To Our Stockholders:

We are pleased to present to you our fiscal 2001 Annual Report. As you will see,
the financial results for fiscal 2001 reflect the continued growth of Sound
Federal in a prudent and disciplined fashion. During the year, we completed the
acquisition of Peekskill Financial Corporation. We are happy to report that the
integration of the two companies has gone very well. The Northern Westchester
market area is rapidly growing and we want to capture a share of this growth.
Our increased branch network also serves to strengthen Sound Federal's market
share in our traditional market area of lower Westchester County. As we consider
the future course of Sound Federal, our thoughts are always based in the context
of the history and experiences of our past. The Board of Directors, Management
and Staff of Sound Federal are proud of the role we have played in our
communities, in our customers' lives and for our stockholders.

As Sound Federal continues to grow, we have renewed our emphasis on the primary
reason our customers prefer us to a large bank - personal service. We understand
that personal service is what distinguishes Sound Federal from the competition
and that care and attention to details will help us to attract new customers and
continue to serve our existing customers.

This philosophy translates into a loyal customer base and a thriving business.
Here are some of this year's highlights:

      o     Earnings per share increased 16.7% to $0.56 per common share.
      o     Earnings per share before goodwill amortization was $0.72 per share
            as compared to $0.48 per share last year.
      o     We originated $88.7 million of loans, increasing the size of the
            loan portfolio to $293.8 million.
      o     Despite the strong loan growth over the last several years, we have
            maintained strong asset quality. Non-performing assets were $933,000
            at March 31, 2001 as compared to $1.0 million at March 31, 2000.
      o     Deposits of the Bank increased by $45.4 million, net of the deposits
            assumed as part of the Peekskill Acquisition. Total deposits are now
            $473.5 million compared to $275.8 million last year.
      o     We completed our first stock repurchase program and started our
            second repurchase program. As of March 31, 2001, we had acquired a
            total of 399,926 shares of the Company's common stock, thereby
            further strengthening the value of our stock.
      o     We signed a lease agreement for our ninth branch in Somers, New
            York. This location is in Northern Westchester County and will
            provide a platform from which to serve other communities in
            Westchester and Putnam counties and counties beyond.
      o     We formed a subsidiary - Mamaroneck Advisors, Inc. enabling us to
            offer investment products and services.

We also take pleasure in welcoming Eldorus Maynard who joined the Board of
Directors in July 2000. Dory was the Chairman of the Board of Peekskill
Financial Corporation. He has over forty years of experience in the banking
industry and his insights will be valuable to us.


                                       1
<PAGE>

In January 2001, several long-time employees retired. William H. Morel, Senior
Vice-President and Corporate Secretary retired after 31 years of service. Bill
was also responsible for residential lending. Coincidentally, David Dalrymple
joined us through the Acquisition and now leads our residential lending team.
MaryEllen Morel, Assistant Vice-President of Human Resources retired after 39
years of service. Gilda Salamone, Vice-President of Residential Lending also
retired after 35 years of service to the Bank. On behalf of the Board of
Directors, Officers and Staff of the Company, we thank each of these people for
their dedication and loyalty and wish them all the best in their retirement.

This year will also bring about the retirement of Arthur C. Phillips from the
Board of Directors, after 26 years of exemplary service. Arthur's dedication and
commitment to Sound Federal and, in particular, his expertise in accounting and
auditing matters, have made him invaluable to the Board of Directors and to the
implementation of Bank policy.

It was with great sadness that this year also saw the passing of Louis M. Klein,
Chairman Emeritus of the Board of Directors. Lou, a beloved community leader,
was an active member of the Board for 36 years and was a significant force in
the evolution and development of Sound Federal.

As we look to the future, it is our goal to achieve greater earnings growth,
increased market share and increased franchise value. The Company's business
plan is designed to continue the prudent and disciplined growth of the Company.
During fiscal year 2002, we plan to focus on the following:

      o     Continuing our stock repurchase program. Our stock price, which was
            trading below the initial public offering price for most of the
            year, ended the year at $10.00. We believe that Sound Federal's
            common stock is an attractive investment and thus far our stock
            repurchases have been accretive to earnings and to book value per
            share.
      o     Opening the Somers branch by the end of 2001. We expect to develop a
            market presence in Somers as well as in the surrounding communities.
            This branch is located less than a mile from the Putnam County
            border and we intend to establish a presence in these new markets.
      o     Continuing to increase our market share in Northern Westchester -
            primarily in the communities surrounding the branches received in
            the Acquisition.
      o     Developing the operations of Mamaroneck Advisors, Inc. The
            investment products and services that are offered through this
            subsidiary will provide the Company with fee income while moving
            Sound Federal closer to the goal of providing customers with
            one-stop financial services.
      o     Continuing to introduce new products and services. We have
            strengthened the sales ability and skills of our retail staff with
            the goal of attracting new customers. We believe that we can meet
            the financial needs of our local communities and exceed customer
            expectations.

As we all know, the stock market has been an unpleasant experience for most
people this year and economic growth is expected to be less robust in the coming
year than in the recent past. Despite all of the turmoil in the markets, the
performance of thrift stocks improved, including that of Sound Federal. The
fiscal year started with our stock trading at $8.625 and we closed the year at
$10.00 - hitting a high of $10.50 on March 21, 2001. We believe that by focusing
on the fundamentals of banking, we can accomplish our goals of revenue growth,
asset growth, increased market share and enhanced franchise value. We further
believe that achieving these goals will translate into the growth of stockholder
value. As always, be assured that everyone associated with Sound Federal is very
focused on these objectives. We believe that our stockholders will be rewarded
for their time and patience.

In closing, we wish to express our thanks to our stockholders and customers for
their continuing support and enthusiasm. And, of course, as is always the case,
our sincere thanks and continuing gratitude go to


                                       2
<PAGE>

our employees, whose dedication, ability, energy and competitiveness have
brought us to our present level of success and will assure our continued growth
and excellence.

We appreciate your investment and your confidence in Sound Federal.


      Richard P. McStravick                     Bruno J. Gioffre


                                       3
<PAGE>

Selected Consolidated Financial Information
(In thousands)

<TABLE>
<CAPTION>
                                                                At or for the Year Ended March 31,
                                          --------------------------------------------------------------------------------
                                           2001(1)            2000              1999              1998              1997
                                          --------------------------------------------------------------------------------
<S>                                       <C>               <C>               <C>               <C>               <C>
Results of Operations:

Net interest income ...................   $ 14,568          $ 10,668          $  9,312          $  8,875          $  8,720

Provision for loan losses .............        208               100               272               155               146

Non-interest income ...................        382               294               171               186               301

Contribution of common stock to
   Charitable Foundation (2) ..........         --                --             1,022                --                --

SAIF special assessment (3) ...........         --                --                --                --             1,232

Other non-interest expense ............     10,033             7,027             4,898             3,956             4,028
                                          --------          --------          --------          --------          --------
Income before income tax expense             4,709             3,835             3,291             4,950             3,615

Income tax expense ....................      2,050             1,443             1,350             2,065             1,325
                                          --------          --------          --------          --------          --------

Net income ............................   $  2,659          $  2,392          $  1,941          $  2,885          $  2,290
                                          ========          ========          ========          ========          ========

Financial Condition:

Total assets ..........................   $552,934          $332,344          $295,311          $254,749          $242,983

Loans, net ............................    293,807           180,932           143,536           128,558           121,617

Mortgage-backed securities:

   Available for sale .................    115,931            24,980            16,531                --                --

   Held to maturity ...................     25,177            32,210            41,739            53,421            52,901

Other securities:

   Available for sale .................     41,595            37,385            22,871             2,994             1,995

   Held to maturity ...................      3,038             3,448             3,851            11,477            10,452

Deposits ..............................    473,546           275,772           237,279           219,913           211,223

Equity ................................     56,929            52,689            54,984            31,901            29,017
                                          ========          ========          ========          ========          ========
</TABLE>


                                       4
<PAGE>

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

<TABLE>
<CAPTION>
                                                                    At or for the Year Ended March 31,
                                             --------------------------------------------------------------------------------
                                               2001(1)              2000            1999              1998               1997
                                             --------------------------------------------------------------------------------
<S>                                          <C>               <C>               <C>               <C>               <C>
Performance Ratios:

Return on average assets ..................       0.56%             0.77%             0.70%             1.16%             0.97%

Return on average equity ..................       4.89              4.48              4.53              9.47              8.17

Average interest rate spread (4) ..........       2.96              2.99              3.01              3.29              3.42

Net interest margin (5) ...................       3.26              3.55              3.51              3.69              3.78

Efficiency ratio (6) ......................      64.80             62.19             51.65             43.66             44.65

Per Common Share Data:

Basic and diluted earnings
per share (7) .............................  $    0.56         $    0.48         $    0.10                --                --

Basic and diluted earnings per share
before goodwill amortization ..............       0.72              0.48              0.10                --                --

Book value per share (8) ..................      11.83             10.53             10.55                --                --

Capital Ratios:

Equity to total assets (consolidated)            10.30%            15.85%            18.62%            12.52%            11.94%

Tier 1 leverage capital (Bank only) .......       6.35%            13.72%            14.76%            12.52%            11.94%

Asset Quality Data:

Total non-performing loans ................  $     933         $     969         $   1,091           $ 1,958         $   2,264

Total non-performing assets ...............      1,130             1,024             1,379             2,087             2,393
</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 Bank's share of a special assessment imposed on all
      financial institutions with deposits insured by the Savings Association
      Insurance Fund.
(4)   Represents the difference between the weighted-average yield on
      interest-earning assets and the weighted-average cost of interest-bearing
      liabilities.
(5)   Represents net interest income as a percent of average interest-earning
      assets.
(6)   Computed by dividing non-interest expense (other than the special charges
      described in (2) and (3) above) by the sum of net interest income and
      non-interest income.
(7)   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.
(8)   Computed based on total common shares issued, less treasury shares.


                                       5
<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, 2001, stockholders other than the Mutual
Holding Company held 2,001,782 shares, or 41.6% 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 and
New City, New York 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 Sound Federal Savings and Loan Association Charitable Foundation (the
"Charitable Foundation") was established to provide funding to support
charitable and not-for-profit causes and community development activities in the
Company's market area. The fair value of the Company's common shares contributed
to the Charitable Foundation ($1.0 million) was recognized as a charge to
non-interest expense at the contribution date (October 8, 1998).

      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, goodwill amortization 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.

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 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.


                                       6
<PAGE>

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 decreases in market interest rates, with no effect given to
any steps that management might take to counter the effect of interest rate
movements.


                                       7
<PAGE>

      The table below sets forth, as of March 31, 2001, the estimated changes in
the Bank's NPV that would result from the designated instantaneous changes in
interest rates.

                                                            Estimated Increase
               Changes in                                   (Decrease) in NPV(1)
             Interest Rates        Estimated                --------------------
             (basis points)           NPV                   Amount      Percent
             --------------           ---                   ------      -------
                                  (Dollars in thousands)

                 +300               $53,348               $(29,913)        (36)%
                 +200                63,713                (19,548)        (23)
                 +100                74,162                 (9,099)        (11)
                    0                83,621                     --          --
                 -100                88,457                  5,196           6
                 -200                90,150                  6,890           8
                 -300                92,227                  8,966          11

----------
(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, 2001, in the event of a 200
basis point decrease in interest rates, the Bank would be expected to experience
an 8% increase in NPV. In the event of a 200 basis point increase in interest
rates, the Bank would be expected to experience a 23% decrease in NPV. Since
March 31, 2001, 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.

Comparison of Financial Condition at March 31, 2001 and 2000

      At the time the Company completed the Acquisition, Peekskill had total
assets of $201.5 million and total deposits of $152.4 million. Principally as a
result of the Acquisition, the Company's total assets increased by $220.6
million to $552.9 million at March 31, 2001 from $332.3 million at March 31,
2000. The increase in total assets primarily reflects an $87.7 million increase
in mortgage-backed and other securities to $185.7 million, a $112.9 million
increase in net loans to $293.8 million and a $14.0 million increase in
goodwill. The Acquisition was accounted for using the purchase method and the
resulting goodwill is being amortized over 15 years.


                                       8
<PAGE>

      Total deposits amounted to $473.5 million at March 31, 2001, an increase
of $197.7 million compared to $275.8 million at March 31, 2000. Total
stockholders' equity increased $4.2 million to $56.9 million at March 31, 2001,
as compared to $52.7 million at March 31, 2000, primarily due to net income of
$2.7 million, an increase of $3.5 million in the after-tax net unrealized gain
on securities available for sale, a decrease of $329,000 in unvested awards of
the Company's common stock pursuant to the Recognition and Retention Plan
("RRP"), partially offset by a $1.8 million increase in treasury stock and the
declaration of cash dividends totaling $580,000.


                                       9
<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, 2001, 2000 and 1999.
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 in interest income.

<TABLE>
<CAPTION>
                                                                       For the Years Ended March  31,
                                     ----------------------------------------------------------------------------------------------
                                                   2001                            2000                            1999
                                     --------------------------------  ------------------------------  ----------------------------
                                                                        Average                        Average
                                       Average                           Out-                           Out-
                                     Outstanding            Average    standing             Average    standing            Average
                                       Balance   Interest  Yield/Rate   Balance  Interest  Yield/Rate  Balance  Interest  Yield/Rate
                                       -------   --------  ----------   -------  --------  ----------  -------  --------  ----------
                                                                       (Dollars in thousands)
<S>                                     <C>       <C>          <C>     <C>        <C>          <C>     <C>        <C>         <C>
Interest-earning assets:
  Loans(1) ...........................  $253,320  $ 19,837     7.83%   $162,753   $ 12,427     7.64%   $135,938   $ 11,040    8.12%
  Mortgage-backed securities(2) ......   114,185     8,194     7.18      56,951      3,353     5.89      54,070      3,277    6.06
  Other securities(2) ................    42,864     3,143     7.33      38,628      2,443     6.32      17,704        973    5.50
  Federal funds sold .................    25,769     1,577     6.12      27,855      1,472     5.28      43,877      2,302    5.25
  Certificates of deposit ............     5,836       437     7.47      11,316        654     5.78      10.850        658    6.06
  Other interest-earning assets ......     5,440       388     7.13       3,033        187     6.17       3,005        193    6.42
                                        --------  --------             --------   --------             --------   --------
    Total interest-earning assets ....   447,414    33,576     7.50     300,536   $ 20,536     6.83     265,444   $ 18,443    6.95
Noninterest earning assets ...........    28,225  --------               11,161   --------               10,735   --------
                                        --------                       --------                        --------
    Total assets .....................  $475,639                       $311,697                        $276,179
                                        ========                       ========                        ========

Interest-bearing liabilities:
  Passbook and club accounts .........  $ 94,032  $  2,420     2.57%   $ 60,144   $  1,245     2.07%   $ 60,573   $  1,493    2.46%
  Money market accounts ..............    26,849       631     2.35      18,929        510     2.69      19,810        541    2.73
  NOW and Super NOW accounts .........    32,658       470     1.44      24,232        370     1.53      22,333        428    1.92
  Certificates of deposit ............   249,145    14,487     5.81     151,511      7,696     5.08     125,615      6,595    5.25
  Borrowings .........................    12,030       927     7.71          86          8     9.30          87          7    8.05
  Other interest-bearing liabilities .     3,508        73     2.08       2,069         39     1.89       3,557         67    1.88
                                        --------  --------             --------   --------             --------   --------
    Total interest-bearing liabilities   418,222    19,008     4.54     256,971      9,868     3.84     231,975   $  9,131    3.94
Noninterest bearing liabilities ......     3,109  --------                1,366   --------                1,355   --------
                                        --------                       --------                        --------
    Total liabilities ................   421,331                        258,377                         233,330
Equity ...............................    54,308                         53,360                          42,849
                                        --------                       --------                        --------
    Total liabilities and equity .....  $475,639                       $311,697                        $276,179
                                        ========                       ========                        ========
Net interest income ..................            $ 14,568                        $ 10,668                        $  9,312
                                                  ========                        ========                        ========
Net interest rate spread(3) ..........                         2.96%                           2.99%                          3.01%
Net earning assets(4) ................  $ 29,192                       $ 43,565                        $ 33,469
                                        ========                       ========                        ========
Net interest margin(5) ...............                         3.26%                           3.55%                          3.51%
Ratio of interest-earning assets to
  interest-bearing liabilities .......      1.07x                          1.17x                           1.14x
</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)   Net interest rate spread represents the difference between the yield on
      average interest-earning assets and the cost of average interest-bearing
      liabilities.
(4)   Net earning assets represent total interest-earning assets less total
      interest-bearing liabilities.
(5)   Net interest margin represents net interest income divided by average
      total interest-earning assets.


                                       10
<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,
                                             -----------------------------------------------------------------------------------
                                                             2001 vs. 2000                              2000 vs. 1999
                                             --------------------------------------       --------------------------------------
                                              Increase (Decrease)                           Increase (Decrease)
                                                     Due to                 Total                 Due to                 Total
                                             -----------------------       Increase       -----------------------       Increase
                                              Volume          Rate        (Decrease)       Volume          Rate        (Decrease)
                                             --------       --------       --------       --------       --------       --------
                                                                                 (In thousands)
<S>                                          <C>            <C>            <C>            <C>            <C>            <C>
Interest-earning assets:
   Loans ..............................      $  7,093       $    317       $  7,410       $  2,072       $   (685)      $  1,387
   Mortgage-backed securities .........         3,974            867          4,841            170            (94)            76
   Other securities ...................           285            415            700          1,306            164          1,470
   Federal funds sold .................          (116)           221            105           (843)            13           (830)
   Certificates of deposit ............          (373)           156           (217)            27            (31)            (4)
   Other ..............................           169             32            201              1             (7)            (6)
                                             --------       --------       --------       --------       --------       --------

     Total interest-earning assets ....        11,032          2,008         13,040          2,733           (640)         2,093
                                             --------       --------       --------       --------       --------       --------

Interest-bearing liabilities:
   Passbook and club accounts .........           822            353          1,175            (11)          (237)          (248)
   Money market accounts ..............           191            (70)           121            (23)            (8)           (31)
   NOW and Super NOW accounts .........           123            (23)           100             34            (92)           (58)
   Certificates of deposit ............         5,553          1,238          6,791          1,321           (220)         1,101
   Other ..............................           730            223            953            (33)             6            (27)
                                             --------       --------       --------       --------       --------       --------

     Total interest-bearing liabilities         7,419          1,721          9,140          1,288           (551)           737
                                             --------       --------       --------       --------       --------       --------

Net interest income ...................      $  3,613       $    287       $  3,900       $  1,445       $    (89)      $  1,356
                                             ========       ========       ========       ========       ========       ========
</TABLE>

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 of


                                       11
<PAGE>

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%.


                                       12
<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 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 91.2% of total loans at March 31, 2001, are generally
evaluated on an aggregate or "pool" basis. In recent years, the Company's
allowance for loan losses was 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 $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.


                                       13
<PAGE>

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 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.

Comparison of Results of Operations for the Years Ended March 31, 2000 and 1999

Net Income

Net income was $2.4 million for the year ended March 31, 2000 as compared to
$1.9 million for fiscal 1999. The results for the fiscal year ended March 31,
1999 included a $1.0 million pre-tax charge related to the contribution of
102,200 shares of the Company's common stock to the Sound Federal Savings and
Loan Association Charitable Foundation (the "Charitable Foundation"). Excluding
the contribution to the Charitable Foundation, net income for fiscal 1999 would
have been approximately $2.5 million. The largest variations in operations
results for fiscal 2000, as compared to fiscal 1999 excluding the contribution
to the Charitable Foundation, were a $2.1 million increase in non-interest
expenses and a $1.4 million increase in net interest income.

Interest and Dividend Income

For the year ended March 31, 2000, interest income increased $2.1 million or
11.4% to $20.5 million as compared to $18.4 million for the year ended March 31,
1999. Average interest-earning assets increased $35.1 million to $300.5 million
in fiscal 2000 from $265.4 million in fiscal 1999. The increase in
interest-earning assets was partially offset by a 12 basis point decrease in the
average yield earned on total interest-earning assets to 6.83%.

Loans. Interest income on loans totaled $12.4 million for fiscal 2000 as
compared to $11.0 million for the prior year. This $1.4 million increase was due
to a $26.8 million increase in the average balance of loans to $162.8 million as
compared to $135.9 million in the prior year. This increase was partially offset
by a 48 basis point decrease in the average yield earned to 7.64%. The growth of
the loan portfolio is a result of the Company's efforts to expand its loan
products offered and markets served, as well as the strong demand for fixed rate
loans (the Company's primary mortgage loan product) during the period of
relatively low interest rates in 1998 and the first half of calendar 1999. The
low interest rates up to mid-1999 also created a strong market for home
purchases and the refinancing of existing mortgage loans in the Company's market
area. The Company originated $49.5 million of fixed rate residential mortgage
loans for the year ended March 31, 2000 as compared to $36.9 million in


                                       14
<PAGE>

the prior year. The new loan production and the refinancing activity were also
the primary reasons for the decrease in the yield earned on mortgage loans since
the rates on these loans are lower than those of the existing portfolio.

Mortgage-Backed Securities. Interest income on mortgage-backed securities
increased $76,000 to $3.4 million for the year ended March 31, 2000 as compared
to $3.3 million for the prior year. This increase was due to a $2.9 million
increase in the average balance of mortgage-backed securities to $57.0 million
partially offset by a 17 basis point decrease in the yield earned to 5.89%. At
March 31, 2000, mortgage-backed securities had a total carrying value of $57.2
million and included $51.6 million of adjustable rate securities. As a result of
the adjustable rate nature of these securities, they repriced to lower rates as
interest rates remained low during 1998 and the first half of calendar 1999. In
addition, principal prepayments resulted in the acceleration of the amortization
of premiums on these securities. This also reduced the yields earned on the
mortgage-backed securities portfolio. The recent increase in interest rates has
caused the yields earned on mortgage-backed securities to begin to increase.

Other Securities. Interest and dividend income earned on other securities
increased $1.5 million to $2.4 million for the year ended March 31, 2000 as
compared to $973,000 for the prior year. This increase was due to a $20.9
million increase in the average balance of other securities to $38.6 million and
an 82 basis point increase in the average yield earned to 6.32%. The increase in
the average balance was due to the investment of funds from deposit growth and
the Company's ongoing strategy to redeploy short-term liquid assets into higher
yielding loans and securities. The increase in the average yield reflects
purchases of securities in the rising interest rate environment during fiscal
2000.

Federal funds. Interest income on federal funds amounted to $1.5 million for the
year ended March 31, 2000 as compared to $2.3 million for the prior year. This
decrease was due to a $16.0 million decrease in the average balance of federal
funds to $27.9 million, partially offset by a 3 basis point increase in the
average yield earned to 5.28%. The decrease in the average balance of Federal
funds reflects the Company's ongoing strategy to redeploy short-term liquid
assets into higher yielding loans and securities. The increase in the average
yield reflects purchases of securities in the rising interest rate environment
during fiscal 2000.

Interest Expense

Interest expense increased $737,000 to $9.9 million as compared to $9.1 million
for the prior year. The average balance of interest-bearing liabilities for
these same periods increased $25.0 million to $257.0 million and the average
cost of these liabilities decreased 10 basis points to 3.84%. The increase in
the average balance of interest-bearing liabilities is due primarily to time
deposits at the Cos Cob, Greenwich branch that was opened in September 1999.

Interest expense on time deposits increased $1.1 million or 16.7% to $7.7
million for the year ended March 31, 2000 as compared to $6.6 million for the
prior year. This increase was due to a $25.9 million increase in the average
balance of time deposits to $151.5 million, partially offset by a 17 basis point
decrease in the average cost of these funds to 5.08%.

Total interest expense on other deposit accounts (passbook, club, money market
and NOW accounts) totaled $2.1 for fiscal 2000 as compared to $2.5 million for
the prior year. The average balance of these accounts was $103.3 million for the
current year as compared to $102.7 million for the prior year, and the overall
cost of these deposits was 2.06% and 2.40% for the respective years.

Net Interest Income

For the year ended March 31, 2000, net interest income increased $1.4 million or
14.6% to $10.7 million as compared to $9.3 million for the prior year. The
Company's interest rate spread was 2.99% for the year ended March 31, 2000 as
compared to 3.01% for the prior year. For those same periods, the net interest
margin was 3.55% and 3.51%, respectively. The relatively flat interest rate
spread in fiscal 2000 is a result of the general decrease in interest rates on
loans and securities, and the increase in time deposits which represented 59.0%
of


                                       15
<PAGE>

average interest-bearing liabilities for the year ended March 31, 2000 as
compared to 54.2% for the prior year. The comparatively low interest rates
during calendar 1998 and the first half of 1999 caused many homeowners to
refinance existing home mortgages and created demand for loans to purchase new
homes. Most customers opted for a fixed rate loan which is the Bank's primary
mortgage product. This resulted in overall growth of the loan portfolio, but
this growth was at lower interest rates than the average yield of the existing
loan portfolio. In addition, the low interest rates resulted in accelerated
prepayments of mortgage-backed securities. The cash flows from mortgage-backed
securities were also reinvested at lower rates than the existing securities
portfolio. The increases in interest rates since mid-1999 initially have
increased asset yields faster than the cost of interest-bearing liabilities.
However, over time, the difference in the yield earned on interest-earning
assets and the cost of funds is expected to diminish if interest rates continue
to rise.

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 89.2% of total loans at March 31, 2000 are generally
evaluated on an aggregate or "pool" basis. In recent years, the Company's
allowance for loan losses was 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 $100,000 and $272,000 for the years ended
March 31, 2000 and 1999, respectively. Charge-offs were $6,000 for the year
ended March 31, 2000 and $162,000 for the year ended March 31, 1999. The
allowance for loan losses amounted to $1.2 million at March 31, 2000 and $1.1
million at March 31, 1999, or approximately 0.65% and 0.76% of total loans,
respectively. Non-performing loans amounted to $969,000 or 0.53% of total loans
at March 31, 2000 as compared to $1.1 million or 0.75% of total loans at March
31, 1999.

Non-Interest Income

Non-interest income consists principally of service charges on deposit accounts,
late charges on loans and various other service fees. Non-interest income
totaled $294,000 and $171,000 for the years ended March 31, 2000 and 1999,
respectively. The amount for the year ended March 31, 2000 included net gains of
$102,000 on the sale of real estate owned.

Non-Interest Expense

Non-interest expense totaled $7.0 million for fiscal 2000 as compared to $5.9
million for the prior year. The $1.1 million increase was due primarily to
increases of $665,000 in compensation and benefits, $458,000 in occupancy and
equipment, $327,000 in advertising and promotion, and $593,000 in other
non-interest expenses. These increases totaling $2.0 million were partially
offset by the absence of the one-time $1.0 million contribution to the
Charitable Foundation which was made in fiscal 1999. The increases in
compensation and benefits are primarily due to RRP expense of $240,000, as well
as staff additions and normal salary increases. The increases in occupancy and
equipment expense and advertising and promotion expense are primarily due to the
new branches (Cos Cob and New City) and the remodeling of existing branches.
Other non-interest expense for fiscal 2000 includes $225,000 related to the
establishment of a real estate investment trust ("REIT") and operating costs
related to the new branches.

Income Tax Expense


                                       16
<PAGE>

For both of the years ended March 31, 2000 and 1999, income tax expense amounted
to $1.4 million, and the effective tax rates were 37.6% and 41.0%, respectively.
The lower effective rate in the current year primarily reflects the
implementation of the REIT.

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 2001, the Company
originated loans of $88.7 million and purchased securities of $28.9 million.
Cash paid in the Acquisition, net of Peekskill's cash acquired, was $33.9
million. In addition, cash outlays of $1.8 million were used to purchase the
Company's common stock during fiscal 2001. These disbursements were funded by
$45.5 million in principal payments, maturities and calls of securities, $21.9
million from the sale of securities classified as available for sale, $40.7
million in loan principal repayments and a $45.4 million increase in deposits.
During fiscal 2001, the Company sold $21.9 million of securities classified as
available for sale. 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.

      At March 31, 2001, the Company had outstanding $47.9 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,
2001, approximately $272.6 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, 2001 with tangible and leverage capital ratios of 6.4% and a total
risk-based capital ratio of 15.7% 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 Sound Federal Bancorp.


                                       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

      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 is 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. Accordingly, SFAS No. 133 is not expected to have any
impact on the Company's consolidated financial statements.

In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 140
supercedes and replaces the guidance in SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," and
rescinds SFAS No.127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No.125." SFAS No. 140 provides accounting and reporting standards
for securitization transactions involving financial assets, sales of financial
assets such as receivables, loans and securities, factoring transactions, wash
sales, servicing assets and liabilities, collateralized borrowing arrangements,
securities lending transactions, repurchase agreements, loan participations, and
extinguishment of liabilities. Certain provisions of this Statement including
relevant disclosures are effective for fiscal years ending after December 15,
2000 and have been incorporated into our consolidated financial statements. The
remaining provisions are effective for transfer transactions entered into after
March 31, 2001. SFAS No. 140 does not require restatement of prior periods. We
believe the implementation of SFAS No. 140 will not have a material impact on
our financial condition.

The FASB issued an exposure draft on February 14, 2001, "Business Combinations
and Intangible Assets," (the "Draft"), which is a limited revision of an
exposure draft on the same topic issued September 7, 1999. In the Draft, the
FASB indicated that the amortization of goodwill created in connection with
business combinations completed both before and after the effective date of any
final pronouncement would be discontinued. Should the Draft be formally
implemented, we anticipate it to be effective for the first quarter of fiscal
2002. At such time, we would cease recording goodwill amortization as an expense
on our consolidated statements of income. The goodwill amortization resulting
from the Acquisition amounts to approximately $984,000 annually, or
approximately $0.21


                                       18
<PAGE>

per common share, based on shares outstanding at March 31, 2001. The elimination
of goodwill amortization will increase our net income and earnings per share by
these amounts.


                                       19
<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, 2001 and 2000, 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, 2001.
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, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 2001 in conformity with accounting principles generally accepted
in the United States of America.


New York, New York                                          /s/ KPMG
April 27, 2001


                                       20
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                              At March 31,
                                                                                                        -------------------------
                                                                                                          2001            2000
                                                                                                          ----            ----
<S>                                                                                                     <C>             <C>
Assets

 Cash and due from banks .........................................................................      $   5,849       $   7,567
 Federal funds sold ..............................................................................         35,000          25,000
 Certificates of deposit .........................................................................          2,491          10,075
 Securities:
   Available for sale, at fair value (including $15,722 and $0 pledged as collateral for
   borrowings under repurchase agreements at March 31, 2001 and 2000, respectively)
   (Notes 4 and 9) ...............................................................................        157,526          62,365
   Held to maturity, at amortized cost (fair value of $28,317 and $34,799
   at March 31, 2001 and 2000, respectively) (Note 5) ............................................         28,215          35,658
                                                                                                        ---------       ---------
       Total securities ..........................................................................        185,741          98,023
                                                                                                        ---------       ---------
 Loans, net (Note 6):
   Mortgage loans ................................................................................        293,954         181,300
   Consumer loans ................................................................................          1,900             820
   Allowance for loan losses .....................................................................         (2,047)         (1,188)
                                                                                                        ---------       ---------
       Total loans, net ..........................................................................        293,807         180,932
                                                                                                        ---------       ---------

 Accrued interest receivable .....................................................................          3,448           2,116
 Federal Home Loan Bank stock ....................................................................          3,745           2,195
 Premises and equipment, net (Note 7) ............................................................          5,850           4,305
 Deferred income taxes (Note 10) .................................................................            373           1,386
 Goodwill (Note 2) ...............................................................................         13,970              --
 Other assets ....................................................................................          2,660             745
                                                                                                        ---------       ---------

       Total assets ..............................................................................      $ 552,934       $ 332,344
                                                                                                        =========       =========

Liabilities and Stockholders' Equity

  Liabilities:
    Deposits (Note 8) ............................................................................      $ 473,546       $ 275,772
    Borrowings (Note 9) ..........................................................................         14,698              86
    Mortgage escrow funds ........................................................................          4,486           2,765
    Accrued expenses and other liabilities .......................................................          3,275           1,032
                                                                                                        ---------       ---------
       Total liabilities .........................................................................        496,005         279,655
                                                                                                        ---------       ---------
  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; 5,212,218 shares issued) .......            521             521
     Additional paid-in capital ..................................................................         22,399          22,415
     Treasury stock, at cost (399,926 and 207,000 shares at March 31, 2001 and 2000, respectively)         (3,867)         (2,069)
     Common stock held by Employee Stock Ownership Plan ("ESOP") (Note 11) .......................         (1,297)         (1,489)
     Common stock awards under the Recognition and Retention Plan ("RRP") (Note 11) ..............           (392)           (721)
     Retained earnings ...........................................................................         37,313          35,234
     Accumulated other comprehensive income (loss), net of taxes (Note 14) .......................          2,252          (1,202)
                                                                                                        ---------       ---------
       Total stockholders' equity ................................................................         56,929          52,689
                                                                                                        ---------       ---------
       Total liabilities and stockholders' equity ................................................      $ 552,934       $ 332,344
                                                                                                        =========       =========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       21
<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY

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

<TABLE>
<CAPTION>
                                                                Years Ended March 31,
                                                          ---------------------------------
                                                            2001         2000         1999
                                                            ----         ----         ----
<S>                                                       <C>          <C>          <C>
Interest and Dividend Income

 Loans .............................................      $19,837      $12,427      $11,040
 Mortgage-backed and other securities ..............       11,337        5,796        4,250
 Federal funds sold and certificates of deposit ....        2,014        2,126        2,960
 Other earning assets ..............................          388          187          193
                                                          -------      -------      -------
 Total interest and dividend income ................       33,576       20,536       18,443
                                                          -------      -------      -------

Interest Expense

 Deposits (Note 8) .................................       18,008        9,821        9,057
 Borrowings (Note 9) ...............................          927            8            7
 Other interest-bearing liabilities ................           73           39           67
                                                          -------      -------      -------
 Total interest expense ............................       19,008        9,868        9,131
                                                          -------      -------      -------

 Net interest income ...............................       14,568       10,668        9,312
 Provision for loan losses (Note 6) ................          208          100          272
                                                          -------      -------      -------
 Net interest income after provision for loan losses       14,360       10,568        9,040
                                                          -------      -------      -------

Non-Interest Income

 Service charges and fees ..........................          354          192          171
 Gains on sales of real estate owned ...............           28          102           --
                                                          -------      -------      -------
 Total non-interest income .........................          382          294          171
                                                          -------      -------      -------

Non-Interest Expense
 Compensation and benefits (Note 11) ...............        4,653        3,419        2,754
 Occupancy and equipment ...........................        1,643          935          477
 Data processing service fees ......................          636          425          339
 Advertising and promotion .........................          599          498          171
 Goodwill amortization (Note 2) ....................          765           --           --
 Contribution of common stock to charitable
      foundation (Note 1) ..........................           --           --        1,022
 Other .............................................        1,737        1,750        1,157
                                                          -------      -------      -------
 Total non-interest expense ........................       10,033        7,027        5,920
                                                          -------      -------      -------

 Income before income tax expense ..................        4,709        3,835        3,291
 Income tax expense (Note 10) ......................        2,050        1,443        1,350
                                                          -------      -------      -------
 Net income ........................................      $ 2,659      $ 2,392      $ 1,941
                                                          =======      =======      =======

 Basic and diluted earnings per common share, for the
    period from date of conversion (Note 15) .......      $  0.56      $  0.48      $  0.10
                                                          =======      =======      =======
</TABLE>

See accompanying notes to consolidated financial statements.


                                       22
<PAGE>

SOUND FEDERAL BANCORP AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity For the Years Ended
March 31, 2001, 2000 and 1999 (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                           Common       Common
                                                                  Additional                Stock       Stock
                                                        Common     Paid-In     Treasury    Held By      Awards     Retained
                                                         Stock     Capital      Stock        ESOP      Under RRP   Earnings
                                                        --------   --------    --------    --------    ---------   --------
<S>                                                     <C>        <C>         <C>                     <C>         <C>
Balance at March 31, 1998 ...........................   $     --   $     --    $     --          --    $     --    $ 31.905

Net income ..........................................         --         --          --          --          --       1,941

Other comprehensive loss (Note 14) ..................         --         --          --          --          --          --

  Total comprehensive income ........................

Issuance of 5,212,218 common shares (Note 1) ........        521     22,439          --          --          --          --

Common shares purchased by ESOP (192,129)
  shares) ...........................................         --         --          --      (1,921)         --          --

ESOP shares allocated or committed to be released for
allocation ..........................................         --         (9)         --         240          --          --
                                                        --------   --------    --------    --------    --------    --------
Balance at March 31, 1999 ...........................        521     22,430          --      (1,681)         --      33,846

Net income ..........................................         --         --          --          --          --       2,392

Other comprehensive loss (Note 14) ..................         --         --          --          --          --          --

  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

Net income ..........................................         --         --          --          --          --       2,659

Other comprehensive income (Note 14) ................         --         --          --          --          --          --

  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
                                                        ========   ========    ========    ========    ========    ========

<CAPTION>
                                                        Accumulated
                                                           Other          Total
                                                       Comprehensive  Stockholders'
                                                            Loss         Equity
                                                         --------     ------------
<S>                                                      <C>           <C>
Balance at March 31, 1998 ...........................    $     (4)    $31,901

Net income ..........................................          --       1,941

Other comprehensive loss (Note 14) ..................        (128)       (128)
                                                                     --------
  Total comprehensive income ........................                   1,813

Issuance of 5,212,218 common shares (Note 1) ........          --      22,960

Common shares purchased by ESOP (192,129)
  shares) ...........................................          --      (1,921)

ESOP shares allocated or committed to be released for
allocation ..........................................          --         231
                                                         --------    --------
Balance at March 31, 1999 ...........................        (132)     54,984

Net income ..........................................          --       2,392

Other comprehensive loss (Note 14) ..................      (1,070)     (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 ...........................      (1,202)     52,689

Net income ..........................................          --       2,659

Other comprehensive income (Note 14) ................       3,454       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 ...........................    $  2,252    $ 56,929
                                                         ========    ========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       23
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                     Years Ended March 31,
                                                                          -----------------------------------------
                                                                             2001            2000            1999
                                                                             ----            ----            ----
<S>                                                                       <C>             <C>             <C>
Operating Activities

  Net income .......................................................      $   2,659       $   2,392       $   1,941
  Adjustments to reconcile net income to net
     cash provided by operating activities:
     Provision for loan losses .....................................            208             100             272
     Goodwill amortization .........................................            765              --              --
     Depreciation expense ..........................................            592             276             158
     ESOP and RRP expense ..........................................            505             417             231
     Deferred income tax expense (benefit) .........................          1,134            (112)           (200)
     Contribution of common stock to charitable foundation .........             --              --           1,022
     Other adjustments, net ........................................            913            (333)           (239)
                                                                          ---------       ---------       ---------
         Net cash provided by operating activities .................          6,776           2,740           3,185
                                                                          ---------       ---------       ---------

Investing Activities

    Purchases of securities:
      Available for sale ...........................................        (28,854)        (35,218)        (37,616)
      Held to maturity .............................................             --              --          (9,634)
    Proceeds from payments, maturities and calls of securities:
      Available for sale ...........................................         38,157           5,290             987
      Held to maturity .............................................          7,312           9,770          28,376
  Proceeds from sales of securities available for sale .............         21,888           5,221              --
  Disbursements for loan originations ..............................        (88,677)        (62,549)        (44,177)
  Principal collections on loans ...................................         40,683          24,974          28,397
  Net decrease in certificates of deposit ..........................          7,584             611             797
  Purchases of Federal Home Loan Bank stock ........................             --            (311)           (139)
  Cash paid in purchase acquisition, net of cash acquired ..........        (33,937)             --              --
  Purchases of premises and equipment ..............................           (669)         (2,646)           (541)
  Proceeds from sales of real estate owned .........................            286             459             237
                                                                          ---------       ---------       ---------
         Net cash used in investing activities .....................        (36,237)        (54,399)        (33,313)
                                                                          ---------       ---------       ---------
Financing Activities

  Net increase in deposits .........................................         45,413          38,493          17,366
  Repayment of borrowings ..........................................         (5,000)             --              --
  Net increase in mortgage escrow funds ............................           (292)            285             116
  Purchases of treasury stock ......................................         (1,798)         (2,069)             --
  Purchases of RRP shares ..........................................             --            (961)             --
  Payment of cash dividends on common stock ........................           (580)         (1,004)             --
  Net proceeds from common stock offering ..........................             --              --          20,017
                                                                          ---------       ---------       ---------
        Net cash provided by financing activities ..................         37,743          34,744          37,499
                                                                          ---------       ---------       ---------

  Increase (decrease) in cash and cash equivalents .................          8,282         (16,915)          7,371
  Cash and cash equivalents at beginning of year ...................         32,567          49,482          42,111
                                                                          ---------       ---------       ---------
  Cash and cash equivalents at end of year .........................      $  40,849       $  32,567       $  49,482
                                                                          =========       =========       =========

Supplemental Information

  Interest paid ....................................................      $  19,189       $   9,746       $   9,111
  Income taxes paid ................................................          1,552           1,510           1,623
  Loans transferred to real estate owned ...........................            290             124             586
                                                                          =========
   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


                                       24
<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.

      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
                                       --------------   --------------
       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
                                           =======         =======


                                       25
<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

      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 six full-service banking
      offices. A seventh 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.

      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.


                                       26
<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

      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.

      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.


                                       27
<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

      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.

      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.


                                       28
<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

      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 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.


                                       29
<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

(4)   Securities Available for Sale

      The following is a summary of securities available for sale at March 31,
      2001 and 2000:

<TABLE>
<CAPTION>
                                                                                            Gross Unrealized
                                                                         Amortized      -------------------------         Fair
                                                                           Cost          Gains           Losses           Value
                                                                           ----          -----           ------           -----
                                                                                             (In thousands)
<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
                                                                         =========      =========       =========       =========

March 31, 2000

Mortgage-backed securities guaranteed by:
  Ginnie Mae ......................................................      $  11,409      $       7       $    (181)      $  11,235
  Fannie Mae ......................................................          7,136             11            (102)          7,045
  Freddie Mac .....................................................          6,940              7            (247)          6,700
                                                                         ---------      ---------       ---------       ---------
                                                                            25,485             25            (530)         24,980
U.S. Government and agency securities .............................         35,891                         (1,474)         34,417
Mutual fund shares ................................................          3,000             --             (32)          2,968
                                                                         ---------      ---------       ---------       ---------

  Total ...........................................................      $  64,376      $      25       $  (2,036)      $  62,365
                                                                         =========      =========       =========       =========
</TABLE>

      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. Debt securities available for sale at March 31,
      2000 consisted of adjustable rate securities and fixed rate securities
      with amortized costs of $20.2 million and $41.2 million, and weighted
      average yields of 6.27% and 6.52%, respectively.

      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.
      There were no sales of securities available for sale during the year ended
      March 31, 1999.


                                       30
<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

      The following is a summary of the amortized cost and fair value of debt
      securities available for sale at March 31, 2001, with information on U.S.
      Government and agency securities shown by remaining term to contractual
      maturity. Actual maturities may differ from these amounts because certain
      issuers have the right to call or redeem their obligations prior to
      contractual maturity.

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

       Mortgage-backed securities ....................   $112,070      $115,931
       U.S. Government and agency securities due:
         Over one to five years ......................     12,000        12,030
         Over five to ten years ......................     11,190        11,220
         Over ten years ..............................     10,454        10,349
                                                         --------      --------

       Total .........................................   $145,714      $149,530
                                                         ========      ========

(5)   Securities Held to Maturity

      The following is a summary of securities held to maturity at March 31,
      2001 and 2000:

<TABLE>
<CAPTION>
                                                                               Gross Unrealized
                                                             Amortized      -----------------------        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
                                                              ========      ========       ========       ========

          March 31, 2000
          Mortgage-backed securities guaranteed by:
             Ginnie Mae ................................      $ 28,343      $     11       $   (613)      $ 27,741
             Fannie Mae ................................         3,827             1           (117)         3,711
             Freddie Mac ...............................            40            --             (2)            38
                                                              --------      --------       --------       --------
                                                                32,210            12           (732)        31,490
          U.S. Government and agency securities ........         3,448            --           (139)         3,309
                                                              --------      --------       --------       --------

             Total .....................................      $ 35,658      $     12       $   (871)      $ 34,799
                                                              ========      ========       ========       ========
</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, 2001, 2000 and 1999.


                                       31
<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

      The following is a summary of the amortized cost and fair value of
      securities held to maturity at March 31, 2001, with information on U.S.
      Government and agency securities shown by remaining term to contractual
      maturity. Actual maturities may differ from these amounts because certain
      issuers have the right to call or redeem their obligations prior to
      contractual maturity.

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

       Mortgage-backed securities ....................     $25,177      $25,282
       U.S. Government and agency securities due:
           Over five to ten years ....................       1,000        1,000
           Over ten years ............................       2,038        2,035
                                                           -------      -------

           Total .....................................     $28,215      $28,317
                                                           =======      =======

(6)   Loans

      A summary of loans at March 31 follows:

                                                            2001         2000
                                                            ----         ----
                                                             (In thousands)
       Mortgage loans:
         Residential properties:
             One-to-four family .......................   $221,617     $138,375
             Home equity lines of credit ..............     47,315       24,337
             Multi-family .............................      3,959        4,621
         Commercial properties ........................     16,771       10,795
         Construction loans ...........................      5,612        3,430
         Construction loans in process ................     (1,953)        (508)
         Deferred loan origination costs, net .........        633          250
                                                          --------     --------
                                                           293,954      181,300
                                                          --------     --------

       Consumer loans:
         Automobile loans .............................      1,154          467
         Secured personal loans .......................        719          265
         Other loans ..................................         27           88
                                                          --------     --------
                                                             1,900          820
                                                          --------     --------

             Total loans ..............................    295,854      182,120

       Allowance for loan losses ......................     (2,047)      (1,188)
                                                          --------     --------

             Total loans, net .........................   $293,807     $180,932
                                                          ========     ========

      Gross principal balances at March 31, 2001 consisted of fixed rate loans
      of $290.4 million and adjustable rate loans of $6.8 million, with weighted
      average yields of 7.72% and 7.55%, respectively. Fixed rate and adjustable
      rate loans at March 31, 2000 totaled $179.5 million and $2.9 million, with
      weighted average yields of 7.57% and 8.31%, respectively.


                                       32
<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

      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:

                                                    2001       2000       1999
                                                    ----       ----       ----
                                                         (In thousands)

      Balance at beginning of year ...........    $ 1,188    $ 1,094    $   984
      Provision for loan losses ..............        208        100        272
      Allowance transferred in Acquisition ...        784
      Charge-offs ............................       (162)        (6)      (162)
      Recoveries .............................         29         --         --
                                                  -------    -------    -------

      Balance at end of year .................    $ 2,047    $ 1,188    $ 1,094
                                                  =======    =======    =======

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

                                                2001        2000        1999
                                                ----        ----        ----
                                                       (In thousands)
      Mortgage loans:
        One-to-four family ................... $  855      $  869      $  769
        Home equity lines of credit ..........     78         100         308
      Consumer loans .........................     --          --          14
                                               ------      ------      ------

          Total nonaccrual loans ............. $  933      $  969      $1,091
                                               ======      ======      ======

      Gross interest income that would have been recorded if the foregoing
      nonaccrual loans had remained current in accordance with their contractual
      terms totaled $84,000, $87,000 and $76,000 for the years ended March 31,
      2001, 2000 and 1999, respectively, compared to interest income actually
      recognized of $49,000, $29,000 and $31,000, respectively.

      The Company had $105,000 of impaired loans at March 31, 2001 and none at
      March 31, 2000 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 $178,000 for the years ended
      March 31, 2001 (none in fiscal year 2000). Interest collections and income
      recognized on impaired loans (while such loans were considered impaired)
      were insignificant.

      Other assets at March 31, 2001 and 2000 include real estate owned
      properties with net carrying values of $197,000 and $55,000, respectively.
      Provisions for losses and other activity in the allowance for losses on
      real estate owned were insignificant during the years ended March 31,
      2001, 2000 and 1999.


                                       33
<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:

                                                              2001      2000
                                                              ----      ----
                                                              (In thousands)

      Land ...............................................  $   592   $   537
      Buildings and improvements .........................    4,241     3,403
      Leasehold improvements .............................    1,502       624
      Furniture and equipment ............................    2,006     1,640
                                                            -------   -------
                                                              8,341     6,204

      Less accumulated depreciation and amortization .....   (2,491)   (1,899)
                                                            -------   -------

          Premises and equipment, net ....................  $ 5,850   $ 4,305
                                                            =======   =======

(8)   Deposits

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

<TABLE>
<CAPTION>
                                                          2001                         2000
                                                 -----------------------      -----------------------
                                                     Rate        Amount           Rate        Amount
                                                     ----        ------           ----        ------
                                                                (Dollars in thousands)

<S>                                                  <C>        <C>               <C>        <C>
       Savings and club accounts .............       2.00%      $108,371          2.00%      $ 60,567
       Money market accounts .................       2.60         28,333          1.77         18,583
       NOW and Super NOW accounts ............       1.27         38,710          1.53         26,664
       Commercial checking ...................         --          2,390            --             --
                                                                --------                     --------
         Total ...............................       1.91        177,804          1.84        105,814
                                                                --------                     --------

       Certificates of deposit by remaining
           Term to contractual maturity:
           Within one year ...................       6.01        272,570          5.23        158,085
           After one but within three years...       5.41         20,619          5.69         10,653
           After three years .................       4.85          2,553          3.88          1,220
                                                                --------                     --------
         Total ...............................       5.96        295,742          5.25        169,958
                                                                --------                     --------

         Total deposits ......................       4.44%      $473,546          3.94%      $275,772
                                                                ========                     ========
</TABLE>

      Certificates of deposit with denominations of $100,000 or more totaled
      $56.2 million and $28.4 million at March 31, 2001 and 2000, respectively.

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

                                                       2001      2000      1999
                                                       ----      ----      ----
                                                            (In thousands)

      Passbook and club accounts ..................  $ 2,420   $ 1,245   $ 1,493
      Money market, NOW and Super NOW accounts ....    1,101       880       969
      Certificates of deposit .....................   14,487     7,696     6,595
                                                     -------   -------   -------

           Total ..................................  $18,008   $ 9,821   $ 9,057
                                                     =======   =======   =======


                                       34
<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.
      These repurchase agreements were assumed in the Acquisition. Securities
      repurchase agreements consist of the following at March 31, 2001 (dollars
      in thousands):

<TABLE>
<CAPTION>
                                                                       Amortized       Accrued
         Maturity Date                 Call Features             Rate     Cost         Interest
         -------------                 -------------             ----     ----         --------
                                                                         (dollars in thousands)
       <S>                    <C>                                <C>      <C>            <C>
       January 2008           Quarterly beginning January 2003   7.20%    $ 9,685        $104
       December 2008          Quarterly beginning November 2001  7.12%      4,927          20
                                                                          -------        ----
                                                                 7.17%    $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 with a carrying value of $6.0 million and mortgage-backed securities
      available for sale with a carrying value of $9.7 million. Accrued interest
      related to the respective securities was $140,000 and $51,000 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 $138.0 million at March 31, 2001, 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 $86,000 is included in borrowings in the
      consolidated balance sheets at March 31, 2001 and 2000. This advance bears
      interest at a fixed rate of 8.29% and matures in 2002.

(10)  Income Taxes

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

                                                     2001      2000      1999
                                                     ----      ----      ----
                                                         (In thousands)
        Federal:
             Current ...........................   $   705   $ 1,392   $ 1,207
             Deferred ..........................       969      (132)     (177)
                                                   -------   -------   -------
                                                     1,674     1,260     1,030
                                                   -------   -------   -------

        State:
             Current ...........................        58       163       343
             Deferred ..........................       318        20       (23)
                                                   -------   -------   -------
                                                       376       183       320
                                                   -------   -------   -------

        Total:
             Current ...........................       763     1,555     1,550
             Deferred ..........................     1,287      (112)     (200)
                                                   -------   -------   -------

                                                   $ 2,050   $ 1,443   $ 1,350
                                                   =======   =======   =======


                                       35
<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

      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>
                                                              2001        2000       1999
                                                              ----        ----       ----
                                                                (Dollars in thousands)

        <S>                                                 <C>         <C>        <C>
        Taxes at Federal statutory rate .................   $ 1,601     $ 1,304    $ 1,119
        State tax expense, net of Federal tax benefit ...       248         121        211
        Goodwill amortization ...........................       260          --         --
        Other reconciling items, net ....................       (59)         18         20
                                                            -------     -------    -------

        Actual income tax expense .......................   $ 2,050     $ 1,443    $ 1,350
                                                            =======     =======    =======

        Effective income tax rate .......................      43.5%       37.6%      41.0%
                                                            =======     =======    =======
</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>
                                                                                  2001     2000
                                                                                  ----     ----
                                                                                  (In thousands)
               <S>                                                               <C>      <C>
               Deferred tax assets:
                 Allowance for loan losses ...................................   $  788   $  473
                 Deferred compensation .......................................      243      235
                 Fair value adjustments related to the Acquisition:
                   Securities ................................................    1,042       --
                   Loans .....................................................      184       --
                   Pension ...................................................      294       --
                 Charitable contributions carried forward for tax purposes ...       --      191
                 Unrealized loss on securities available for sale ............       --      809
                 Other deductible temporary differences ......................      264      119
                                                                                 ------   ------
                      Total deferred tax assets ..............................    2,815    1,827
                                                                                 ------   ------

               Deferred tax liabilities:
                 Tax bad debt reserves in excess of base-year reserves .......      251      340
                 Unrealized gain on securities available for sale ............    1,560       --
                  Deferred loan costs ........................................      313       97
                 Fair value adjustments related to the Acquisition:
                    Buildings ................................................      138       --
                    FHLB advances ............................................      149       --
                 Other taxable temporary differences .........................       31        4
                                                                                 ------   ------
                      Total deferred tax liabilities .........................    2,442      441
                                                                                 ------   ------

               Net deferred tax asset ........................................   $  373   $1,386
                                                                                 ======   ======
</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, 2001 and 2000.

      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


                                       36
<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

      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 $5.2 million for
      Federal tax purposes and $8.7 million for State tax purposes at March 31,
      2001. 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 $2.4 million at March 31, 2001.

(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.

      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:

                                                             2001       2000
                                                             ----       ----
                                                              (In thousands)

          Change in benefit obligations:
            Beginning of year ...........................  $ 4,864    $ 5,301
            Benefit obligation assumed in Acquisition ...    2,803         --
            Service cost ................................      118         69
            Interest cost ...............................      554        343
            Actuarial (gain) loss .......................      433       (716)
            Benefits paid ...............................     (249)      (133)
                                                           -------    -------

            End of year .................................    8,523      4,864
                                                           -------    -------

          Change in fair value of plan assets:
            Beginning of year ...........................    4,420      4,412
            Assets received in Acquisition ..............    2,286         --
            Actual return on plan assets ................      437         64
            Employer contributions ......................      372         77
            Benefits paid ...............................     (249)      (133)
                                                           -------    -------
            End of year .................................    7,266      4,420
                                                           -------    -------

          Funded status at end of year ..................   (1,257)      (444)
          Unrecognized net actuarial loss ...............      708        345
          Unrecognized prior service cost ...............       --          9
          Unrecognized net transition obligation ........       12         19
                                                           -------    -------

          Accrued pension cost ..........................  $   537    $   (71)
                                                           =======    =======


                                       37
<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

      A discount rate of 7.25% and a rate of increase in future compensation
      levels of 4.75% were used in determining the actuarial present value of
      the projected benefit obligations at March 31, 2001 (8.00% and 5.50%,
      respectively, at March 31, 2000). The expected long-term rate of return on
      plan assets was 9.00% for 2001, 2000 and 1999.

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

                                                        2001     2000     1999
                                                        ----     ----     ----
                                                              (In thousands)

       Service cost .................................   $ 118    $  69    $  73
       Interest cost ................................     554      343      325
       Expected return on plan assets ...............    (547)    (394)    (367)
       Recognized net actuarial loss ................       2       27        9
       Amortization of prior service cost and net
         transition obligation ......................      21       53       53
                                                        -----    -----    -----

         Net periodic pension expense ...............   $ 148    $  98    $  93
                                                        =====    =====    =====

      Director Emeritus Plan

      The Company maintains a non-qualified, unfunded Director Emeritus Plan.
      The plan provides for lifetime payments to directors who reach emeritus
      status, in annual amounts equal to the compensation earned as a director
      at the time of retirement. 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 $704,000 and $554,000, respectively, at March 31,
      2001 ($681,000 and $633,000, respectively, at March 31, 2000). Total
      expense for this plan was $96,000, $94,000 and $143,000 for the years
      ended March 31, 2001, 2000 and 1999, 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. Savings plan expense was
      $49,000 for the year ended March 31, 1999.

      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.


                                       38
<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

      ESOP expense was $176,000, $178,000 and $231,000 for the years ended March
      31, 2001, 2000 and 1999, respectively. The fiscal 1999 expense consisted
      of (i) $185,000 attributable to the allocation of 19,213 shares to
      participants for the initial plan year ended December 31, 1998 and (ii)
      $46,000 attributable to 4,803 shares committed to be released to
      participants in the quarter ended March 31, 1999 with respect to the 1999
      plan year. The cost of the ESOP shares that have not yet been allocated or
      committed to be released to participants is deducted from stockholders'
      equity (129,700 shares with a cost of $1.3 million at March 31, 2001). The
      fair value of these shares was approximately $1.3 million at that date.

      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 has been 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. All of these options were outstanding at March 31, 2001, and 84,295
      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 $2.6 million, $0.54 and $0.54, respectively, for the
      year ended March 31, 2001 and $2.3 million, $0.46 and $0.46, respectively,
      for the year ended March 31, 2000.

      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, 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, 2001
      and 2000 were limited to loan origination commitments of $16.8 million and
      $12.3 million, respectively, and unused lines of credit (principally home
      equity lines) extended to customers of $31.1 million and $19.9 million,
      respectively. Substantially all of these commitments and lines of credit
      carry fixed interest rates and have been provided to customers within the


                                       39
<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

      Company's primary lending area described in Note 6. Fixed rate loan
      origination commitments at March 31, 2001 provide for interest rates
      ranging from 6.75% to 10.50%.

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

      Lease Commitments

      The Company is obligated under non-cancelable operating leases for four
      branch offices. Rent expense under these leases was $258,000, $176,000 and
      $75,000 for the years ended March 31, 2001, 2000 and 1999, respectively.
      Two of these branch offices were acquired in the Acquisition. In addition,
      the Company is obligated under an operating lease for a branch office
      scheduled to open in December 2001. At March 31, 2001, the future minimum
      rental payments under these lease agreements for the fiscal years ending
      March 31 are $297,000 in 2002, $336,000 in 2003, $303,000 in 2004,
      $306,000 in 2005, $310,000 in 2006, and a total of $2.7 million for 2007
      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.


                                       40
<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

      Management believes that, as of March 31, 2001 and 2000, 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. The decreases in
      the Bank's actual capital amounts and ratios at March 31, 2001 compared to
      March 31, 2000 are primarily attributable to the deduction of goodwill
      from regulatory capital and the increase in the Bank's total assets caused
      by the Acquisition.

      The following is a summary of the Bank's actual capital amounts and ratios
      as of March 31, 2001 and 2000, 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, 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

     March 31, 2000
     Tangible capital ...........   $ 45,786       13.7%   $  5,007        1.5%
     Tier I (core) capital ......     45,786       13.7      13,353        4.0    $ 16,690        5.0%
     Risk-based capital:
       Tier I ...................     45,786       32.9                              8,352        6.0
       Total ....................     46,909       33.7      11,136        8.0      13,920       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 and $394,000 were waived for the years ended March 31, 2001 and
      2000, 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, 2001, the Company had acquired 399,926
      shares of its common stock as treasury shares, at a total cost of
      approximately $3.9 million or an average of $9.67 per share.


                                       41
<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

      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 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 2001, 2000 and 1999 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>
                                                                          2001       2000       1999
                                                                          ----       ----       ----
                                                                                 (In thousands)
      <S>                                                                <C>        <C>        <C>
      Net unrealized holding gain (loss) arising during the period
        on securities available for sale .............................   $ 5,823    $(1,788)   $  (217)
      Related deferred income tax effect .............................    (2,369)       718         89
                                                                         -------    -------    -------

      Other comprehensive income (loss) ..............................   $ 3,454    $(1,070)   $  (128)
                                                                         =======    =======    =======
</TABLE>

      The Company's accumulated other comprehensive income, which is included in
      stockholders' equity, represents the net unrealized gain on securities
      available for sale as of March 31, 2001, net of the related deferred tax
      effect.

(15)  Earnings Per Share

      The following is a summary of the Company's EPS calculations for the
      years ended March 31, 2001 and 2000 and for the period ended March 31,
      1999. For purposes of computing basic EPS, net income applicable to common
      stock equaled net income for all periods.

<TABLE>
<CAPTION>
                                                                     2001           2000           1999
                                                                     ----           ----           ----
                                                                   (in thousands, except per share data)

         <S>                                                      <C>            <C>            <C>
         Net income .......................................       $  2,659       $  2,392       $    529(1)
                                                                  ========       ========       ========
         Weighted average common shares outstanding
           for computation of basic EPS (2) ...............          4,783          4,949          5,042
         Common-equivalent shares due to the dilutive
           effect of stock options and RRP awards (3) .....             --              2             --
                                                                  --------       --------       --------
         Weighted average common shares for
           computation of diluted EPS .....................          4,783          4,951          5,042
                                                                  ========       ========       ========
         Earnings per common share:
                  Basic ...................................       $   0.56       $   0.48       $   0.10
                  Diluted .................................           0.56           0.48           0.10
                                                                  ========       ========       ========
</TABLE>

--------------------

(1)   Represents net income for the six-month period subsequent to the
      Reorganization and Offering.
(2)   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.
(3)   Computed using the treasury stock method.


                                       42
<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

(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.

      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>
                                                             2001                          2000
                                                   ------------------------      -----------------------
                                                   Carrying         Fair         Carrying         Fair
                                                    Amount         Value          Amount         Value
                                                    ------         -----          ------         -----
                                                                       (In millions)
          <S>                                        <C>            <C>            <C>            <C>
          Financial assets:
            Cash and due from banks ........       $    5.8       $    5.8       $    7.6       $    7.6
            Federal funds sold .............           35.0           35.0           25.0           25.0
            Certificates of deposit ........            2.5            2.5           10.1           10.1
            Securities .....................          185.7          185.8           98.0           97.2
            Loans ..........................          293.8          299.4          180.9          177.2
            Accrued interest receivable ....            3.4            3.4            2.1            2.1
            FHLB stock .....................            3.7            3.7            2.2            2.2
          Financial liabilities:
            Savings certificate accounts ...          295.7          298.8          170.0          170.0
            Other deposit accounts .........          177.8          177.8          105.8          105.8
            Mortgage escrow funds ..........            4.5            4.5            2.8            2.8
            Borrowings .....................           14.7           15.5            0.1            0.1
                                                   ========       ========       ========       ========
</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.


                                       43
<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

      Loans

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

      Deposit Liabilities

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

      Borrowings

      The fair 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, 2001 and
      2000, the fair values of these instruments approximated the related
      carrying amounts which were not significant.

(17)  Parent Company Condensed Financial Statements

      Set forth below are the condensed balance sheets of Sound Federal Bancorp
      at March 31, 2001 and 2000, together with the related condensed statements
      of income and cash flows for each of the years in the two years ended
      March 31, 2001 and for the period from October 8, 1998 through March 31,
      1999.

<TABLE>
<CAPTION>

        Condensed Balance Sheets                             March 31, 2001     March 31, 2000
                                                             --------------     --------------
                                                                      (In thousands)

      <S>                                                        <C>                <C>
      Assets
        Interest-bearing deposits at subsidiary bank .....       $ 6,116            $ 8,240
        Loan receivable from ESOP ........................         1,345              1,537
        Investment in subsidiary bank ....................        50,468             44,584
        Other assets .....................................           704                556
                                                                 -------            -------
           Total assets ..................................       $58,633            $54,917
                                                                 =======            =======

        Liabilities ......................................       $ 1,704            $ 2,228
        Stockholder's Equity .............................        56,929             52,689
                                                                 -------            -------
           Total liabilities and stockholders' equity ....       $58,633            $54,917
                                                                 =======            =======

</TABLE>


                                       44
<PAGE>

                      SOUND FEDERAL BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                             Year Ended           Year Ended          Period Ended
Condensed Statements of Income                                             March 31, 2001       March 31, 2000       March 31, 1999
                                                                           --------------       --------------       --------------
<S>                                                                          <C>                 <C>                 <C>
Interest income ....................................................         $    345             $    410             $    143

Contribution of common stock to Charitable Foundation ..............               --                   --               (1,022)

Other expenses .....................................................              (77)                (221)                 (52)
                                                                             --------             --------             --------

Income (loss) before income taxes and equity in  undistributed
  earnings of subsidiary bank ......................................              268                  189                 (931)

Income tax expense (benefit) .......................................               56                   48                 (314)
                                                                             --------             --------             --------
Income (loss) before equity in undistributed earnings of
  subsidiary bank ..................................................              212                  141                 (617)

Equity in undistributed earnings of subsidiary bank ................            2,447                2,251                1,146
                                                                             --------             --------             --------
Net income .........................................................         $  2,659             $  2,392             $    529
                                                                             ========             ========             ========
     Condensed Statements of Cash Flows

     Operating Activities
     Net income ....................................................         $  2,659             $  2,392             $    529

     Adjustments to reconcile net income to net cash
        provided by (used in) operating activities:
     Equity in undistributed earnings of subsidiary bank ...........           (2,447)              (2,251)              (1,146)
     Contribution of common stock to the Charitable Foundation .....               --                   --                1,022
     Decrease (increase) in other assets ...........................             (148)                  12                 (568)
     Other .........................................................               (2)                 (70)                  40
                                                                             --------             --------             --------
     Net cash provided by (used in) operating activities ...........               62                   83                 (123)
                                                                             --------             --------             --------

     Investing Activities
     Purchase of subsidiary bank's common stock ....................               --                   --               (9,048)
     Funding of ESOP loan receivable ...............................               --                   --               (1,921)
     ESOP loan repayments ..........................................              192                  192                  192
                                                                             --------             --------             --------
     Net cash provided by (used in) investing activities ...........              192                  192              (10,777)
                                                                             --------             --------             --------

     Financing Activities
     Purchases of treasury stock ...................................           (1,798)              (2,069)                  --
     Payment of cash dividends on common stock .....................             (580)              (1,004)                  --
     Net proceeds from common stock offering, inclusive of ESOP
     shares ........................................................               --                   --               21,938
                                                                             --------             --------             --------
     Net cash (used in) provided by financing activities ...........           (2,378)              (3,073)              21,938
                                                                             --------             --------             --------
     Net (decrease) increase in cash and cash equivalents ..........           (2,124)              (2,798)              11,038

     Cash and cash equivalents at beginning of period ..............            8,240               11,038                   --
                                                                             --------             --------             --------

     Cash and cash equivalents at end of period ....................         $  6,116             $  8,240             $ 11,038
                                                                             ========             ========             ========
</TABLE>


                                       45
<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, 2001 and 2000:

<TABLE>
<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
                                                               ======    ======    ======    ======

<CAPTION>
                                                               First     Second    Third     Fourth
                                                              Quarter   Quarter   Quarter   Quarter
                                                              -------   -------   -------   -------
                                                              (In thousands, except per share data)
       Year Ended March 31, 2000
       -------------------------

   <S>                                                         <C>       <C>       <C>       <C>
   Interest and dividend income ...........................    $4,822    $4,940    $5,295    $5,479
   Interest expense .......................................     2,237     2,335     2,609     2,687
                                                               ------    ------    ------    ------
   Net interest income ....................................     2,585     2,605     2,686     2,792
   Provision for loan losses ..............................        25        25        25        25
   Non-interest income ....................................       130        51        46        67
   Other non-interest expense .............................     1,605     1,713     2,008     1,701
                                                               ------    ------    ------    ------
   Income (loss) before income tax expense ................     1,085       918       699     1,133
   Income tax expense .....................................       424       291       250       478
                                                               ------    ------    ------    ------
   Net income (loss) ......................................    $  661    $  627    $  449    $  655
                                                               ======    ======    ======    ======
   Basic and diluted earnings (loss) per common share .....    $ 0.13    $ 0.13    $ 0.09    $ 0.14
                                                               ======    ======    ======    ======
</TABLE>


                                       46
<PAGE>

Corporate Information

Headquarters

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

Transfer Agent

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

Annual Meeting

August 9, 2001 10:00 a.m.
Hyatt Regency Greenwich

Common Stock Information

The Company's common stock is traded on the Nasdaq National Market under the
symbol "SFFS". At March 31, 2001, the common stock was held by approximately 824
stockholders of record. Market prices and dividends for the indicated fiscal
quarters were as follows:

Quarter Ended           High        Low    Dividends
-------------           ----        ---    ---------

June 30, 1999         $ 9.500    $ 8.813    $  0.07
September 30, 1999     10.313      9.000       0.07
December 31, 1999       9.500      8.930       0.07
March 31, 2000          9.500      8.375       0.07
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

General Counsel

James Staudt, Esquire

Special Counsel

Luse Lehman 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

Investor Relations

Anthony J. Fabiano
Vice-President & Chief Financial Officer
Sound Federal Bancorp
300 Mamaroneck Avenue
Mamaroneck, New York 10543
914-670-0123

Annual Report on Form 10-K

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


                                       47
<PAGE>

Directors of the Company and the Bank

Bruno J. Gioffre, Chairman of the Board
Richard P. McStravick, President and Chief
    Executive Officer
Joseph Dinolfo
Donald Heithaus
Joseph A. Lanza
Eldorus Maynard
Arthur C. Phillips, Jr.
James Staudt

Branch Locations

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

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

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

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

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

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

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

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

Officers of the Company and the Bank

Richard P. McStravick, President and Chief Executive Officer
Anthony J. Fabiano, Vice-President and Chief Financial Officer

Officers of the Bank

Accounting

Michael J. Ceruzzi, Controller
Terri Anne Stollmer, Assistant Controller

Branches

Robert V. Galante, Assistant Vice-President
Heather Moloney, Assistant Vice-President
Sylvia Astrologo, Assistant Treasurer
Henry Benvenuto, Assistant Treasurer
Michael Bulgia, Assistant Treasurer
Doreen Leonard, Assistant Treasurer

Branch Operations

Sheila V. Torpey, Assistant Vice-President
Sara Ricci, Assistant Treasurer

Business Development

Vito LaRusso, Vice-President
William J. LaCalamito, Vice-President

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

Security Officer

Raymond M. Bennett, Assistant Treasurer

Audit

Charles Zivian, Senior Internal Auditor



                                       48