March 31, 2001. For the
same respective years, compensation and benefits increased $484,000, data
processing fees increased $230,000 and other non-interest expenses increased
$451,000. The increases were substantially offset by a $71,000 decrease in
occupancy and equipment, a $46,000 decrease in advertising and promotion and the
absence of $765,000 in goodwill amortization.

         Non-interest expense for fiscal 2002 includes a $170,000 pre-tax refund
of real estate taxes related to branch locations.

Income Taxes

         Income tax expense amounted to $3.4 million and $2.1 million for the
years ended March 31, 2002 and 2001, respectively. The effective tax rates for
those same periods were 36.9% and 43.5%, respectively. The higher effective tax
rate in the prior fiscal year is a result of the non-deductibility of goodwill
amortization.


Comparison of Results of Operations for the Years Ended March 31, 2001 and 2000

Net Income

         Net income amounted to $2.7 million or $0.56 per common share for the
year ended March 31, 2001, as compared to $2.4 million or $0.48 per common share
for the year ended March 31, 2000. The increase in net income for the current
year was due primarily to a $3.9 million increase in net interest income,
substantially offset by an $3.0 million increase in non-interest expense and a
$607,000 increase in income tax expense.

         The results for the current year reflect increases in income and
expense largely attributable to the Acquisition, as the related operating
results are included for approximately nine months of the 2001 fiscal year.

Interest and Dividend Income

         For the year ended March 31, 2001, interest income totaled $33.6
million as compared to $20.5 million for the same period in the prior year. The
increase is due to a $146.9 million increase in the average balance of
interest-earning assets to $447.4 million and a 67 basis point increase in the
yield earned to 7.50%. The increase in the average balance of interest-earning
assets was due primarily to the Acquisition. The increase in the average yield
on interest-earning assets reflects fixed-rate loan growth and adjustable-rate
security repricings during periods

                                       14

<PAGE>

of rising interest rates (particularly the first half of calendar 2000), as well
as higher-yielding securities recorded in the Acquisition.

Loans. For the year ended March 31, 2001, interest income on loans increased
$7.4 million or 59.6% to $19.8 million as compared to $12.4 million for the same
period in 2000. This increase is due to a $90.6 million increase in the average
balance of loans to $253.3 million and a 19 basis point increase in the yield
earned to 7.83%. The growth of the loan portfolio is principally a result of the
Acquisition (Peekskill had net loans of $67.3 million at the acquisition date),
as well as efforts by the Company to expand the loan products it offers and the
markets served, and the strong demand for fixed rate loans (the Company's
primary mortgage loan product). The Company originated $84.0 million of fixed
rate loans for the year ended March 31, 2001 as compared to $62.5 million in the
prior year.

Mortgage-Backed Securities. Interest income from mortgage-backed securities
increased $4.8 million to $8.2 million for the year ended March 31, 2001 due
primarily to an increase of $57.2 million in the average balance of
mortgage-backed securities to $114.2 million and an increase of 129 basis points
in the average yield to 7.18%. The higher average balances in the current year
reflect securities acquired in the Acquisition. At March 31, 2001,
mortgage-backed securities had a total carrying value of $141.1 million of which
$83.7 million were adjustable rate securities. The increases in market interest
rates during the first half of fiscal 2001 resulted in our adjustable rate
securities repricing to higher rates. However, recent declines in interest rates
will cause these securities to reprice to lower rates and may also cause
repayments of principal amounts to accelerate.

Other Securities. Interest income from other securities increased $700,000 to
$3.1 million for the year ended March 31, 2001 as compared to the year ended
March 31, 2000 due to a $4.2 million increase in the average balance of other
securities to $42.9 million and a 101 basis point increase in the average yield
earned to 7.33%. The higher average balances in the current year reflect the
impact of securities acquired in the Acquisition, net of sales of securities
which were made in order to fund a portion of the Acquisition.

Federal Funds. Interest income from Federal funds increased $105,000 to $1.6
million, reflecting an 84 basis point increase in the average yield earned to
6.12% partially offset by a $2.1 million decrease in the average balance to
$25.8 million. The lower level of Federal funds in the current year reflects the
utilization of Federal funds to fund a portion of the Acquisition cost.

Interest Expense

         For the year ended March 31, 2001, interest expense totaled $19.0
million, as compared to $9.9 million for the year ended March 31, 2000. The
average balance of interest-bearing liabilities increased $161.2 million to
$418.2 million for the year ended March 31, 2001 from $257.0 million in the
prior year and the average cost of these liabilities increased 70 basis points
to 4.54%. The increase in interest-bearing liabilities is due primarily to the
Acquisition. The increase in the cost of interest-bearing liabilities is due to
borrowings that were assumed in the Acquisition, an increase in the amount of
time deposits in relation to total deposits and, to a lesser extent, an increase
in interest rates during calendar year 2000. Time deposits carry interest rates
that are higher than other deposit accounts. For the year ended March 31, 2001,
the average balance of time deposits accounted for 61.9% of average total
deposits as compared to 59.5% for the same respective periods in the prior year.

         Interest expense on time deposits totaled $14.5 million for the year
ended March 31, 2001 as compared to $7.7 million for the same period in 2000.
The increase is due to a $97.6 million increase in the average balance of time
deposits and a 73 basis point increase in the average cost to 5.81%.

         Interest on savings accounts amounted to $2.4 million for the current
year as compared to $1.2 million for the year ended March 31, 2000. The average
balance of savings accounts increased $33.9 million to $94.0 million and the
average cost increased 50 basis points to 2.57%.

                                       15

<PAGE>


     Interest expense on other deposits (NOW and money market accounts) amounted
to $1.1 million for the year ended March 31, 2001 as compared to $880,000 for
the same period in the prior year. The average balance of these accounts
increased $16.3 million to $59.5 million and the average cost decreased 19 basis
points to 1.85%.

     For the year ended March 31, 2001, interest on borrowings amounted to
$927,000 as compared to $8,000 in the prior year. The average balance of
borrowings for the current year was $12.0 million and the average cost was
7.71%. The increase in borrowings consists of securities repurchase agreements
with the FHLB that were a component of Peekskill's capital management strategy
and that were assumed in the Acquisition.

Net Interest Income

     Net interest income for the year ended March 31, 2001 amounted to $14.6
million as compared to $10.7 million for the prior year. The interest rate
spread for those same periods was 2.96% and 2.99%, respectively. The net
interest margin was 3.26% for the year ended March 31, 2001 as compared to 3.55%
for the same period in 2000. The decrease in net interest margin is primarily a
result of a decrease in the ratio of interest-earning assets to interest-bearing
liabilities, to 1.07 for fiscal 2001 from 1.17 for the prior year. The lower
ratio in the current year reflects higher levels of non-earning assets
(primarily goodwill) and the use of earning assets to fund stock repurchases. In
addition, the decreases in interest rate spread and net interest margin were
also caused by the rising market interest rates during the first half of
calendar 2000. While the yield on interest-earning assets increased as a result
of the rising market interest rates, the cost of interest-bearing liabilities
grew faster since borrowings and time deposits accounted for a greater
percentage of these funds. The average balances of time deposits and borrowings
accounted for 62.4% of interest-bearing liabilities during fiscal 2001 as
compared to 59.0% during the prior year.

Provision for Loan Losses

     The provision for loan losses was $208,000 for the year ended March 31,
2001 as compared to $100,000 for the prior year. Non-performing loans amounted
to $933,000 or 0.32% of total loans at March 31, 2001, as compared to $969,000
or 0.53% of total loans at March 31, 2000. The allowance for loan losses
amounted to $2.0 million and $1.2 million at March 31, 2001 and 2000,
respectively. The increase in the allowance for loan losses is primarily a
result of Peekskill's allowance for loan losses that was transferred in the
Acquisition. Charge-offs, net of recoveries, amounted to $133,000 for the year
ended March 31, 2001 as compared to $6,000 for the year ended March 31, 2000.

Non-Interest Income

     Non-interest income amounted to $382,000 and $294,000 for the years ended
March 31, 2001 and 2000, respectively. Non-interest income consists principally
of service charges on deposit accounts, late charges on loans and various other
service fees. For the years ended March 31, 2001 and 2000, service fees amounted
to $354,000 and $192,000, respectively. The year ended March 31, 2001 included
net gains on the sale of real estate owned of $28,000 as compared to $102,000 in
the prior year.

Non-Interest Expense

     Non-interest expense totaled $10.0 million for fiscal 2001 as compared to
$7.0 million for fiscal 2000. This increase is due primarily to increases of
$1.2 million in compensation and benefits, $708,000 in occupancy and equipment
costs, $211,000 in data processing service fees, $101,000 in advertising and
promotion, and $765,000 in goodwill amortization, partially offset by a $13,000
decrease in other non-interest expenses.

     The increases in non-interest expenses are due primarily to the
Acquisition, as well as continuing internal growth. In addition to ongoing
expenses attributable to the acquired operations, non-interest expense for the
current year includes $216,000 in costs related to the conversion of Peekskill's
customers to the Bank's data processing system and customer service costs
incurred during the conversion process and a $148,000 charge for

                                       16

<PAGE>

benefits that vested under the RRP Plan for participants who retired during the
year. Other non-interest expense for fiscal 2000 includes $225,000 related to
the establishment of a real estate investment trust ("REIT").

Income Tax Expense

     Income tax expense amounted to $2.1 million and $1.4 million for the fiscal
years ended March 31, 2001 and 2000, respectively. The effective tax rate for
those same periods was 43.5% and 37.6%, respectively. The higher effective tax
rates in the current year are primarily due to the amortization of goodwill,
which is not deductible for tax purposes.

Capital Resources and Liquidity

     The objective of the Company's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses the
Company's 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.

     The Company's 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 2002, the Company
originated loans of $220.4 million and purchased securities of $57.7 million.
These disbursements were funded by $90.2 million in principal payments,
maturities and calls of securities, $95.0 million in loan principal repayments,
$20.0 million in borrowings and a $46.4 million increase in deposits.

     At March 31, 2002, the Company had outstanding $65.5 million in loan
origination commitments and unused lines of credit extended to customers. If the
Company requires funds beyond its internal funding capabilities, advances from
the Federal Home Loan Bank (the "FHLB") of New York are available. At March 31,
2002, approximately $268.1 million in certificates of deposit were scheduled to
mature within one year. The Company's experience has been that a substantial
portion of its maturing certificate of deposit accounts are renewed.

     OTS regulations also require savings associations, such as the Bank, to
meet three minimum capital standards: a tangible capital ratio requirement of
1.5% of total assets as adjusted under the OTS 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. The Bank satisfied these minimum capital standards
at March 31, 2002 with tangible and leverage capital ratios of 6.5% and a total
risk-based capital ratio of 13.5% and was 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 United States Government or its agencies to 100% for assets such as
consumer and commercial loans, as assigned by the OTS capital regulations. These
capital requirements, which are applicable to the Bank only, do not consider
additional capital retained by the Company.

                                       17

<PAGE>

Impact of Inflation and Changing Prices

     The Consolidated Financial Statements and related Notes have been prepared
in conformity with generally accepted accounting principles in the United States
of America, 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 the Company's operations. Unlike most industrial companies,
nearly all the assets and liabilities of the Company are financial. As a result,
the Company's net income is directly impacted by changes in interest rates,
which are influenced by inflationary expectations. The Company's ability to
match the interest sensitivity of its financial assets to the interest
sensitivity of its financial liabilities as part of its interest rate risk
management program may reduce the effect that changes in interest rates have on
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 the Company's assets and
liabilities are critical to the maintenance of acceptable levels of net income.
Management has concluded that by maintaining a significant portion of the
Company's assets in short-term investments and adjustable rate mortgage-backed
securities, the Company will be able to redeploy its assets in a rising interest
rate environment.

Accounting Standards

In July 2001, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after September 30, 2001 as well
as all purchase method business combinations completed after September 30, 2001.
SFAS No. 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead be tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.

The Company adopted SFAS Nos. 141 and 142 as of April 1, 2001. As a result, the
Company ceased recording goodwill amortization. Goodwill resulting from the
Acquisition totaled $15.2 million, and the remaining balance at March 31, 2002
was $14.0 million. As of April 1 (the date of adoption of SFAS No. 142) and as
of March 31, 2002, the Company has not recognized any impairment of unamortized
goodwill. The goodwill amortization resulting from the Acquisition amounted to
approximately $984,000 annually, or approximately $0.22 per common share, based
on weighted average shares outstanding at March 31, 2002. The elimination of
goodwill amortization increased our net income and earnings per share by these
amounts.

Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, requires entities to recognize
all derivatives as either assets or liabilities in the balance sheet at fair
value. If certain conditions are met, a derivative may be specifically
designated as a fair value hedge, a cash flow hedge, or a foreign currency
hedge. A specific accounting treatment applies to each type of hedge. Entities
may reclassify securities from the held-to-maturity category to the
available-for-sale category at the time of adopting SFAS No. 133. As amended,
SFAS No. 133 became effective for all fiscal quarters of fiscal years beginning
after June 15, 2000 (as of April 1, 2001 for the Company). The Company adopted
SFAS No. 133 on April 1, 2001 and reclassified held to maturity securities to
the available for sale portfolio. The Company has not engaged in derivatives and
hedging activities covered by the new standard, and does not expect to do so in
the foreseeable future.

                                       18

<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Sound Federal Bancorp:

We have audited the accompanying consolidated balance sheets of Sound Federal
Bancorp and subsidiary (the "Company") as of March 31, 2002 and 2001, 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, 2002.
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 auditing standards generally accepted
in the United States of America. 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 and subsidiary as of March 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 2002 in conformity with accounting principles generally accepted
in the United States of America.

As discussed in Note 2 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", as of April 1, 2001 and as a result ceased amortizing
goodwill.


New York, New York
April 30, 2002, except for Note 19,
which is as of June 14, 2002

                                       19

<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                           Consolidated Balance Sheets
                 (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                             At March 31,
                                                                                        ----------------------
                                                                                          2002         2001
                                                                                          ----         ----
<S>                                                                                     <C>          <C>
Assets
 Cash and due from banks ..........................................................     $   6,931    $   5,849
 Federal funds sold and other overnight deposits ..................................        19,847       35,000
 Securities:
     Available for sale, at fair value (including $35,779 and $15,722 pledged as
     collateral for borrowings under repurchase agreements at March 31, 2002 and
     2001, respectively) (Notes 4 and 9) ..........................................       150,231      157,526
     Held to maturity, at amortized cost (fair value of $28,317 at March 31, 2001)
        (Note 5) ..................................................................            --       28,215
                                                                                        ---------    ---------
          Total securities ........................................................       150,231      185,741
                                                                                        ---------    ---------
 Loans, net (Note 6):
     Mortgage loans ...............................................................       419,120      293,954
     Consumer loans ...............................................................         1,469        1,900
     Allowance for loan losses ....................................................        (2,221)      (2,047)
                                                                                        ---------    ---------
          Total loans, net ........................................................       418,368      293,807
                                                                                        ---------    ---------

 Other interest-earning assets ....................................................            --        2,491
 Accrued interest receivable ......................................................         3,241        3,448
 Federal Home Loan Bank stock .....................................................         4,141        3,745
 Premises and equipment, net (Note 7) .............................................         5,459        5,850
 Deferred income taxes (Note 10) ..................................................           942          373
 Goodwill (Note 2) ................................................................        13,970       13,970
 Other assets .....................................................................           855        2,660
                                                                                        ---------    ---------

           Total assets ...........................................................     $ 623,985    $ 552,934
                                                                                        =========    =========

Liabilities and Stockholders' Equity
  Liabilities:
      Deposits (Note 8) ...........................................................     $ 519,905    $ 473,546
      Borrowings (Note 9) .........................................................        34,922       14,698
      Mortgage escrow funds .......................................................         5,021        4,486
      Accrued expenses and other liabilities ......................................         3,122        3,275
                                                                                        ---------    ---------
          Total liabilities .......................................................       562,970      496,005
                                                                                        ---------    ---------
  Commitments and contingencies (Note 12)
  Stockholders' equity (Notes 1 and 13):
     Preferred stock ($0.10 par value; 10,000,000 shares authorized; none issued
       and outstanding) ...........................................................            --           --
     Common stock ($0.10 par value; 20,000,000 shares authorized; 5,220,218 and
      5,212,218 shares issued at March 31, 2002 and 2001, respectively) ...........           522          521
     Additional paid-in capital ...................................................        22,525       22,399
     Treasury stock, at cost (444,926 and 399,926 shares at March 31, 2002 and
     2001, respectively) ..........................................................        (4,350)      (3,867)
     Common stock held by Employee Stock Ownership Plan ("ESOP") (Note 11) ........        (1,105)      (1,297)
     Common stock awards under the Recognition and Retention Plan ("RRP")
         (Note 11) ................................................................          (244)        (392)
     Retained earnings ............................................................        42,566       37,313
     Accumulated other comprehensive income, net of taxes (Note 14) ...............         1,101        2,252
                                                                                        ---------    ---------
          Total stockholders' equity ..............................................        61,015       56,929
                                                                                        ---------    ---------
          Total liabilities and stockholders' equity ..............................     $ 623,985    $ 552,934
                                                                                        =========    =========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       20

<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY

                        Consolidated Statements of Income
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                               Years Ended March 31,
                                                            ---------------------------
                                                             2002      2001      2000
                                                             ----      ----      ----
<S>                                                         <C>       <C>       <C>
Interest and Dividend Income
 Loans ................................................     $25,560   $19,837   $12,427
 Mortgage-backed and other securities .................      10,838    11,337     5,796
 Federal funds sold and other overnight deposits ......         777     1,577     1,472
 Other earning assets .................................         270       825       841
                                                            -------   -------   -------
 Total interest and dividend income ...................      37,445    33,576    20,536
                                                            -------   -------   -------

Interest Expense
 Deposits (Note 8) ....................................      17,403    18,008     9,821
 Borrowings (Note 9) ..................................       1,065       927         8
 Other interest-bearing liabilities ...................          71        73        39
                                                            -------   -------   -------
 Total interest expense ...............................      18,539    19,008     9,868
                                                            -------   -------   -------

 Net interest income ..................................      18,906    14,568    10,668
 Provision for loan losses (Note 6) ...................         175       208       100
                                                            -------   -------   -------
 Net interest income after provision for loan losses ..      18,731    14,360    10,568
                                                            -------   -------   -------

Non-Interest Income
 Service charges and fees .............................         662       354       192
 Gains on sales of real estate owned ..................          69        28       102
                                                            -------   -------   -------
 Total non-interest income ............................         731       382       294
                                                            -------   -------   -------

Non-Interest Expense
 Compensation and benefits (Note 11) ..................       5,137     4,653     3,419
 Occupancy and equipment ..............................       1,572     1,643       935
 Data processing service fees .........................         866       636       425
 Advertising and promotion ............................         553       599       498
 Goodwill amortization (Note 2) .......................          --       765        --
 Other ................................................       2,188     1,737     1,750
                                                            -------   -------   -------
 Total non-interest expense ...........................      10,316    10,033     7,027
                                                            -------   -------   -------

 Income before income tax expense .....................       9,146     4,709     3,835
 Income tax expense (Note 10) .........................       3,376     2,050     1,443
                                                            -------   -------   -------
 Net income ...........................................     $ 5,770   $ 2,659   $ 2,392
                                                            =======   =======   =======

Basic earnings per share (Note 15) ....................     $  1.24   $  0.56   $  0.48
                                                            =======   =======   =======
Diluted earnings per share (Note 15) ..................     $  1.23   $  0.56   $  0.48
                                                            =======   =======   =======
</TABLE>

See accompanying notes to consolidated financial statements.

                                       21

<PAGE>

SOUND FEDERAL BANCORP AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended March 31, 2002, 2001 and 2000
(In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                 Common    Common                      Accumulated
                                                          Additional              Stock     Stock                         Other
                                                Common     Paid-In    Treasury   Held By    Awards       Retained     Comprehensive
                                                Stock      Capital     Stock      ESOP     Under RRP     Earnings     Income (Loss)
                                                -----      -------      ----      ----     ---------     --------     -------------
<S>                                           <C>         <C>         <C>        <C>       <C>           <C>          <C>
Balance at March 31, 1999 ................... $    521   $ 22,430   $     --    $(1,681)  $     --      $ 33,846
Net income ..................................       --         --         --         --         --         2,392         (132)
Other comprehensive loss (Note 14) ..........       --         --         --         --         --            --           --
                                                                                                                       (1,070)

     Total comprehensive income
Dividends declared ($0.28 per share) ........       --         --         --         --         --        (1,004)          --
Purchases of treasury stock (207,000
shares) .....................................       --         --     (2,069)        --         --            --           --
Purchases and awards of RRP shares
(105,369 shares) ............................       --         --         --         --       (961)           --           --
Vesting of RRP shares .......................       --         (1)        --         --        240            --           --
ESOP shares allocated or committed to be
released for allocation .....................       --        (14)        --        192         --            --           --
                                              --------   --------   --------   --------   --------      --------     --------

Balance at March 31, 2000 ...................      521     22,415     (2,069)    (1,489)      (721)       35,234       (1,202)
Net income ..................................       --         --         --         --         --         2,659           --
Other comprehensive income (Note 14) ........       --         --         --         --         --            --        3,454

     Total comprehensive income
Dividends paid ($0.28 per share) ............       --         --         --         --         --          (580)          --
Purchases of treasury stock (192,926
shares) .....................................       --         --     (1,798)        --         --            --           --
Vesting of RRP shares .......................       --                    --         --        329            --           --
ESOP shares allocated or committed to be
released for allocation .....................       --        (16)        --        192         --            --           --
                                              --------   --------   --------   --------   --------      --------     --------
Balance at March 31, 2001 ...................      521     22,399     (3,867)    (1,297)      (392)       37,313        2,252
                                              ========   ========   ========   ========   ========      ========     ========

Net income ..................................       --         --         --         --         --         5,770           --
Other comprehensive income (Note 14) ........       --         --         --         --         --            --       (1,151)

     Total comprehensive income .............
Dividends paid ($0.28 per share) ............       --         --         --         --         --          (517)          --
Purchases of treasury stock (45,000
shares) .....................................       --         --       (483)        --         --            --           --
Issuance of stock pursuant to stock option
plan ........................................        1         72         --         --         --            --           --
Vesting of RRP shares .......................       --         --         --         --        148            --           --
ESOP shares allocated or committed to be
released for allocation .....................       --         54         --        192         --            --           --
                                              --------   --------   --------   --------   --------      --------     --------
Balance at March 31, 2002 ................... $    522   $ 22,525   $ (4,350)  $ (1,105)  $   (244)     $ 42,566     $  1,101
                                              ========   ========   ========   ========   ========      ========     ========

<CAPTION>
                                                    Total
                                                Stockholders'
                                                   Equity
                                                   ------
<S>                                             <C>
Balance at March 31, 1999 ...................    $ 54,984
Net income ..................................       2,392
Other comprehensive loss (Note 14) ..........      (1,070)
                                                 --------
     Total comprehensive income .............       1,322
Dividends declared ($0.28 per share) ........      (1,004)
Purchases of treasury stock (207,000
shares) .....................................      (2,069)
Purchases and awards of RRP shares
(105,369 shares) ............................        (961)
Vesting of RRP shares .......................         239
ESOP shares allocated or committed to be
released for allocation .....................         178
                                                 --------

Balance at March 31, 2000 ...................      52,689
Net income ..................................       2,659
Other comprehensive income (Note 14) ........       3,454
                                                 --------
     Total comprehensive income .............       6,113
Dividends paid ($0.28 per share) ............        (580)
Purchases of treasury stock (192,926
shares) .....................................      (1,798)
Vesting of RRP shares .......................         329
ESOP shares allocated or committed to be
released for allocation .....................         176
                                                 --------
Balance at March 31, 2001 ...................      56,929
                                                 ========

Net income ..................................       5,770
Other comprehensive income (Note 14) ........      (1,151)
                                                 --------
     Total comprehensive income .............       4,619
Dividends paid ($0.28 per share) ............        (517)
Purchases of treasury stock (45,000
shares) .....................................        (483)
Issuance of stock pursuant to stock option
plan ........................................          73
Vesting of RRP shares .......................         148
ESOP shares allocated or committed to be
released for allocation .....................         246
                                                 --------
Balance at March 31, 2002 ...................    $ 61,015
                                                 ========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       22

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                               Years Ended March 31,
                                                                               ----------------------------------------------------
                                                                                    2002                  2001               2000
                                                                                    ----                  ----               ----
<S>                                                                            <C>                    <C>                <C>
Operating Activities
 Net income ................................................................   $     5,770            $    2,659         $   2,392
 Adjustments to reconcile net income to net
   cash provided by operating activities:
   Provision for loan losses ...............................................           175                   208               100
   Goodwill amortization ...................................................            --                   765                --
   Depreciation, amortization and accretion ................................           706                   592               276
   ESOP and RRP expense ....................................................           394                   505               417
   Income taxes ............................................................         2,883                 1,134              (112)
   Other adjustments, net ..................................................           708                   913              (333)
                                                                               ------------           ----------         ---------
         Net cash provided by operating activities .........................        10,636                 6,776             2,740
                                                                               ------------           ----------         ---------

Investing Activities

 Purchases of securities available for sale ................................       (57,737)              (28,854)          (35,218)
 Proceeds from payments, maturities and calls of securities:
   Available for sale ......................................................        90,224                38,157             5,290
   Held to maturity ........................................................            --                 7,312             9,770
 Proceeds from sales of securities available for sale ......................            --                21,888             5,221
 Disbursements for loan originations .......................................      (220,350)              (88,677)          (62,549)
 Principal collections on loans ............................................        94,983                40,683            24,974
 Net decrease in certificates of deposit ...................................         2,491                 7,584               611
 Purchases of Federal Home Loan Bank stock .................................          (396)                   --              (311)
 Cash paid in purchase acquisition, net of cash acquired ...................            --               (33,937)               --
 Purchases of premises and equipment .......................................          (294)                 (669)           (2,646)
 Proceeds from sales of real estate owned ..................................           405                   286               459
                                                                               -----------            ----------         ---------
         Net cash used in investing activities .............................       (90,674)              (36,237)          (54,399)
                                                                               -----------            ----------         ---------

Financing Activities
 Net increase in deposits ..................................................        46,359                45,413            38,493
 Proceeds from borrowings ..................................................        20,000                    --                --
 Repayment of borrowings ...................................................            --                (5,000)               --
 Net increase (decrease) in mortgage escrow funds ..........................           535                  (292)              285
 Purchases of treasury stock ...............................................          (483)               (1,798)           (2,069)
 Purchases of RRP shares ...................................................            --                    --              (961)
 Issuance of stock pursuant to stock option plan ...........................            73                    --                --
 Payment of cash dividends on common stock .................................          (517)                 (580)           (1,004)
                                                                               -----------            ----------         ---------
        Net cash provided by financing activities ..........................        65,967                37,743            34,744
                                                                               -----------            ----------         ---------

 (Decrease) increase in cash and cash equivalents ..........................       (14,071)                8,282           (16,915)
 Cash and cash equivalents at beginning of year ............................        40,849                32,567            49,482
                                                                               -----------            ----------         ---------
 Cash and cash equivalents at end of year ..................................   $    26,778            $   40,849         $  32,567
                                                                               ===========            ==========         =========

Supplemental Information
 Interest paid .............................................................   $    18,443            $   19,189         $   9,746
 Income taxes paid .........................................................         1,980                 1,552             1,510
 Loans transferred to real estate owned ....................................           253                   290               124
                                                                               ===========            ==========         =========
 Acquisition accounted for by the purchase method:
   Fair value of assets acquired, including goodwill of $14,735 ............   $        --            $  212,850         $      --
   Fair value of liabilities assumed .......................................            --              (174,081)               --
                                                                               -----------            ----------         ---------
   Cash paid in acquisition ................................................   $        --            $   38,769         $      --
                                                                               ===========            ==========         =========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       23

<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements


(1)    Reorganization and Stock Offering

       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 (the "Offering"). In the
       Reorganization, Sound Federal Savings and Loan Association (the "Bank")
       converted from a federally-chartered mutual savings association to a
       federally-chartered stock savings association (the "Conversion"). The
       Bank became the wholly-owned subsidiary of Sound Federal Bancorp, which
       became the majority-owned subsidiary of Sound Federal, MHC (the "Mutual
       Holding Company"). Collectively, Sound Federal Bancorp and the Bank are
       referred to herein as "the Company".

       Sound Federal Bancorp issued a total of 5,212,218 shares of its common
       stock in the Reorganization and Offering, consisting of 2,810,510 shares
       (or 53.92%) issued to the Mutual Holding Company and 2,401,708 shares (or
       46.08%) issued to other stockholders. The shares issued to other
       stockholders consisted of 192,129 shares purchased by the Company's
       Employee Stock Ownership Plan (the "ESOP") using $1.9 million in proceeds
       from a loan made by Sound Federal Bancorp; 102,200 shares contributed by
       the Company to establish the Sound Federal Savings and Loan Association
       Charitable Foundation (the "Charitable Foundation"); and 2,107,379 shares
       sold for cash of $21.1 million ($10.00 per share) in the Offering. After
       deducting offering costs of $1.1 million, the net cash proceeds from the
       Offering were $20.0 million.

(2)    Acquisition

       On July 18, 2000, the Company consummated its acquisition of Peekskill
       Financial Corporation ("Peekskill"). Peekskill and its wholly-owned
       subsidiary, First Federal Savings Bank, merged with and into the Bank,
       with the Bank as the surviving entity (the "Acquisition"). Peekskill's
       stockholders received $22 per share in cash. The transaction was valued
       at approximately $41.7 million including the "in-the-money" portion of
       outstanding stock options. At the time of the Acquisition, Peekskill had
       total assets of $201.5 million and total deposits of $152.4 million
       (historical carrying amounts before purchase accounting adjustments).

       The Acquisition was accounted for using the purchase method of accounting
       and, accordingly, the assets acquired and liabilities assumed were
       recorded by the Company at their fair values at the consummation date.
       Related operating results are included in the Company's consolidated
       financial statements for periods after the consummation date. The excess
       of the Company's total acquisition cost over the fair value of the net
       assets acquired, or "goodwill", has been recognized as an intangible
       asset and is being amortized to expense over a period of 15 years.
       Goodwill resulting from the Acquisition totaled $14.7 million, and the
       related amortization expense was $765,000 for the year ended March 31,
       2001.

       The Company adopted Statement of Financial Accounting Standards ("SFAS")
       No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
       Intangible Assets as of April 1, 2001. As a result, the Company ceased
       amortizing goodwill and, as a result, net income and earnings per share
       for the year ended March 31, 2002 does not include goodwill amortization
       expense. Net income and earnings per share for the year ended March 31,
       2001 adjusted to reflect the effects of ceasing the amortization of
       goodwill is as follows:

                                                               Year ended
                                                             March 31, 2001
                                                             --------------
                                                             (In thousands,
                                                         except per share data)

              Net income, as reported                          $   2,659
              Amortization of Goodwill                               765
                                                               ----------
              Net income, as adjusted                          $   3,424
                                                               ==========

              Earnings per Share, as adjusted:
                   Basic                                       $    0.72
                   Diluted                                     $    0.72

                                       24

<PAGE>

                     SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements


     Pro forma results of operations for the years ended March 31, 2001 and
     2000, assuming the Acquisition took place at the beginning of fiscal year
     2000 are as follows (unaudited):

                                             Year Ended        Year Ended
                                           March 31, 2001    March 31, 2000
                                           --------------    --------------
                                                    (In thousands)
     Net interest income                   $       15,418    $       14,006
     Provision for loan losses                        273               160
     Non-interest income                              456               569
     Non-interest expense                          11,302            11,770
                                           --------------    --------------
       Income before taxes                          4,299             2,645
     Income tax expense                             1,870             1,150
                                           --------------    --------------
       Net income                          $        2,429    $        1,495
                                           ==============    ==============

     The pro forma results of operations reflect the combination of the
     historical results of operations of the Company and Peekskill for the years
     ended March 31, 2001 and 2000.

     The pro forma information does not reflect any potential cost savings or
     revenue enhancements that resulted from the combination of the operations
     of the Company and Peekskill other than those included in the fiscal year
     2001 results of operations from the date of the merger (July 18, 2000). As
     a result, the pro forma information is not necessarily indicative of the
     results of operations that would have been achieved had the acquisition in
     fact occurred on the dates indicated, nor do they purport to be indicative
     of the results of operations that may be achieved in the future by the
     combined company.

(3)  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 County, New York where it operates seven full-service banking
     offices. An eighth full-service office is located in Cos Cob, Connecticut
     and an in-store branch is operated in Rockland County, New York.

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

     Basis of Presentation

     The consolidated financial statements include the accounts of Sound Federal
     Bancorp, the Bank, Sound REIT, First Federal REIT and Mamaroneck Advisors,
     Inc. Sound REIT is a wholly-owned subsidiary of the Bank that was formed in
     April 1999 as a real estate investment trust to hold a portion of the
     Company's mortgage loan portfolio. First Federal REIT was formed by
     Peekskill prior to the Acquisition and holds a portion of the Company's
     mortgage-related securities. Mamaroneck Advisors, Inc. is a wholly-owned
     subsidiary of the Bank that was formed in February 2001. The Bank offers
     investment products and services to its customers through Mamaroneck
     Advisors. All significant intercompany accounts and transactions have been
     eliminated in consolidation. Prior to the Reorganization and Offering,
     Sound Federal Bancorp had no operations other than those of an
     organizational nature.

                                       25

<PAGE>

                     SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements


       The consolidated financial statements have been prepared in conformity
       with accounting principles generally accepted in the United States of
       America. 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 represent federal funds sold for one-day periods.

       Securities

       The Company classifies 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 classified as held to maturity are carried at
       amortized cost. 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). The Company has no
       trading securities.

       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 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 evaluation of the adequacy of the
       allowance for loan losses is based on the Company's past loan loss
       experience, known and inherent risks in the portfolio, adverse situations
       that may affect a borrower's ability to repay, estimated value of
       underlying collateral, and current economic conditions. In management's
       judgment, the allowance for loan losses is adequate to absorb probable
       losses in the existing loan portfolio.

       Establishing the allowance for loan losses involves significant
       management judgments utilizing the best information available at the time
       of review. Those judgments are subject to further review by various
       sources, including the Company's regulators. Adjustments to the allowance
       may be necessary in the future based on changes in economic and real
       estate market conditions, further information obtained regarding known
       problem loans, the identification of additional problem loans, and other
       factors.

       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 to
       identify impairment for loans 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). The standard does not generally apply
       to smaller-balance homogeneous loans that are
       collectively evaluated for impairment, such as residential mortgage and
       consumer loans. 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.

                                       26

<PAGE>

                     SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements


       Interest and Fees on Loans

       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 applicable to prepaid loans are recognized in
       interest income at the time of prepayment.

       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.

       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

       Premises and equipment are comprised of land (carried at cost) and
       buildings, leasehold improvements, furniture and equipment (carried at
       cost less accumulated depreciation and amortization). Depreciation
       expense is recognized on a straight-line basis over the estimated useful
       lives of the related assets. Amortization of leasehold improvements is
       recognized on a straight-line basis over the terms of the respective
       leases or the estimated useful lives of the assets, whichever is shorter.
       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" and tax carryforwards. Temporary
       differences are 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.

                                       27

<PAGE>

                     SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements


     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 and tax carryforwards 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.

     Treasury Stock

     Treasury stock is recorded at cost and is included as a deduction of
     stockholders' equity.

     Stock-Based Compensation Plans

     Compensation expense is recognized for the Company's employee stock
     ownership plan ("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.

     The Company accounts for its stock option plan in accordance with
     Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
     Issued to Employees. Accordingly, compensation expense is recognized only
     if the exercise price of the option is less than the fair value of the
     underlying stock at the grant date. Statement of Financial Accounting
     Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation,
     encourages entities to recognize the fair value of all stock-based awards
     (measured on the grant date) as compensation expense over the vesting
     period. Alternatively, SFAS No. 123 allows entities to apply the provisions
     of APB Opinion No. 25 and provide pro forma disclosures of net income and
     earnings per share as if the fair-value-based method defined in SFAS No.
     123 had been applied. The Company has elected to apply the provisions of
     APB Opinion No. 25 and provide these pro forma disclosures.

     The Company's recognition and retention plan ("RRP") is also accounted for
     in accordance with APB Opinion No. 25. The fair value of the shares
     awarded, 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.

     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. RRP shares 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 unvested RRP shares) were issued or
     became vested during the reporting period. For purposes of computing both
     basic and diluted EPS, outstanding shares include all shares issued to the
     Mutual Holding Company and contributed to the Charitable Foundation, but
     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. Specific information to be

                                       28

<PAGE>

                     SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements


     reported for individual operating segments includes a measure of profit and
     loss, certain revenue and expense items, and total assets. 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.

     Goodwill

     The Company adopted SFAS No.142 as of April 1, 2001. SFAS No. 142 requires
     that goodwill and intangible assets with indefinite useful lives no longer
     be amortized, but instead be tested for impairment at least annually in
     accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires
     that intangible assets with definite useful lives be amortized over their
     respective estimated useful lives to their estimated residual values, and
     reviewed for impairment in accordance with SFAS No. 121, Accounting for the
     Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
     Of.

     As a result, the Company ceased amortizing goodwill in connection with the
     Acquisition. Goodwill resulting from the Acquisition totaled $15.2 million,
     and the remaining balance at March 31, 2002 was $14.0 million. The Company
     did not recognize any impairment of unamortized goodwill during the year
     ended March 31, 2002.

(4)  Securities Available for Sale

     The following is a summary of securities available for sale at March 31,
2002 and 2001:

<TABLE>
<CAPTION>
                                                        Amortized            Gross Unrealized            Fair
                                                                         ----------------------
                                                           Cost          Gains          Losses          Value
                                                           ----          -----          ------          -----
                                                                             (In thousands)
     <S>                                                <C>            <C>             <C>            <C>
     March 31, 2002
     --------------
     Collateralized mortgage obligations .............  $  13,238      $  1,021        $     --       $  14,259
     Mortgage-backed securities guaranteed by:
          Ginnie Mae .................................     47,113           751             (70)         47,794
          Fannie Mae .................................     20,672           410             (66)         21,016
          Freddie Mac ................................     20,613           493             (41)         21,065
                                                        ---------      --------        --------       ---------
                                                          101,636         2,675            (177)        104,134
     U.S. Government and agency securities ...........     29,788            29            (588)         29,229
     Municipal securities ............................        845            77              --             922
     Mutual fund shares ..............................     16,000            10             (64)         15,946
                                                        ---------      --------        --------       ---------

          Total ......................................  $ 148,269      $  2,791        $   (829)      $ 150,231
                                                        =========      ========        ========       =========
</TABLE>

                                       29

<PAGE>

                     SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

<TABLE>
     <S>                                                    <C>               <C>           <C>             <C>
     March 31, 2001
     --------------
     Collateralized mortgage obligations .............. $  29,834          1,740               --       $  31,574
     Mortgage-backed securities guaranteed by:
          Ginnie Mae ..................................    38,678            783              (16)         39,445
          Fannie Mae ..................................    17,675            513               --          18,188
          Freddie Mac .................................    25,883            854              (13)         26,724
                                                        ---------       --------        ---------       ---------
                                                          112,070          3,890              (29)        115,931
     U.S. Government and agency securities ............    33,644            188             (233)         33,599
     Mutual fund shares ...............................     8,000              2               (6)          7,996
                                                        ---------       --------        ---------       ---------

          Total ....................................... $ 153,714       $  4,080        $    (268)      $ 157,526
                                                        =========       ========        =========       =========
</TABLE>

     Debt securities available for sale at March 31, 2002 consisted of
     adjustable rate securities and fixed rate securities with amortized costs
     of $78.3 million and $54.0 million, and weighted average yields of 5.80%
     and 6.26%, respectively. Debt securities available for sale at March 31,
     2001 consisted of adjustable rate securities and fixed rate securities with
     amortized costs of $61.2 million and $84.5 million, and weighted average
     yields of 7.00% and 6.85%, respectively.

     There were no sales of securities available for sale during the year ended
     March 31, 2002.

     The Company sold $21.9 million of securities available for sale during
     fiscal 2001. These securities were part of Peekskill's portfolio and were
     recorded by the Company at their fair value in accordance with the purchase
     method of accounting. The securities were sold by the Company immediately
     thereafter and, as a result of the fair value adjustment, there was no gain
     or loss on the sale.

     The Company sold certain mutual fund shares during fiscal 2000 with no
     resulting gain or loss. Proceeds from the sale amounted to $5.2 million.

     The following is a summary of the amortized cost and fair value of debt
     securities available for sale at March 31, 2002, 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.


<TABLE>
<CAPTION>
                                                                             Amortized          Fair
                                                                               Cost             Value
                                                                               ----             -----
                                                                                  (In thousands)
          <S>                                                               <C>               <C>
          Mortgage-backed securities .....................................  $ 101,636         $ 104,134
          U.S. Government and agency securities due:
              Within one year ............................................     13,998            13,908
              Over one to five years .....................................      2,999             2,993
              Over five to ten years .....................................      4,880             4,818
              Over ten years .............................................      7,911             7,510
          Municipal securities - Due over ten years ......................        845               922
                                                                            ---------         ---------

          Total ..........................................................  $ 132,269         $ 134,285
                                                                            =========         =========
</TABLE>

                                       30

<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements


(5)  Securities Held to Maturity

     The Company adopted SFAS No. 133, Accounting for Derivative Instruments and
     Hedging Activities, on April 1, 2001. All securities that were classified
     as held to maturity at March 31, 2001 were reclassified as available for
     sale. The following is a summary of securities held to maturity at March
     31, 2001:

<TABLE>
<CAPTION>
                                                           Amortized         Gross Unrealized            Fair
                                                                          -------------------------
                                                              Cost         Gains            Losses       Value
                                                              ----        -------          --------     -------
                                                                                (In thousands)
        <S>                                                 <C>          <C>             <C>            <C>
        March 31, 2001
        --------------
        Mortgage-backed securities guaranteed by:
           Ginnie Mae ...................................   $  22,042          151            (59)     $ 22,134
           Fannie Mae ...................................       3,114           25            (12)        3,127
           Freddie Mac ..................................          21           --             --            21
                                                            ---------     --------        -------      --------
                                                               25,177          176            (71)       25,282
        U.S. Government and agency securities ...........       3,038            3             (6)        3,035
                                                            ---------     --------        -------      --------

           Total ........................................   $  28,215     $    179        $   (77)     $ 28,317
                                                            =========     ========        =======      ========
</TABLE>

     At March 31, 2001, debt securities consisted of adjustable rate securities
     of $26.8 million and fixed rate securities of $1.4 million, with weighted
     average yields of 7.25% and 7.18%, respectively. Adjustable rate and fixed
     rate securities at March 31, 2000 totaled $34.0 million and $1.6 million,
     with weighted average yields of 6.76% and 7.29%, respectively.

     There were no sales of securities held to maturity during the years ended
     March 31, 2002, 2001 and 2000.

(6)  Loans

     A summary of loans at March 31 follows:

<TABLE>
<CAPTION>
                                                                                         2002              2001
                                                                                         ----              ----
                                                                                             (In thousands)
            <S>                                                                       <C>             <C>
            Mortgage loans:
               Residential properties:
                  One-to-four family .............................................    $  334,683        $  221,617
                  Home equity lines of credit ....................................        47,889            47,315
                  Multi-family ...................................................         8,347             3,959
               Commercial properties .............................................        23,701            16,771
               Construction loans ................................................         3,733             3,659
               Deferred loan origination costs, net ..............................           767               633
                                                                                      ----------        ----------
                                                                                         419,120           293,954
                                                                                      ----------        ----------
            Consumer loans:
               Automobile loans ..................................................           785             1,154
               Secured personal loans ............................................           660               719
               Other loans .......................................................            24                27
                                                                                      ----------        ----------
                                                                                           1,469             1,900
                                                                                      ----------        ----------

                  Total loans ....................................................       420,589           295,854

            Allowance for loan losses ............................................        (2,221)           (2,047)
                                                                                      ----------        ----------

                  Total loans, net ...............................................    $  418,368        $  293,807
                                                                                      ==========        ==========
</TABLE>


                                       31

<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements


       Gross principal balances at March 31, 2002 consisted of fixed rate loans
       of $356.8 million and adjustable rate loans of $63.0 million, with
       weighted average yields of 7.36% and 6.33%, respectively. Fixed rate and
       adjustable rate loans at March 31, 2001 totaled $290.4 million and $6.8
       million, with weighted average yields of 7.72% and 7.55%, respectively.

       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 and
       consumer loans. Substantially all of the mortgage loan portfolio is
       secured by real estate properties located in Westchester County, 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.

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

<TABLE>
<CAPTION>
                                                                              2002          2001          2000
                                                                              ----          ----          ----
                                                                                       (In thousands)
<S>                                                                    <C>              <C>            <C>
           Balance at beginning of year ............................   $      2,047     $   1,188      $  1,094
           Provision for loan losses ...............................            175           208           100
           Allowance transferred in Acquisition ....................             --           784            --
           Charge-offs .............................................            (15)         (162)           (6)
           Recoveries ..............................................             14            29            --
                                                                       ------------     ---------      --------

           Balance at end of year ..................................   $      2,221     $   2,047      $  1,188
                                                                       ============     =========      ========
</TABLE>



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

<TABLE>
<CAPTION>
                                                                              2002          2001          2000
                                                                              ----          ----          ----
                                                                                       (In thousands)
          <S>                                                            <C>            <C>             <C>
           Mortgage loans:
               One-to-four family ...................................    $      690     $     855      $    869
               Home equity lines of credit ..........................            65            78           100
           Consumer loans ...........................................            --            --            --
                                                                         ----------     ---------      --------

               Total nonaccrual loans ...............................    $      755     $     933      $    969
                                                                         ==========     =========      ========
</TABLE>


       Gross interest income that would have been recorded if the foregoing
       nonaccrual loans had remained current in accordance with their
       contractual terms totaled $67,000, $84,000 and $87,000 for the years
       ended March 31, 2002, 2001 and 2000, respectively, compared to interest
       income actually recognized of $20,000, $49,000 and $29,000, respectively.

       The Company had $105,000 of impaired loans at March 31, 2002 and 2001
       within the scope of SFAS No. 114, "Accounting by Creditors for Impairment
       of a Loan" (multi-family, commercial mortgage and construction loans).
       The Company determines the need for an allowance for loan impairment
       under SFAS No. 114 on a loan-by-loan basis. The average recorded
       investment in impaired loans was $105,000 and $178,000 for the years
       ended March 31, 2002 and 2001, respectively. No interest was collected or
       recognized on impaired loans during fiscal 2002.

       Other assets at March 31, 2002 and 2001 include real estate owned
       properties with net carrying values of $114,000 and $197,000,
       respectively. Provisions for losses and other activity in the allowance
       for losses on real estate owned were insignificant during the years ended
       March 31, 2002, 2001 and 2000.

                                       32

<PAGE>

                     SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements


(7)    Premises and Equipment

       A summary of premises and equipment at March 31 follows:

<TABLE>
<CAPTION>
                                                                                            2002        2001
                                                                                            ----        ----
                                                                                             (In thousands)
<S>                                                                                   <C>            <C>
           Land ................................................................      $       592    $     592
           Buildings and improvements ..........................................            4,304        4,241
           Leasehold improvements ..............................................            1,519        1,502
           Furniture and equipment .............................................            2,220        2,006
                                                                                      -----------    ---------
                                                                                            8,635        8,341

           Less accumulated depreciation and amortization ......................           (3,176)      (2,491)
                                                                                      ------------   ---------

               Premises and equipment, net .....................................      $     5,459    $   5,850
                                                                                      ===========    =========
</TABLE>


(8)    Deposits

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

<TABLE>
<CAPTION>
                                                                  2002                        2001
                                                        -------------------------     ---------------------
                                                            Rate         Amount          Rate       Amount
                                                        ------------  -----------     ----------  ---------
                                                                      (Dollars in thousands)
<S>                                                     <C>          <C>              <C>        <C>
        Savings and club accounts ...................       1.00%    $   118,578         2.00%    $ 108,371
        Money market accounts .......................       1.43          36,012         2.60        28,333
        NOW accounts ................................       0.76          47,578         1.27        38,710
        Commercial checking .........................         --           5,436           --         2,390
                                                                     -----------                  ---------
           Total ....................................       0.99         207,604         1.91       177,804
                                                                     -----------                  ---------

        Certificates of deposit by remaining
           Term to contractual maturity:
           Within one year ..........................       3.24         268,116         6.01       272,570
           After one but within three years .........       3.66          37,622         5.41        20,619
           After three years ........................       4.62           6,563         4.85         2,553
                                                                     -----------                  ---------
           Total ....................................       3.32         312,301         5.96       295,742
                                                                     -----------                  ---------

           Total deposits ...........................       2.39%    $   519,905         4.44%    $ 473,546
                                                                     ===========                  =========
</TABLE>

       Certificates of deposit with denominations of $100,000 or more totaled
       $59.5 million and $56.2 million at March 31, 2002 and 2001, respectively.

       The following is a summary of interest expense on deposits for the years
       ended March 31:

<TABLE>
<CAPTION>
                                                                              2002          2001           2000
                                                                              ----          ----           ----
                                                                                       (In thousands)
<S>                                                                       <C>           <C>            <C>
       Passbook and club accounts .....................................   $    1,609    $   2,420      $   1,245
       Money market, NOW and Super NOW accounts .......................        1,034        1,101            880
       Certificates of deposit ........................................       14,760       14,487          7,696
                                                                          ----------    ---------      ---------

            Total .....................................................   $   17,403    $  18,008      $   9,821
                                                                          ==========    =========      =========
</TABLE>

                                       33

<PAGE>

                     SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements


 (9)   Borrowings

       The Company is a party to securities repurchase agreements with the FHLB.
       Securities repurchase agreements consist of the following at March 31:

<TABLE>
<CAPTION>
                                                                         Coupon         Amortized         Accrued
                            Maturity Date          Call Features          Rate            Cost           Interest
                            -------------          -------------          ----            ----           --------
                                                                                          (dollars in thousands)
<S>                         <C>                <C>                       <C>         <C>               <C>
      March 31, 2002
      --------------
                            January 2008      Quarterly beginning           5.42%   $       9,838      $        92
                                              January 2003
                            December 2008     Quarterly beginning           4.72            5,000               17
                                              November 2001
                            March 2003                 None                 2.54            7,000               15
                            March 2004                 None                 3.57            7,000               21
                            March 2005                 None                 4.22            6,000               21
                                                                                    -------------      -----------
                                                                            4.17%   $      34,838      $       166
                                                                                    =============      ===========


      March 31, 2001
      --------------
                            January 2008      Quarterly beginning           5.42%   $       9,685      $       104
                                              January 2003
                            December 2008     Quarterly beginning           4.72            4,927               20
                                                                                    -------------      -----------
                                              November 2001
                                                                            5.18%   $      14,612      $       124
                                                                                    =============      ===========
</TABLE>

       The securities transferred to the FHLB subject to these repurchase
       agreements include U.S. Government and agency securities available for
       sale and mortgage-backed securities available for sale of $23.8 million
       and $12.0 million, respectively at March 31, 2002 ($6.0 million and $9.7
       million, respectively at March 31, 2001). Accrued interest related to the
       respective securities was $415,000 and $85,000, respectively at March 31,
       2002 ($140,000 and $51,000, respectively at March 31, 2001.)

       In addition to securities repurchase agreements, the Bank may have
       outstanding borrowings from the FHLB of up to 25% of total assets, or
       approximately $99.6 million at March 31, 2002, in a combination of term
       advances and overnight funds. Borrowings are 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.

       An outstanding FHLB advance of $84,000 and $86,000 is included in
       borrowings in the consolidated balance sheets at March 31, 2002 and 2001,
       respectively. This advance bears interest at a fixed rate of 8.29% and
       matures in 2002.

                                       34

<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements


(10)  Income Taxes

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

<TABLE>
<CAPTION>
                                                                  2002          2001          2000
                                                                  ----          ----          ----
                                                                           (In thousands)
      <S>                                                      <C>            <C>           <C>
      Federal:
          Current .........................................    $   2,722      $     705     $   1,392
          Deferred ........................................          252            969          (132)
                                                               ---------      ---------     ---------
                                                                   2,974          1,674         1,260
                                                               ---------      ---------     ---------

      State:
          Current .........................................          374             58           163
          Deferred ........................................           28            318            20
                                                               ---------      ---------     ---------
                                                                     402            376           183
                                                               ---------      ---------     ---------

      Total:
          Current .........................................        3,096            763         1,555
          Deferred ........................................          280          1,287          (112)
                                                               ---------      ---------     ---------

                                                               $   3,376      $   2,050     $   1,443
                                                               =========      =========     =========
</TABLE>

      The following is a reconciliation of expected income taxes (computed at
      the applicable Federal statutory tax rate of 34%) to the Company's actual
      income tax expense for the years ended March 31:

<TABLE>
<CAPTION>
                                                                  2002          2001          2000
                                                                  ----          ----          ----
                                                                       (Dollars in thousands)
      <S>                                                      <C>            <C>           <C>
      Taxes at Federal statutory rate .....................    $   3,110      $   1,601     $   1,304
      State tax expense, net of Federal tax benefit .......          265            248           121
      Goodwill amortization ...............................           --            260            --
      Other reconciling items, net ........................            1            (59)           18
                                                               ---------      ---------     ---------

      Actual income tax expense ...........................    $   3,376      $   2,050     $   1,443
                                                               =========      =========     =========

      Effective income tax rate ...........................         36.9%          43.5%         37.6%
                                                               =========      =========     =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                           2002           2001
                                                                           ----           ----
                                                                              (In thousands)
        <S>                                                             <C>          <C>
        Deferred tax assets:
            Allowance for loan losses ................................    $   819       $   788
            Deferred compensation ....................................        343           243
            Director emeritus plan ...................................        149           101
            Fair value adjustments related to the Acquisition:
                 Securities ..........................................        436         1,042
                 Loans ...............................................        154           184
                 Pension .............................................        293           294
            Accrued pension expense ..................................        118            --
            Other deductible temporary differences ...................         --           163
                                                                          -------       -------
                Total deferred tax assets ............................      2,312         2,815
                                                                          -------       -------
</TABLE>

                                       35

<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

<TABLE>
<S>                                                                           <C>        <C>
        Deferred tax liabilities:
           Tax bad debt reserves in excess of base-year reserves ..........       221        251
           Unrealized gain on securities available for sale ...............       757      1,560
              Deferred loan costs                                                 194        313
           Fair value adjustments related to the Acquisition:
                  Buildings ...............................................       120        138
                  FHLB advances                                                    60        149
           Other taxable temporary differences ............................        18         31
                                                                              -------    -------
                   Total deferred tax liabilities .........................     1,370      2,442
                                                                              -------    -------

        Net deferred tax asset ............................................   $   942    $   373
                                                                              =======    =======
</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, 2002 and 2001.

      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 and $8.7 million for State tax purposes at March 31,
      2002. 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 Sound Federal Bancorp, 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 approximately $3.8 million at March 31, 2002.

(11)  Employee Benefit and Stock-Based Compensation Plans

      Pension Plan

      The Company maintains 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.

                                       36

<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements


      The following is a summary of the changes in the plan's projected benefit
      obligation and the fair value of plan assets, together with a
      reconciliation of the plans' funded status to the accrued pension costs
      recognized in the consolidated balance sheets at March 31:

<TABLE>
<CAPTION>
                                                                              2002            2001
                                                                              ----            ----
                                                                                   (In thousands)
        <S>                                                                 <C>             <C>
        Change in benefit obligations:
          Beginning of year ..........................................      $   8,523       $   4,864
          Benefit obligation assumed in Acquisition ..................             --           2,803
          Service cost ...............................................            190             118
          Interest cost ..............................................            641             554
          Actuarial (gain) loss ......................................            444             433
          Settlements ................................................           (918)             --
          Benefits paid ..............................................           (438)           (249)
                                                                            ---------       ---------

          End of year ................................................          8,442           8,523
                                                                            ---------       ---------

        Change in fair value of plan assets:
          Beginning of year ..........................................          7,266           4,420
          Assets received in Acquisition .............................             --           2,286
          Actual return on plan assets ...............................            510             437
          Employer contributions .....................................            401             372
          Settlements ................................................           (918)             --
          Benefits paid ..............................................           (438)           (249)
                                                                            ---------       ---------
          End of year ................................................          6,821           7,266
                                                                            ---------       ---------

        Funded status at end of year .................................         (1,621)         (1,257)
        Unrecognized net actuarial loss. .............................          1,144             708
        Unrecognized prior service cost ..............................             --              --
        Unrecognized net transition obligation .......................              5              12
                                                                            ---------       ---------

        Accrued pension cost .........................................      $     472       $     537
                                                                            =========       =========

        Change in Additional Minimum Liability:
          Charge to accumulated comprehensive income .................      $     170       $      --
          Intangible asset ...........................................      $       5       $      --
                                                                            ---------       ---------
          Additional minimum liability ...............................      $     175       $      --
                                                                            =========       =========
</TABLE>

      A discount rate of 7.00% and a rate of increase in future compensation
      levels of 4.25% were used in determining the actuarial present value of
      the projected benefit obligations at March 31, 2002 (7.25% and 4.75%,
      respectively, at March 31, 2001). The expected long-term rate of return on
      plan assets was 9.00% for 2002, 2001 and 2000.

                                       37

<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements


     The components of the net periodic pension expense were as follows for the
     years ended March 31:

<TABLE>
<CAPTION>
                                                                               2002         2001          2000
                                                                               ----         ----          ----
                                                                                        (In thousands)
           <S>                                                              <C>           <C>           <C>
           Service cost ..................................................  $   190       $   118       $    69
           Interest cost .................................................      641           554           343
           Expected return on plan assets ................................     (651)         (547)         (394)
           Recognized net actuarial loss .................................       53             2            27
           Settlement charge .............................................       16            --            --
           Amortization of prior service cost and net
               transition obligation .....................................        7            21            53
                                                                            -------       -------       -------

               Net periodic pension expense ..............................  $   256       $   148       $    98
                                                                            =======       =======       =======
</TABLE>

     Director Emeritus Plan

     The Company maintains a non-qualified, unfunded Director Emeritus Plan. The
     plan provides for payments to directors who reach emeritus status, in
     annual amounts equal to the compensation earned as a director at the time
     of retirement. Payments are made to the Director Emeritus for a period not
     to exceed fifteen years or age 85 or until the death of the Director
     Emeritus, whichever comes first. Directors qualify for emeritus status upon
     attaining age 70 with at least 15 years of board service (5 years if
     directorship ceases as a result of a merger, consolidation or similar
     transaction). The plan's projected benefit obligation and unrecognized
     prior service cost were $741,000 and $475,000, respectively, at March 31,
     2002 ($704,000 and $554,000, respectively, at March 31, 2001). Total
     expense for this plan was $133,000, $96,000 and $94,000 for the years ended
     March 31, 2002, 2001 and 2000, respectively.

     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. Participants vest immediately in both their own
     contributions and Company contributions.

     Employee Stock Ownership Plan

     In connection with the Reorganization and Offering, the Company established
     an ESOP for eligible employees who meet certain age and service
     requirements. The ESOP borrowed approximately $1.9 million from Sound
     Federal Bancorp and used the funds to purchase 192,129 shares of common
     stock sold in the Offering. The Bank makes periodic contributions to the
     ESOP sufficient to satisfy the debt service requirements of the loan which
     has a ten-year term and bears interest at the prime rate. The ESOP uses
     these contributions and any dividends received by the ESOP on unallocated
     shares to make principal and interest payments on the loan.

     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 $246,000, $176,000 and $178,000 for the years ended March
     31, 2002, 2001 and 2000, 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 (110,473 shares with a cost of $1.1
     million at March 31, 2002). The fair value of these shares was
     approximately $1.7 million at that date.

                                       38

<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements


     Stock Option Plan

     On October 14, 1999, stockholders approved the Sound Federal Bancorp 1999
     Stock Option Plan (the "Stock Option Plan"). A total of 210,738 shares of
     authorized but unissued common stock were reserved for issuance under the
     Stock Option Plan. Options have a ten-year term and may be either
     non-qualified stock options or incentive stock options. 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.

     Effective October 20, 1999, initial option grants were made under the Stock
     Option Plan for 210,738 shares at an exercise price of $9.125 per share.
     During the year ended March 31, 2002, 8,000 options were exercised. Options
     outstanding at March 31, 2002 amounted to 202,738, and 126,043 were
     exercisable at that date.

     In accordance with the provisions of APB Opinion No. 25 related to fixed
     stock options, compensation expense is not recognized with respect to these
     options since the exercise price equals the fair value of the common stock
     at the grant date. Under the alternative fair-value-based method defined in
     SFAS No. 123, the grant-date fair value of fixed stock options is
     recognized as expense over the vesting period. The estimated per-share fair
     value of options granted in October 1999 was $2.25, estimated using the
     Black-Scholes option-pricing model with assumptions as follows: dividend
     yield of 3.1%; expected volatility rate of 20.0%; risk-free interest rate
     of 6.4%; and expected option life of 7 years. Had the Company applied the
     fair-value-based method to the options granted, it would have reported net
     income, basic earnings per share and diluted earnings per share of $5.7
     million, $1.22 and $1.21, respectively, for the year ended March 31, 2002
     and $2.6 million, $0.54 and $0.54, respectively, for the year ended March
     31, 2001.

     Recognition and Retention Plan

     On October 14, 1999, stockholders also approved the Sound Federal Bancorp
     1999 Recognition and Retention Plan (the "RRP"). The purpose of the RRP is
     to provide officers and non-employee directors of the Company with a
     proprietary interest in the Company in a manner designed to encourage their
     retention. A total of 105,369 shares were awarded under the RRP in October
     1999 and funded with shares purchased by the Company in the open market.
     The grant-date fair value of these shares was charged to stockholders'
     equity. The awards vest at a rate of 20% on each of five annual vesting
     dates, the first of which was January 1, 2000. RRP expense for the year
     ended March 31, 2002 amounted to $148,000. RRP expense for the year ended
     March 31, 2001 was $329,000 and included $148,000 for awards that vested as
     a result of the retirement of certain participants. RRP expense for the
     year ended March 31, 2000 was $240,000 and included $193,000 for the 20% of
     the 1999 awards that vested on January 1, 2000.

(12) Commitments and Contingencies

     Off-Balance Sheet Financial Instruments

     The Company's off-balance sheet financial instruments at March 31, 2002 and
     2001 were limited to loan origination commitments of $28.7 million and
     $16.8 million, respectively, and unused lines of credit (principally fixed
     rate home equity lines) extended to customers of $36.8 million and $31.1
     million, respectively. Loan origination commitments at March 31, 2002
     consisted of adjustable rate and fixed rate commitments of $4.8 million and
     $23.9 million, respectively with weighted average yields of 6.78% and
     6.68%, respectively. Substantially all of the commitments at March 31, 2001
     carry fixed interest rates. Fixed rate loan origination commitments at
     March 31, 2001 provide for interest rates ranging from 6.75% to 10.50%.
     Substantially all of the loan commitments have been provided to customers
     within the Company's primary lending area described in Note 6.

     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

                                       39

<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements


     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.

     Lease Commitments

     The Company is obligated under non-cancelable operating leases for six
     branch offices. Rent expense under these leases was $304,000, $258,000 and
     $176,000 for the years ended March 31, 2002, 2001 and 2000, respectively.
     At March 31, 2002, the future minimum rental payments under these lease
     agreements for the fiscal years ending March 31 are $385,000 in 2003,
     $395,000 in 2004, $382,000 in 2005, $388,000 in 2006, $395,000 in 2007, and
     a total of $2.6 million for 2008 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.


(13) 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 Sound Federal Bancorp.

     Management believes that, as of March 31, 2002 and 2001, 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
     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.

                                       40

<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements


     The following is a summary of the Bank's actual capital amounts and ratios
     as of March 31, 2002 and 2001, compared to the OTS requirements for minimum
     capital adequacy and for classification as a well-capitalized institution:

<TABLE>
<CAPTION>
                                                                   OTS Requirements
                                                     ---------------------------------------------
                                                        Minimum Capital        Classification as
                                     Bank Actual           Adequacy             Well Capitalized
                                 ------------------- ----------------------- ---------------------
                                   Amount    Ratio    Amount      Ratio         Amount     Ratio
                                   ------    -----    ------      -----         ------     -----
                                                        (Dollars in thousands)
     <S>                         <C>        <C>       <C>         <C>          <C>         <C>
     March 31, 2002
     --------------
     Tangible capital .........  $ 39,865     6.5%   $  9,139      1.5%
     Tier I (core) capital ....    39,865     6.5      24,371      4.0        $  30,464      5.0%
     Risk-based capital:
        Tier I ................    39,865    12.7                                18,776      6.0
        Total .................    42,087    13.5      25,035      8.0           31,294     10.0

     March 31, 2001
     --------------
     Tangible capital .........  $ 34,247     6.4%   $  8,029      1.5%
     Tier I (core) capital ....    34,247     6.4      21,410      4.0        $  26,763      5.0%
     Risk-based capital:
        Tier I ................    34,247    14.8                                13,847      6.0
        Total .................    36,294    15.7      18,463      8.0           23,079     10.0
</TABLE>

     Dividend Limitations

     Under current 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 such amount require OTS approval. Unlike the
     Bank, Sound Federal Bancorp is not subject to OTS regulatory limitations on
     the payment of dividends to its shareholders. Beginning in April 1999,
     Sound Federal Bancorp has declared a quarterly cash dividend of $0.07 per
     common share. Since October 1999, the Mutual Holding Company has waived
     receipt of this dividend with respect to all of its shares. Dividends of
     $787,000 were waived for the each of the years ended March 31, 2002 and
     2001, respectively.

     Stock Repurchase Program

     In July 1999, the Company announced a stock repurchase program to acquire
     up to 344,926 shares of its common stock, which represents approximately
     15% of the common stock held by persons other than the Mutual Holding
     Company. This repurchase program was completed in February 2001. In March
     2001 the Company announced a program to repurchase up to 206,000 shares of
     its common stock. As of March 31, 2002, the Company had acquired 444,926
     shares of its common stock as treasury shares, at a total cost of
     approximately $4.4 million or an average of $9.78 per share.

     Liquidation Rights

     All depositors who had liquidation rights with respect to the Bank as of
     the effective date of the Reorganization continue to have such rights
     solely with respect to the Mutual Holding Company, as long as they continue
     to hold

                                       41

<PAGE>

                     SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

     deposit accounts with the Bank. In addition, all persons who become
     depositors of the Bank subsequent to the Reorganization will have such
     liquidation rights with respect to the Mutual Holding Company.

(14) Comprehensive Income

     Comprehensive income 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. The Company has
     reported its comprehensive income for fiscal 2002, 2001 and 2000 in the
     consolidated statements of changes in stockholders' equity.

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

<TABLE>
<CAPTION>
                                                                                 2002          2001           2000
                                                                                 ----          ----           ----
                                                                                          (In thousands)
           <S>                                                                 <C>        <C>                <C>
           Net unrealized holding gain (loss) arising during the period
              on securities available for sale ..............................  $ (1,850)      $ 5,823        $(1,788)
           Additional minimum pension liability .............................      (170)           --             --
           Related deferred income tax effect ...............................       869        (2,369)           718
                                                                               --------       -------        -------

           Other comprehensive income (loss) ................................  $ (1,151)      $ 3,454        $(1,070)
                                                                               ========       =======        =======
</TABLE>

     The Company's accumulated other comprehensive income, which is included in
     stockholders' equity, is summarized as follows:

<TABLE>
<CAPTION>
                                                                                      March 31,
                                                                                      ---------
                                                                                 2002           2001
                                                                                 ----           ----
                                                                                    (In thousands)
           <S>                                                                 <C>           <C>
           Net unrealized holding gain on securities available for sale .....  $ 1,962       $ 3,812
           Additional minimum pension liability .............................     (170)           --
           Related deferred income taxes ....................................     (691)       (1,560)
                                                                               -------       -------

           Accumulated other comprehensive income ...........................  $ 1,101       $ 2,252
                                                                               =======       =======
</TABLE>

                                       42



<PAGE>

                     SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements


(15) Earnings Per Share

     The following is a summary of the Company's EPS calculations for the years
     ended March 31, 2002, 2001 and 2000. For purposes of computing basic EPS,
     net income applicable to common stock equaled net income for all periods.

<TABLE>
<CAPTION>
                                                                             2002         2001          2000
                                                                             ----         ----          ----
                                                                          (in thousands, except per share data)
        <S>                                                               <C>           <C>           <C>
        Net income ....................................................    $ 5,770      $ 2,659       $ 2,392
                                                                           =======      =======       =======
        Weighted average common shares outstanding
          for computation of basic EPS (1) ............................      4,639        4,783         4,949
        Common-equivalent shares due to the dilutive
          effect of stock options and RRP awards (2) ..................         56           --             2
                                                                           -------      -------       -------
        Weighted average common shares for computation of
          diluted EPS .................................................      4,695        4,783         4,951
                                                                           =======      =======       =======

        Earnings per common share:
                Basic .................................................    $  1.24      $  0.56       $  0.48
                Diluted ...............................................       1.23         0.56          0.48
                                                                           =======      =======       =======
</TABLE>

        (1) Includes all shares issued to the Mutual Holding Company and
            contributed to the Charitable Foundation. Excludes unvested RRP
            shares and unallocated ESOP shares that have not been released or
            committed to be released to participants.
        (2) Computed using the treasury stock method.

(16) 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.

                                       43

<PAGE>

                     SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

       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>
                                                                            2002                      2001
                                                                    --------------------      ---------------------
                                                                     Carrying      Fair        Carrying     Fair
                                                                      Amount       Value        Amount      Value
                                                                      ------       -----        ------      -----
                                                                                    (In millions)
       <S>                                                          <C>         <C>           <C>         <C>
       Financial assets:
          Cash and due from banks ................................   $   6.9    $    6.9      $    5.8    $    5.8
          Federal funds sold and other overnight deposits ........      19.8        19.8          35.0        35.0
          Certificates of deposit ................................        --          --           2.5         2.5
          Securities .............................................     150.2       150.2         185.7       185.8
          Loans ..................................................     418.4       426.4         293.8       299.4
          Accrued interest receivable ............................       3.2         3.2           3.4         3.4
          FHLB stock .............................................       4.1         4.1           3.7         3.7
       Financial liabilities:
          Savings certificate accounts ...........................     312.3       313.5         295.7       298.8
          Other deposit accounts .................................     207.6       207.6         177.8       177.8
          Mortgage escrow funds ..................................       5.0         5.0           4.5         4.5
          Borrowings .............................................      34.9        35.4          14.7        15.5
                                                                     =======    ========      ========    ========
</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.

       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.

                                       44

<PAGE>

                     SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

       Borrowings

       The fair values of securities repurchase agreements and FHLB advances
       represent contractual repayments discounted using interest rates
       currently available on borrowings with similar characteristics and
       remaining maturities.

       Other Financial Instruments

       The other 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 12 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, 2002
       and 2001, the fair values of these instruments approximated the related
       carrying amounts.

(17)   Parent Company Condensed Financial Statements

       Set forth below are the condensed balance sheets of Sound Federal Bancorp
       at March 31, 2002 and 2001, together with the related condensed
       statements of income and cash flows for each of the years in the three
       years ended March 31, 2002.

<TABLE>
<CAPTION>
        Condensed Balance Sheets                                      March 31, 2002           March 31, 2001
                                                                      --------------           --------------
                                                                                  (In thousands)
       <S>                                                       <C>                         <C>
       Assets
        Interest-bearing deposits at subsidiary bank .........   $          5,229             $          6,116
        Loan receivable from ESOP ............................              1,153                        1,345
        Investment in subsidiary bank ........................             55,082                       50,468
        Other assets .........................................                931                          704
                                                                 ----------------             ----------------
          Total assets .......................................   $         62,395             $         58,633
                                                                 ================             ================

        Liabilities ..........................................   $          1,380             $          1,704
        Stockholder's Equity .................................             61,015                       56,929
                                                                 ----------------             ----------------
          Total liabilities and stockholders' equity .........   $         62,395             $         58,633
                                                                 ================             ================

<CAPTION>
                                                                                  Year Ended March  31,
                                                                  ---------------------------------------------
                                                                        2002            2001            2000
                                                                  --------------  --------------   ------------
                                                                                  (In thousands)

       <S>                                                        <C>               <C>               <C>
       Condensed Statements of Income
       Interest income .......................................    $      269        $      345        $     410
       Other expenses ........................................          (208)              (77)            (221)
                                                                  -----------       -----------       ----------
       Income before income taxes and equity in
          undistributed earnings of subsidiary bank ..........            61               268              189
       Income tax expense ....................................            56                56               48
                                                                  ----------        ----------        ---------
       Income before equity in undistributed earnings of
           subsidiary bank ...................................             5               212              141
       Equity in undistributed earnings of subsidiary bank ...         5,765             2,447            2,251
                                                                  ----------        ----------        ---------
       Net income ............................................    $    5,770        $    2,659        $   2,392
                                                                  ==========        ==========        =========
</TABLE>

                                       45

<PAGE>

                     SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                                    Year Ended March 31
                                                                      ----------------------------------------
                                                                            2002          2001         2000
                                                                      -------------  ------------   ----------
                                                                                    (In thousands)
    <S>                                                               <C>            <C>            <C>
    Condensed Statements of Cash Flows
      Operating Activities
      Net income ..................................................   $      5,770    $     2,659   $    2,392
      Adjustments to reconcile net income to net cash
         provided by (used in) operating activities:
      Equity in undistributed earnings of subsidiary bank .........         (5,765)        (2,447)      (2,251)
      Decrease (increase) in other assets .........................           (227)          (148)          12
      Other .......................................................             70             (2)         (70)
                                                                      ------------    -----------   ----------
      Net cash provided by (used in) operating activities .........           (152)            62           83
                                                                      ------------    -----------   ----------

      Investing Activities
      ESOP loan repayments ........................................            192            192          192
                                                                      ------------    -----------   ----------
      Net cash provided by investing activities ...................            192            192          192
                                                                      ------------    -----------   ----------

      Financing Activities
      Purchases of treasury stock .................................           (483)        (1,798)      (2,069)
      Issuance of stock pursuant to stock option plan .............             73             --           --
      Payment of cash dividends on common stock ...................           (517)          (580)      (1,004)
                                                                      ------------    -----------   ----------
      Net cash (used in) provided by financing activities .........           (927)        (2,378)      (3,073)
                                                                      ------------    -----------   ----------
      Net decrease in cash and cash equivalents ...................           (887)        (2,124)      (2,798)
      Cash and cash equivalents at beginning of period ............          6,116          8,240       11,038
                                                                      ------------    -----------   ----------
       Cash and cash equivalents at end of period .................   $      5,229    $     6,116   $    8,240
                                                                      ============    ===========   ==========

</TABLE>

                                       46

<PAGE>

                     SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

(18)  Quarterly Results of Operations (Unaudited)

      The following is a condensed summary of quarterly results of operations
      for the years ended March 31, 2002 and 2001:

<TABLE>
<CAPTION>
                                                             First         Second          Third           Fourth
                                                            Quarter        Quarter        Quarter         Quarter
                                                            -------        -------        -------         -------
                                                                     (In thousands, except per share data)

      Year Ended March 31, 2002
      -------------------------
   <S>                                                   <C>            <C>            <C>              <C>
   Interest and dividend income ....................     $     9,365    $     9,464    $     9,445      $   9,171
   Interest expense ................................           5,339          4,961          4,650          3,589
                                                         -----------    -----------    -----------      ---------
   Net interest income .............................           4,026          4,503          4,795          5,582
   Provision for loan losses .......................              25             25             75             50
   Non-interest income .............................             196            169            194            172
   Non-interest expense ............................           2,334          2,421          2,535          3,026
                                                         -----------    -----------    -----------      ---------
   Income before income tax expense ................           1,863          2,226          2,379          2,678
   Income tax expense ..............................             688            854            914            920
                                                         -----------    -----------    -----------      ---------
   Net income ......................................           1,175          1,372          1,465          1,758
                                                         ===========    ===========    ===========      =========
   Basic earnings per common share .................     $      0.25    $      0.30    $      0.32      $    0.38
                                                         ===========    ===========    ===========      =========
   Diluted earnings per share ......................     $      0.25    $      0.29    $      0.31      $    0.37
                                                         ===========    ===========    ============     =========

<CAPTION>
                                                             First         Second          Third          Fourth
                                                            Quarter        Quarter        Quarter        Quarter
                                                            -------        -------        -------        -------
                                                                    (In thousands, except per share data)

      Year Ended March 31, 2001
      -------------------------
   <S>                                                   <C>            <C>            <C>              <C>
   Interest and dividend income ....................     $     5,730    $     8,610    $     9,635      $   9,601
   Interest expense ................................           2,896          4,808          5,701          5,603
                                                         -----------    -----------    -----------      ---------
   Net interest income .............................           2,834          3,802          3,934          3,998
   Provision for loan losses .......................              50             58             50             50
   Non-interest income .............................              55             66            146            115
   Non-interest expense ............................           1,888          2,550          2,868          2,727
                                                         -----------    -----------    -----------      ---------
   Income before income tax expense ................             951          1,260          1,162          1,336
   Income tax expense                                            356            590            491            613
                                                         -----------    -----------    -----------      ---------
   Net income ......................................             595            670            671            723
                                                         ===========    ===========    ===========      =========
   Basic and diluted earnings per common share .....     $      0.12    $      0.14    $      0.14      $     0.15
                                                         ===========    ===========    ===========      ==========
</TABLE>

(19)  Subsequent Event

         On June 14, 2002, the Mutual Holding Company adopted a plan to convert
to a capital stock corporation. Upon conversion, shares of the Company's common
stock held by the public will be exchanged for shares of a Delaware holding
company which will become the Bank's parent company. In addition, shares of the
Delaware holding company will be offered for sale to the Bank's depositors in a
subscription offering. The shares to be sold in the subscription offering
represent the ownership interest of the Mutual Holding Company. The conversion
and offering are expected to close in the fourth quarter of calendar 2002. The
conversion and offering would result in additional capital and an increase in
the number of shares outstanding.

                                       47

<PAGE>

<TABLE>
<CAPTION>
Corporate Information
---------------------
<S>                                       <C>
                                          Investor Relations

Headquarters                              Anthony J. Fabiano
                                          Senior Vice-President, Chief Financial Officer
300 Mamaroneck Avenue                     And Corporate Secretary
Mamaroneck, New York 10543                Sound Federal Bancorp
914-698-6400                              300 Mamaroneck Avenue
                                          Mamaroneck, New York 10543
Transfer Agent                            914-698-6400

Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
1-800-866-1340
                                          Annual Report on Form 10-K
Annual Meeting

August 8, 2002 10:00 a.m.                 A copy of the Company's Form 10-K, as filed with the Securities
Hyatt Regency Greenwich                   and Exchnage Commission, is available without charge by written
Greenwich, Connecticut                    request to Investor Relations as the address set forth above.

Common Stock Information

The Company's common stock is traded
on the Nasdaq National Market under the
symbol "SFFS". At March 31, 2002, the
common stock was held by approximately
768 stockholders of record. Market
prices and dividends for the indicated
fiscal quarters were as follows:
</TABLE>

Quarter Ended          High     Low  Dividends
-------------          ----     ---  ---------
June 30, 2000        $ 9.000 $ 8.250 $ 0.07
September 30, 2000     9.250   8.250   0.07
December 31, 2000      9.188   8.688   0.07
March 31, 2001        10.500   8.625   0.07
June 30, 2001         11.500  10.000   0.07
September 30, 2001    15.100  11.100   0.07
December 31, 2001     13.430  11.670   0.07
March 31, 2002        15.450  13.050   0.07

General Counsel
James Staudt, Esquire

Special Counsel

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

Independent Auditors

KPMG LLP
757 Third Avenue
New York, New York 10017

                                       48

<PAGE>

<TABLE>
<CAPTION>
Directors of the Company and the Bank             Officers of the Bank
<S>                                               <C>
Bruno J. Gioffre, Chairman of the Board           Accounting
Richard P. McStravick, President and Chief        Frank Rossi, Controller
    Executive Officer                             Terri Anne Stollmer, Assistant Controller
Joseph Dinolfo
Donald H. Heithaus                                Branches
Joseph A. Lanza                                   Robert V. Galante, Vice-President
Eldorus Maynard                                   Heather Smeriglio, Assistant Vice-President
James Staudt                                      Sylvia Astrologo, Assistant Treasurer
Samuel T. Telerico                                Henry Benvenuto, Assistant Treasurer
                                                  Michael Bulgia, Assistant Treasurer
Director Emeriti                                  Doreen Leonard, Assistant Treasurer

Paul F. Starck, Chairman Emeritus                 Branch Operations
George W. Brown                                   Sheila V. Torpey, Assistant Vice-President
Arthur C. Phillips                                Sara Ricci, Assistant Treasurer

Officers of the Company and the Bank              Business Development
                                                  Vito LaRusso, Vice-President
Richard P. McStravick, President and Chief        William J. LaCalamito, Vice-President
    Executive Officer
                                                  Compliance
Anthony J. Fabiano, Senior Vice-President,        Michael J. Ceruzzi, Asssistant Vice-President
Chief Financial Officer and Corporate Secretary
                                                  Executive Secretary
                                                  Linda Lunapiena

                                                  Human Resources
                                                  Judy E. Malinowski, Assistant Vice-President

                                                  Lending
                                                  David Dalrymple, Vice-President
                                                  Joseph Filanowski, Vice-President
                                                  Mary K. Harrison, Assistant Vice-President
                                                  Leonore Kiep, Assistant Treasurer
                                                  Mary A. Maida, Assistant Secretary
                                                  Jennifer Penrod, Assistant Treasurer

                                                  Information Technology
                                                  Jean Degl, Assistant Treasurer

                                                  Security Officer
                                                  Raymond M. Bennett, Assistant Treasurer

                                                  Audit
                                                  Charles Zivian, Senior Internal Auditor
</TABLE>

                                       49

<PAGE>

Branch Locations

Main Office                                   Peekskill
300 Mamaroneck Avenue                         1019 Park Street
Mamaroneck, New York 10543                    Peekskill, New York 10566
914-698-6400                                  914-737-2777

Harrison                                      Yorktown Heights
189 Halstead Avenue                           1961 Commerce Street
Harrison, New York 10528                      Yorktown Heights, New York 10598
914-835-0500                                  914-962-3883

Rye Brook                                     Cortlandt Town Center
115 South Ridge Street                        Route 6
Rye Brook, New York 10573                     Cortlandt, New York 10547
914-939-0100                                  914-528-1117

New City                                      New Rochelle
180 South Main Street                         88 Fourth Street
New City, New York 10956                      New Rochelle, New York 10801
845-639-3400                                  914-633-0345

Cos Cob                                       Somers
East Putnam Avenue                            3 Somers Commons
Cos Cob, Connecticut 06807                    Baldwin Place, New York 10589
203-862-8400                                  914-621-2221

                                       50