EXHIBIT 13

                       2006 ANNUAL REPORT TO STOCKHOLDERS

<PAGE>

Selected Consolidated Financial Information
(In thousands)

<TABLE>
<CAPTION>
                                                                                 At or for the Years Ended March 31,
-----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)                               2006          2005          2004          2003         2002
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>           <C>           <C>           <C>           <C>
Results of Operations:

Net interest income                                              $   26,821    $   26,423    $   26,192    $   25,839    $   18,906

Provision for loan losses                                               300           300           275           275           175

Non-interest income                                                   1,855         1,447         1,041           890           731

Non-interest expense                                                 21,209        18,568        16,106        12,709        10,316
-----------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense                                      7,167         9,002        10,852        13,745         9,146

Income tax expense                                                    3,003         3,533         4,234         5,219         3,376
-----------------------------------------------------------------------------------------------------------------------------------
Net income                                                       $    4,164    $    5,469    $    6,618    $    8,526    $    5,770
===================================================================================================================================
Financial Condition:

Total assets                                                     $1,169,591    $1,006,950    $  890,541    $  796,088    $  623,985

Loans, net                                                          741,589       560,751       478,455       427,684       418,368

Mortgage-backed securities:

      Available for sale                                            140,053       199,745       255,853       212,484       104,134

      Held to maturity                                               65,303        59,777            --            --            --

Other securities:

      Available for sale                                             75,402        76,409        81,877        82,564        46,097

      Held to maturity                                               45,943        19,712            --            --            --

Deposits                                                          1,003,691       831,768       708,330       604,260       519,905

Borrowings                                                           28,000        38,000        35,000        35,000        34,922

Stockholders' equity                                                128,686       127,160       137,059       138,321        61,015

Performance Ratios:
Return on average assets                                               0.38%         0.57%         0.79%         1.23%         1.01%
Return on average equity                                               3.26          4.23          4.87         10.50          9.85
Average interest rate spread (1)                                       2.29          2.69          2.98          3.71          3.31
Net interest margin (2)                                                2.57          2.91          3.24          3.93          3.51
Efficiency ratio (3)                                                  72.90         66.85         59.14         47.65         52.72
Dividend payout ratio (4)                                             79.17         51.06         40.74         20.90         22.22
Per Common Share Data:
Basic earnings per share                                         $     0.36    $     0.47    $     0.54    $     0.67    $     0.45
Diluted earnings per share                                             0.35          0.46          0.52          0.65          0.44
Book value per share (5)                                              10.43         10.27         10.40         10.44          4.62
Tangible book value per share (5)                                      9.30          9.15          9.34          9.39          3.56
Dividends per share                                                   0.285          0.24          0.22          0.14          0.10
Capital Ratios:
Average equity to average total assets (consolidated)                 11.70%        13.59%        16.15%        11.68%        10.26%
Tier 1 leverage capital at end of period (Bank only)                   9.34         10.26         10.92         11.29          6.54
Asset Quality Data:
Total non-performing loans                                       $    2,893    $      580    $    1,981    $      477    $      755
Total non-performing assets                                           2,893           580         1,981           477           869
===================================================================================================================================
</TABLE>

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

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

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

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

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


                                       1
<PAGE>

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

General

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

      On February  8, 2006 the Company  entered  into an  Agreement  and Plan of
Merger (the "Merger Agreement") pursuant to which it would be acquired by Hudson
City Bancorp,  Inc.  ("Hudson  City").  Shareholders of the Company will receive
$20.75 in cash for each share of Sound Federal  Bancorp,  Inc. common stock they
own. The  acquisition  is subject to the receipt of regulatory  and  shareholder
approvals.  It is expected  that the  acquisition  will be completed  during the
Company's second fiscal quarter.

Forward-Looking Statements

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

Critical Accounting Policies

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


                                       2
<PAGE>

Management of Market Risk

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

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

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

      The table below sets forth, as of March 31, 2006, the estimated changes in
the Bank's  NPV and NII that  would  result  from the  designated  instantaneous
changes in  interest  rates.  The  interest  rate  changes  are assumed to occur
uniformly across the yield curve.

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

     +300         $ 47,925     $(81,767)         (63.0)%        (27.6)%
     +200           78,449      (51,243)         (39.5)         (18.0)
     +100          105,856      (23,836)         (18.4)          (8.7)
      0            129,692           --             --             --

     -100          148,302       18,610           14.3            7.3
     -200          159,208       29,516           22.8           10.7
     -300          167,749       38,057           29.3            9.2

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

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


                                       3
<PAGE>

      The above table  indicates  that at March 31, 2006,  in the event of a 100
basis point  decrease in interest  rates,  we would expect to experience a 14.3%
increase  in NPV and a 7.3%  increase  in NII. In the event of a 200 basis point
increase in interest  rates,  we would expect to experience a 39.5%  decrease in
NPV and an 18.0% decrease in NII.  Subsequent to March 31, 2006, there have been
no  significant  changes  in our  interest  rate  risk  exposures  or how  those
exposures would be managed.

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

Comparison of Financial Condition at March 31, 2006 and 2005

Assets.

      The Company's  total assets  amounted to $1.2 billion at March 31, 2006 as
compared  to $1.0  billion at March 31,  2005.  The $162.6  million  increase in
assets  primarily  consisted of a $180.8 million increase in net loans to $741.6
million,  partially  offset by a decrease in total  securities of $28.9 million.
Our asset growth was funded principally by a $171.9 million increase in deposits
to $1.0 billion.

Liabilities.

      Total  deposits were $1.0 billion at March 31, 2006, an increase of $171.9
million as compared to $831.8 million at March 31, 2005. Certificates of deposit
increased $170.3 million to $723.2 million from $552.9 million; savings and club
accounts  decreased  $20.9 million to $129.6  million from $150.5  million;  and
money market,  NOW and commercial  checking accounts  increased $22.5 million to
$150.9  million  from  $128.4  million.  The  increase  in  deposits,  primarily
certificates of deposits,  reflects deposit growth in two branches opened during
the fourth quarter of fiscal 2005 as well as growth in our existing branches. We
have used our  certificates  of  deposit  product  as a  promotional  product to
attract new customers to our branches. Borrowings totaled $28.0 million at March
31, 2006 and $38.0 million at March 31, 2005.

Stockholders' Equity.

      Total  stockholders'  equity  increased  $1.5 million to $128.7 million at
March 31, 2006 as compared to $127.2  million at March 31,  2005.  The  increase
reflects net income of $4.2 million and total  increases of $3.2 million related
to stock options, stock awards and ESOP shares, partially offset by common stock
repurchases  at a cost of $1.4  million,  dividends  paid of $3.3 million and an
increase of $1.2 million in the accumulated other comprehensive loss.

      The accumulated other comprehensive loss of $3.9 million at March 31, 2006
represents  the after-tax net unrealized  loss on securities  available for sale
($6.5  million  pre-tax).  The  Company  invests  primarily  in  mortgage-backed
securities  issued by Ginnie Mae,  Fannie Mae and  Freddie  Mac, as well as U.S.
Government and Agency  securities.  The unrealized losses at March 31, 2006 were
caused by increases in market yields subsequent to purchase.  There were no debt
securities past due or securities for which the Company currently believes it is
not probable that it will collect all amounts due  according to the  contractual
terms of the  security.  Because  the Company has the ability and intent to hold
securities with unrealized losses until a market price recovery (which, for debt
securities may be until maturity), the Company did not consider these securities
to be other-than-temporarily impaired at March 31, 2006.


                                       4
<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, 2006, 2005 and 2004.
The table reflects the average yield on interest-earning  assets and the average
cost of  interest-bearing  liabilities  (derived by dividing  interest income or
expense   by  the  daily   average   balance  of   interest-earning   assets  or
interest-bearing  liabilities,  respectively),  as  well  as the  net  yield  on
interest-earning  assets. No tax-equivalent  yield adjustments were made, as the
effect  thereof  was  not  material.  Nonaccrual  loans  were  included  in  the
computation of average  balances and therefore have a zero yield. The yields set
forth below include the effect of deferred loan  origination fees and costs, and
purchase  discounts  and  premiums  that are  amortized  or accreted to interest
income.  Interest  income on loans for fiscal years 2006, 2005 and 2004 has been
reduced by  amortization  of net deferred  loan  origination  costs of $408,000,
$568,000  and  $981,000,   respectively.   Interest  income  on  mortgage-backed
securities  has been  reduced  by  amortization  of  purchase  premiums  (net of
discounts)  of $701,000,  $1.1  million and  $631,000 for those same  respective
years.

<TABLE>
<CAPTION>
                                                                    For the Years Ended March 31,
                              ------------------------------------------------------------------------------------------------------
                                             2006                               2005                                2004
                              ------------------------------------------------------------------------------------------------------
                                Average              Average      Average                Average     Average                 Average
                              Outstanding             Yield/    Outstanding               Yield/   Outstanding                Yield/
(Dollars in thousands)          Balance    Interest   Rate        Balance     Interest    Rate       Balance      Interest     Rate
------------------------------------------------------------------------------------------------------------------------------------
<S>                           <C>           <C>       <C>        <C>           <C>        <C>       <C>            <C>         <C>
Interest - earning assets:
Loans (1)                     $  658,776    37,395    5.68%      $  521,558    29,430     5.64%     $  442,466     26,819      6.06%
Mortgage-backed
  securities (2)                 232,722     8,674    3.73%         259,897     9,058     3.49%        243,952      8,909      3.65%
Other securities (2)             111,772     4,087    3.66%          91,725     2,940     3.21%         85,868      2,629      3.06%
Federal funds sold and
  other overnight
  deposits (3)                    32,807       972    2.96%          28,702       340     1.18%         30,283        240      0.79%
Other (4)                          5,638       313    5.55%           5,850       132     2.26%          5,460        142      2.60%
                              --------------------               --------------------               ---------------------
Total interest - earning
  assets                       1,041,715    51,441    4.94%         907,732    41,900     4.62%        808,029     38,739      4.79%
                                            ------                             ------                              ------
Non-interest - earning
  assets                          48,391                             44,608                             33,941
                              ----------                         ----------                         ----------
Total assets                  $1,090,106                         $  952,340                         $  841,970
                              ==========                         ==========                         ==========

Interest - bearing
  liabilities:
Savings and club accounts     $  139,356       767    0.55%      $  151,077       783     0.52%     $  143,926        856      0.59%
Money market accounts             39,982       497    1.24%          46,216       372     0.80%         45,923        375      0.82%
NOW accounts                      68,159       369    0.54%          59,876       154     0.26%         53,420        172      0.32%
Certificates of deposit          641,465    21,574    3.36%         503,695    12,659     2.51%        405,837      9,601      2.37%
Borrowings                        35,233     1,390    3.95%          37,268     1,489     4.00%         39,208      1,495      3.81%
Mortgage escrow funds              5,207        23    0.44%           4,282        20     0.47%          3,800         48      1.26%
                              --------------------               --------------------               ---------------------
Total interest - bearing
  liabilities                    929,402    24,620    2.65%         802,414    15,477     1.93%        692,114     12,547      1.81%
                                            ------                             ------                              ------
Non - interest-bearing
  liabilities                     33,129                             20,531                             13,910
                              ----------                         ----------                         ----------
Total liabilities                962,531                            822,945                            706,024
Stockholders' equity             127,575                            129,395                            135,946
                              ----------                         ----------                         ----------
Total liabilities and
  stockholders' equity        $1,090,106                         $  952,340                         $  841,970
                              ==========                         ==========                         ==========
Net interest income                         26,821                             26,423                              26,192
                                            ======                             ======                              ======
Average interest rate
  spread (5)                                          2.29%                               2.69%                                2.98%
Net earning assets (6)        $  112,313                         $  105,318                         $  115,915
                              ==========                         ==========                         ==========
Net interest margin (7)                               2.57%                               2.91%                                3.24%
Ratio of interest -
  earning assets to
  interest - bearing
  liabilities                       1.12x                              1.13x                              1.17x
</TABLE>

(1)   Balances are net of the allowance for loan losses.

(2)   Average outstanding balances are based on amortized cost. As a result, the
      average  balances  and yields do not include the effect of changes in fair
      value of securities available for sale.

(3)   Other overnight deposits represent an  interest-earning  demand account at
      the Federal Home Loan Bank of New York.

(4)   Consists primarily of Federal Home Loan Bank Stock.

(5)   Net interest rate spread  represents the  difference  between the yield on
      average interest-earning assets and the cost of average interest - bearing
      liabilities.

(6)   Net earning assets  represent  total  interest-  earning assets less total
      interest - bearing liabilities.

(7)   Net interest  margin  represents  net interest  income  divided by average
      total interest - earning assets.


                                       5
<PAGE>

Rate/Volume Analysis

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

<TABLE>
<CAPTION>
                                                                                   For the Years Ended March 31,
                                                          --------------------------------------------------------------------------
                                                                     2006 vs. 2005                          2005 vs. 2004
                                                          -----------------------------------    -----------------------------------
                                                           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                                                     $ 7,756      $   209      $ 7,965      $ 4,560      $(1,949)     $ 2,611
Mortgage-backed securities                                   (984)         600         (384)         556         (407)         149
Other securities                                              699          448        1,147          181          130          311
Federal funds and other overnight deposits                     54          578          632          (13)         113          100
Other                                                          (5)         186          181           10          (20)         (10)
                                                          --------------------------------------------------------------------------

Total interest-earning assets                               7,520        2,021        9,541        5,294       (2,133)       3,161
                                                          --------------------------------------------------------------------------

Interest-bearing liabilities:
Savings and club accounts                                     (61)          45          (16)          38         (111)         (73)
Money market accounts                                         (56)         181          125            3           (6)          (3)
NOW accounts                                                   25          190          215           18          (36)         (18)
Certificates of deposit                                     3,983        4,932        8,915        2,456          602        3,058
Borrowings                                                    (80)         (19)         (99)         (77)          71           (6)
Mortgage escrow funds                                           4           (1)           3            5          (33)         (28)
                                                          --------------------------------------------------------------------------

Total interest-bearing liabilities                          3,815        5,328        9,143        2,443          487        2,930
                                                          --------------------------------------------------------------------------

Net interest income                                       $ 3,705      $(3,307)     $   398      $ 2,851      $(2,620)     $   231
                                                          ==========================================================================
</TABLE>


                                       6
<PAGE>

Comparison of Results of Operations for the Years Ended March 31, 2006 and 2005

      Net Income.  Net income  amounted to $4.2 million or diluted  earnings per
share of $0.35 for the year ended March 31, 2006, as compared to $5.5 million or
diluted  earnings  per  share of $0.46 for the year  ended  March  31,  2005,  a
decrease of $1.3  million or 23.9% in net income.  Operating  results for fiscal
2006 included $541,000 of merger-related  costs in connection with the Company's
announced merger with Hudson City. The decrease in net income for the year ended
March  31,  2006  is  primarily  attributable  to a  $2.6  million  increase  in
non-interest expense,  including the merger-related  costs,  partially offset by
increases of $408,000 in  non-interest  income,  $398,000 in net interest income
and a $530,000 decrease in income tax expense.

      Interest  Income.  Interest income increased $9.5 million to $51.4 million
for the year ended March 31,  2006,  as  compared to $41.9  million for the year
ended March 31, 2005. The increase reflects a $134.0 million increase in average
interest-earning  assets to $1.0 billion during the year ended March 31, 2006 as
compared to $907.7  million for the prior year and a 32 basis point  increase in
the  average  yield on  interest-earning  assets to 4.94%.  The  increase in the
average balance of interest-earning assets was due primarily to a $137.2 million
increase in the average balance of net loans to $658.8 million, partially offset
by a $7.1 million  decrease in the average balance of total securities to $344.5
million. The increase in average  interest-earning assets was funded principally
by deposit growth in the Bank's  branches.  The increase in the average yield on
interest-earning assets reflects the purchase of securities at higher rates than
the existing  portfolio and increased yields earned on Federal funds as a result
of recent increases in short-term market interest rates.

      Loans. Interest income on loans increased $8.0 million, or 27.1%, to $37.4
million  for the year ended  March 31,  2006 as  compared  to $29.4  million for
fiscal 2005.  This increase is due to a $137.2  million  increase in the average
balance of loans to $658.8  million  and a 4 basis  point  increase in the yield
earned to 5.68%.  While  short-term  interest rates have increased,  longer-term
interest rates remained substantially unchanged during fiscal 2006. The interest
rates on loan products are typically based on longer-term  interest rates,  such
as the  10-year  Treasury  bond.  As a  result,  the  rates  on  mortgage  loans
originated during fiscal 2006 remained substantially unchanged. Loans originated
during the year ended March 31, 2006  amounted to $303.6  million.  If long-term
market  interest  rates  increase,  our average yield on loans should  increase,
however loan  originations may decrease which would result in slower growth or a
decrease in the loan portfolio.

      Mortgage-Backed   and  Other  Securities.   Interest  on   mortgage-backed
securities totaled $8.7 million for the year ended March 31, 2006, a decrease of
384,000 from fiscal 2005. The decrease is due to a $27.2 million decrease in the
average  balance of  mortgage-backed  securities  to $232.7  million,  partially
offset by a 24 basis point increase in the average yield to 3.73%.  The increase
in the average  yield is due  primarily  to rising  short-term  interest  rates.
Mortgage-backed  securities with adjustable  rates amounted to $113.0 million or
55.0% of total mortgage-backed  securities at March 31, 2006. The interest rates
on these  securities  typically adjust using an index that is based on the yield
of the 1-year Treasury bill.

      Interest on other  securities  increased  $1.2 million to $4.1 million for
the year ended March 31, 2006, as compared to $2.9 million for fiscal 2005.  The
increase is due to a $20.0  million  increase  in the  average  balance of other
securities to $111.8  million and a 45 basis point increase in the average yield
to 3.66%.  The  increase  in both the average  balance and the average  yield of
other  securities  is due  primarily  to recent  purchases  of bonds,  issued by
Government-sponsored  entities,  with  maturity or call dates of less than three
years. As a result of recent increases in market interest rates in this maturity
timeframe,  securities  purchased  during  fiscal 2006 have been at higher rates
than the existing portfolio.

      Federal Funds Sold and Other Overnight Deposits.  For the year ended March
31, 2006,  interest on Federal funds sold and other overnight deposits increased
$632,000 to $972,000, reflecting a 178 basis point increase in the average yield
to 2.96%,  and a $4.1 million  increase in the average balance to $32.8 million.
The  increase  in the  average  yield is a result of  increases  by the  Federal
Reserve in the Federal funds rate.


                                       7
<PAGE>

      Other Earning  Assets.  Other earning assets consist  primarily of FHLB of
New York common  stock.  Dividends on FHLB of New York common stock  amounted to
$299,000 for year ended March 31, 2006 as compared to $126,000 for fiscal 2005.

      Interest  Expense.  Interest  expense  for the year ended  March 31,  2006
increased  $9.1 million to $24.6  million,  as compared to $15.5 million for the
year ended March 31, 2005. The average balance of  interest-bearing  liabilities
increased  $127.0 million to $929.4 million during the year ended March 31, 2006
as compared to $802.4  million for fiscal 2005,  while the average cost of these
liabilities  increased  72 basis  points to 2.65%.  The  increase in the average
balance of  interest-bearing  liabilities  includes  deposit  growth in the most
recently  opened  branches  as well as  growth  in the  existing  branches.  The
increase in the average cost of liabilities is a result of increasing short-term
market interest rates and an increase in  certificates of deposit  accounts as a
percentage of total  deposits.  The average  balance of  certificates of deposit
represented 69.0% of the average balance of total  interest-bearing  liabilities
for the year  ended  March 31,  2006,  as  compared  to 62.8% for  fiscal  2005.
Certificates  of deposit  are  generally  offered at higher  rates than  savings
accounts  and we have used these  accounts to attract  customers to our recently
opened branch locations.

      Interest  expense on certificates of deposit amounted to $21.6 million for
the year ended March 31,  2006 as  compared to $12.7  million for the year ended
March 31, 2005.  The increase is due primarily to a $137.8  million  increase in
the average balance to $641.5 million from $503.7 million, and an 85 basis point
increase in the average cost of certificates of deposit to 3.36%.

      Interest on savings accounts amounted to $767,000 for the year ended March
31,  2006 as  compared  to  $783,000  for the year ended  March 31,  2005.  This
decrease is the result of an $11.7  million  decrease in the average  balance of
savings accounts to $139.4 million for the year ended March 31, 2006 as compared
to $151.1  million for fiscal 2005,  while the average cost of savings  accounts
increased 3 basis points to 0.55%.

      Interest expense on NOW and money market accounts amounted to $866,000 for
fiscal 2006 as compared to $526,000 for fiscal  2005.  The average cost of these
deposits  increased  30 basis  points to 0.80% and the average  balance of these
accounts increased $2.0 million to $108.1 million.

      For fiscal 2006,  interest expense on borrowings  amounted to $1.4 million
as compared to $1.5 million for fiscal 2005.  The average  balance of borrowings
decreased to $35.2  million for fiscal 2006 as compared to $37.3 million for the
prior year. The average cost of borrowings decreased 5 basis points to 3.95%.

      Net Interest Income. Net interest income for the year ended March 31, 2006
increased  $398,000 to $26.8  million as compared to $26.4 million for the prior
year. The net interest rate spread was 2.29% and 2.69% for the years ended March
31,  2006 and  2005,  respectively.  The net  interest  margin  for  those  same
respective  periods was 2.57% and 2.91%.  The  decreases in interest rate spread
and net  interest  margin are  primarily  the result of a decrease in the spread
between  short- and long-term  market  interest  rates.  At March 31, 2006,  the
spread between the 1-month and 10-year  Treasury yield rates was 21 basis points
as compared to 187 basis points at March 31, 2005.  As a result,  the  Company's
average cost of interest-bearing liabilities has increased faster than the yield
on interest-earning  assets which are affected primarily by longer-term interest
rates.

      Provision for Loan Losses. Management regularly reviews the loan portfolio
and makes  provisions  for loan  losses in  amounts  required  to  maintain  the
allowance for loan losses in accordance with U.S. generally accepted  accounting
principles.  The  allowance  consists  of  losses  that  are both  probable  and
estimable at the date of the financial statements. The allowance for loan losses
consists of amounts  allocated to specific  nonperforming  loans and to loans in
each major  portfolio  category.  Loan  categories  such as  one-to-four  family
residential  mortgage and home equity loans,  which  represented  84.1% of total
loans at March 31,  2006,  are  generally  evaluated  on an  aggregate or "pool"
basis. Our allowance for loan losses is predominately determined on a pool basis
by applying loss factors to the current balances of the various loan categories.
The loss factors are  determined  by  management  based on an  evaluation of our
historical  loss  experience,  delinquency  trends,  volume  and type of lending
conducted, and the impact of current economic conditions in our market area.

      The  provision  for loan losses was $300,000 for the years ended March 31,
2006 and 2005.  Non-performing  loans amounted to $2.9 million or 0.39% of total
loans at March 31,  2006,  as  compared  to  $580,000 or 0.10% of total


                                       8
<PAGE>

loans at March 31, 2005. The allowance for loan losses  amounted to $3.3 million
and $3.0 million at March 31, 2006 and March 31, 2005, respectively. Charge-offs
amounted  to $2,000 and $1,000  for  fiscal  years 2006 and 2005,  respectively.
There were no recoveries  for these  periods.  The increase in the allowance for
loan losses is primarily  due to an increase in the  origination  of  adjustable
rate mortgage loans, commercial mortgage loans and commercial loans (not secured
by real estate) as well as overall  portfolio growth.  Adjustable-rate  mortgage
loans can involve greater credit risk than fixed-rate  loans because as interest
rates  increase,  the  underlying  payments  by  the  borrower  increase,   thus
increasing  the  risk  of  default  by the  borrower.  At  the  same  time,  the
marketability of the underlying  collateral may be adversely  affected by higher
interest rates. At March 31, 2006,  adjustable rate loans accounted for 45.6% of
total loans as compared to 37.8% at March 31, 2005.

      Non-Interest  Income.  Non-interest income consists principally of service
charges on deposit  accounts,  fees earned on the sale of  investment  products,
late  charges  on loans,  various  other  service  fees and  changes in the cash
surrender value of bank-owned life insurance ("BOLI").  Service charges and fees
totaled  $1.1  million and $953,000 for the years ended March 31, 2006 and 2005,
respectively.  The increase in service  charges and fees is primarily  due to an
increase  in service  charges on deposits  as a result of  increases  in the fee
structure and deposit account  growth.  The increase in the cash surrender value
of BOLI  amounted  to  $381,000  and  $379,000  for fiscal  years 2006 and 2005,
respectively.  The Company also had gains on the sale of real estate of $325,000
and $93,000  during fiscal years 2006 and 2005,  respectively.  Both  properties
sold were  contiguous to an existing  branch site.  Management  determined  that
these  properties  were not going to be used in connection with the operation of
the branch.

      Non-Interest  Expense.  Non-interest expense totaled $21.2 million for the
year ended March 31, 2006 as compared to $18.6  million for the year ended March
31,  2005.  This  increase is  primarily  due to  increases  of $1.8  million in
compensation  expense,  $301,000 in occupancy and equipment expense,  $96,000 in
advertising and promotion  expense and $541,000 in  merger-related  costs due to
the Company's announced merger with Hudson City.

      The increase in  compensation  and benefits is due primarily to a $692,000
increase in  compensation  costs,  a $215,000  increase in director  fees and an
$839,000 increase in benefit plans expense.  The increase in compensation  costs
is due  primarily to normal  salary  increases and increases in staff to support
the growth in the Company's lending operations and new branches. The increase in
director fees is due  primarily to an increased  number of meetings as the Board
of  Directors  considered  the  actions  to take in the  months  preceeding  the
announcement  of the merger  with Hudson  City.  The  increase in benefit  plans
expense  includes a $287,000  increase in ESOP expense,  a $218,000  increase in
pension  expense  and a $169,000  increase  in expense  related to the  Director
Retirement Plan. The increase in ESOP expense is due primarily to an increase in
the market value of shares committed to be released for allocation. Compensation
expense is recognized  for the ESOP equal to the fair value of shares  committed
to be released for allocation to participant accounts.

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

      Income  Taxes.  For the years ended  March 31,  2006 and 2005,  income tax
expense amounted to $3.0 million and $3.5 million,  respectively.  The effective
tax rates for those same periods were 41.9% and 39.2%, respectively.  The higher
effective tax rate in fiscal 2006 was due primarily to merger-related costs that
are not deductible for tax purposes.

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

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


                                       9
<PAGE>

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

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

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

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

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

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

      Interest  Expense.  Interest  expense  for the year ended  March 31,  2005
increased  $3.0 million to $15.5  million,  as compared to $12.5 million for the
year ended March 31, 2004. The average balance of  interest-bearing  liabilities
increased  $110.3  million to $802.4 million for fiscal 2005 from $692.1 million
for fiscal 2004,  and the average cost of these  liabilities  increased 12 basis
points to  1.93%.  The  increase  in the  average  balance  of  interest-bearing
liabilities  includes deposit growth in three new branches that opened in fiscal
2005, a new branch that opened in the second  quarter of fiscal 2004, and growth
in the existing  branches.  The increase in the average cost of liabilities is a
result of the rising  short-term  market  interest  rates in fiscal  2005 and an
increase  in  certificates  of  deposit   accounts  as  a  percentage  of  total
interest-bearing  liabilities.  The average  balance of  certificates of deposit
represented 62.8% of the average balance of total  interest-bearing  liabilities
for fiscal 2005, as compared to 58.6% for fiscal 2004.  Certificates  of deposit
are  generally  offered at higher rates than  savings  accounts and we have used
these accounts to attract customers to the new branches.

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


                                       10
<PAGE>

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

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

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

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

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

      Provision for Loan Losses.  The provision for loan losses was $300,000 for
fiscal  2005 as  compared  to $275,000  for fiscal  2004.  Non-performing  loans
amounted to $580,000 or 0.10% of total loans at March 31,  2005,  as compared to
$2.0 million or 0.41% of total loans at March 31, 2004.  The  allowance for loan
losses  amounted to $3.0  million  and $2.7  million at March 31, 2005 and 2004,
respectively.  Charge-offs  amounted to $1,000 and $5,000 for fiscal  years 2005
and 2004, respectively. There were no recoveries for these periods. The increase
in the  allowance  for  loan  losses  is  primarily  due to an  increase  in the
origination of  adjustable-rate  mortgage loans,  commercial  mortgage loans and
commercial  loans  (not  secured by real  estate)  as well as overall  portfolio
growth.  Adjustable-rate  mortgage  loans can involve  greater  credit risk than
fixed-rate loans because as interest rates increase,  the underlying payments by
the borrower increase,  thus increasing the risk of default by the borrower.  At
the same time, the  marketability of the underlying  collateral may be adversely
affected by higher  interest  rates.  At March 31, 2005,  adjustable  rate loans
accounted for 37.8% of total loans as compared to 27.1% at March 31, 2004.

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

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


                                       11
<PAGE>

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

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

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

Liquidity and Capital Resources

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

      Our primary  investing  activities are the  origination of mortgage loans,
and  the  purchase  of  short-term  investments,  government  agency  bonds  and
adjustable  rate  mortgage-backed   securities.   These  activities  are  funded
primarily by deposit growth and principal  repayments on loans,  mortgage-backed
securities  and other  investment  securities.  During fiscal 2006,  the Company
originated  loans of $303.6  million and purchased  securities of $53.1 million.
These were funded by $76.9 million in principal  payments,  maturities and calls
of securities,  $125.9  million in loan principal  repayments and an increase in
deposits of $171.9 million.

      At March 31, 2006, we had $95.6 million of  outstanding  loan  origination
commitments  and unused  lines of credit  extended to  customers.  If we require
funds beyond our internal funding capabilities, borrowings other than securities
repurchase  agreements,  of up to $100.0  million are available from the Federal
Home Loan Bank of New York. At March 31, 2006,  approximately  $574.2 million in
certificates  of deposit  were  scheduled  to mature  within one year.  The Bank
anticipates that most of these  certificates of deposit maturing within one year
will remain with the Bank.  However,  should market  interest  rates continue to
increase,  the  Bank's  cost  of  funds  may  significantly  increase  or we may
experience a significant loss of deposits.

      The following table summarizes the contractual  obligations of the Company
by  contractual  payment  period  as of  March  31,  2006.  Further  information
concerning  borrowings,  loan  commitments and lease  commitments is included in
Notes 8 and 11 to the Consolidated Financial Statements.

<TABLE>
<CAPTION>
                                                                                           Payments Due In
                                                                 -------------------------------------------------------------------
                                               Total             Less Than             1-3               3 - 5             More Than
                                              Payments             1 Year             Years              Years             5 Years
------------------------------------------------------------------------------------------------------------------------------------
                                                                                  (In thousands)
<S>                                            <C>                <C>                <C>                <C>                <C>
Borrowings                                     $ 28,000           $  7,000           $ 21,000           $     --           $     --
Loan commitments                                 95,614             95,614                 --                 --                 --
Lease commitments                                 6,272              1,072              1,961              1,023              2,216
------------------------------------------------------------------------------------------------------------------------------------
   Total                                       $129,886           $103,686           $ 22,961           $  1,023           $  2,216
====================================================================================================================================
</TABLE>

      Office of Thrift  Supervision  regulations  require savings  associations,
such as Sound  Federal  Savings,  to meet three  minimum  capital  standards:  a
tangible capital ratio requirement of 1.5% of total assets as adjusted under the
Office of Thrift Supervision  regulations;  a leverage ratio requirement of 4.0%
of core capital to such adjusted  total assets;  and a risk-based  capital ratio
requirement  of 8.0% of core  and  supplementary  capital  to  total  risk-based
assets.  We satisfied  these  minimum  capital  standards at March 31, 2006 with
tangible  and leverage


                                       12
<PAGE>

capital  ratios of 9.3% and a total  risk-based  capital ratio of 20.3%,  and we
were classified as a well-capitalized  institution for regulatory  purposes.  In
determining  the amount of  risk-weighted  assets for purposes of the risk-based
capital  requirement,  a savings  association  multiplies  its assets and credit
equivalent  amounts for certain  off-balance sheet items by risk-weights,  which
range  from 0% for cash and  obligations  issued by the U.S.  Government  or its
agencies to 100% for assets such as consumer and commercial  loans,  as assigned
by  the  Office  of  Thrift  Supervision  capital  regulations.   These  capital
requirements,  which  are  applicable  to Sound  Federal  Savings  only,  do not
consider additional capital retained by Sound Federal Bancorp, Inc.

Impact of Inflation and Changing Prices

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

Accounting Standards

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

      In May 2005, the FASB issued SFAS No. 154,  "Accounting  Changes and Error
Corrections",  which replaces APB No. 20, "Accounting Changes",  and SFAS No. 3,
"Reporting  Changes in Interim Financial  Statements".  SFAS No. 154 changes the
accounting for, and reporting of, a change in accounting principle. SFAS No. 154
requires  retrospective  application to prior period's  financial  statements of
voluntary changes in accounting principle and changes required by new accounting
standards  when the standard does not include  specific  transition  provisions,
unless it is  impracticable  to do so. SFAS No. 154 is effective for  accounting
changes and  corrections of errors in fiscal years  beginning after December 15,
2005 and will only affect the Company's  consolidated  financial statements upon
adoption of a voluntary  change in  accounting  principle or a new standard that
does not include specific transition provisions.

      FASB  Staff  Position  No.  FAS  115-1  and FAS  124-1,  "The  Meaning  of
Other-Than-Temporary Impairment and Its Application to Certain Investments" (the
"FSP"),  was issued in November 2005 and addresses the  determination of when an
investment is considered  impaired;  whether the  impairment  loss is other than
temporary;  and how to  measure  an  impairment  loss.  The FSP  also  addresses
accounting    considerations    subsequent    to   the    recognition    of   an
other-than-temporary  impairment loss on a debt security,  and requires  certain
disclosures   about   unrealized   losses  that  have  not  been  recognized  as
other-than-temporary  impairments.  The FSP replaces the impairment  guidance in
EITF  Issue No.  03-1  with  references  to  existing  authoritative  literature
concerning other-than-temporary determinations (principally SFAS No. 115 and SEC
Staff  Accounting  Bulletin  59).  Under  the  FSP,  impairment  losses  must be
recognized in earnings  equal to the entire  difference  between the  security's
cost and its fair value at the financial  statement  date,  without  considering
partial  recoveries  subsequent  to that  date.  The FSP also  requires  that an
investor  recognize an  other-than-temporary  impairment loss when a decision to
sell a security has been made and the investor does not expect the fair value of
the security to fully  recover  prior to the expected  time of sale.  The FSP is
effective  for  reporting   periods  beginning  after  December  15,  2005.  The


                                       13
<PAGE>

application of the FSP did not affect the Company's financial condition, results
of operations or financial statement disclosures.


                                       14
<PAGE>

Management Report on Internal Control Over Financial Reporting

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

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

      Management   assessed  the  Company's   internal  control  over  financial
reporting  as of March 31,  2006.  This  assessment  was based on  criteria  for
effective  internal  control over  financial  reporting  established in Internal
Control-   Integrated   Framework   issued  by  the   Committee  of   Sponsoring
Organizations  of the Treadway  Commission.  Based on this  assessment,  we have
concluded  that,  as of March 31, 2006,  the Company's  disclosure  controls and
procedures and internal control over financial reporting are effective.

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


                                       15
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited management's assessment, included in the accompanying Management
Report on Internal Control Over Financial Reporting, that Sound Federal Bancorp,
Inc. and subsidiary (the "Company")  maintained  effective internal control over
financial  reporting  as of March 31,  2006,  based on criteria  established  in
Internal  Control--Integrated  Framework  issued by the  Committee of Sponsoring
Organizations of the Treadway Commission  ("COSO").  The Company's management is
responsible for maintaining  effective internal control over financial reporting
and for its assessment of the  effectiveness  of internal control over financial
reporting.   Our  responsibility  is  to  express  an  opinion  on  management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.

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

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

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

In our opinion,  management's  assessment that the Company maintained  effective
internal  control  over  financial  reporting  as of March 31,  2006,  is fairly
stated,  in all material  respects,  based on criteria  established  in Internal
Control--Integrated  Framework issued by COSO. Also, in our opinion, the Company
maintained, in all material respects,  effective internal control over financial
reporting  as of March 31,  2006,  based on  criteria  established  in  Internal
Control--Integrated Framework issued by COSO.


                                       16
<PAGE>

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the consolidated balance sheets of
Sound Federal  Bancorp,  Inc. and  subsidiary as of March 31, 2006 and 2005, 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,
2006,  and our report  dated June 8, 2006  expressed an  unqualified  opinion on
those consolidated financial statements.

/s/ KPMG LLP

Stamford, Connecticut
June 8, 2006


                                       17
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the  accompanying  consolidated  balance sheets of Sound Federal
Bancorp,  Inc. and subsidiary (the "Company") as of March 31, 2006 and 2005, 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,
2006. These  consolidated  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  financial  position of Sound  Federal
Bancorp,  Inc. and  subsidiary as of March 31, 2006 and 2005, and the results of
their  operations  and their cash flows for each of the years in the  three-year
period  ended  March  31,  2006,  in  conformity  with U.S.  generally  accepted
accounting principles.

We have also  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the effectiveness of the Company's
internal control over financial reporting as of March 31, 2006 based on criteria
established in Internal Control-Integrated  Framework issued by the Committee of
Sponsoring  Organizations of the Treadway Commission,  and our report dated June
8, 2006 expressed an unqualified opinion on management's  assessment of, and the
effective operation of, internal control over financial reporting.

/s/ KPMG LLP

Stamford, Connecticut
June 8, 2006


                                       18
<PAGE>

                   SOUND FEDERAL BANCORP, INC. AND SUBSIDIARY
                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                March 31,                March 31,
(In thousands, except share and per share data)                                                    2006                     2005
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>                      <C>
Assets
Cash and due from banks                                                                        $    12,194              $    11,512
Federal funds sold and other overnight deposits                                                     42,092                   31,095
-----------------------------------------------------------------------------------------------------------------------------------
     Total cash and cash equivalents                                                                54,286                   42,607
-----------------------------------------------------------------------------------------------------------------------------------
Securities:
   Available for sale, at fair value (including
       $29,144 and $37,831 pledged as collateral for
       borrowings under repurchase agreements at
       March 31, 2006 and 2005, respectively) (Notes
       3 and 8)                                                                                    215,455                  276,154
   Held to maturity, at amortized cost (fair value
       of $109,410 and $78,728  at March 31, 2006 and
       2005, respectively) (Note 4)                                                                111,246                   79,489
-----------------------------------------------------------------------------------------------------------------------------------
            Total securities                                                                       326,701                  355,643
-----------------------------------------------------------------------------------------------------------------------------------
Loans, net (Note 5):
  Mortgage loans                                                                                   737,274                  558,662
  Consumer and commercial loans                                                                      7,624                    5,100
  Allowance for loan losses                                                                         (3,309)                  (3,011)
-----------------------------------------------------------------------------------------------------------------------------------
            Total loans, net                                                                       741,589                  560,751
-----------------------------------------------------------------------------------------------------------------------------------
 Accrued interest receivable                                                                         5,319                    4,277
 Federal Home Loan Bank stock                                                                        2,842                    5,738
 Premises and equipment, net (Note 6)                                                                5,546                    6,214
 Goodwill                                                                                           13,970                   13,970
 Bank-owned life insurance                                                                          10,845                   10,464
 Prepaid pension costs (Note 10)                                                                     4,177                    3,057
 Deferred income taxes (Note 9)                                                                      2,645                    2,236
 Other assets                                                                                        1,671                    1,993
-----------------------------------------------------------------------------------------------------------------------------------
            Total assets                                                                       $ 1,169,591              $ 1,006,950
===================================================================================================================================
Liabilities and Stockholders' Equity
Liabilities:
  Deposits (Note 7)                                                                            $ 1,003,691              $   831,768
  Borrowings (Note 8)                                                                               28,000                   38,000
  Mortgagors' escrow funds                                                                           6,160                    5,264
  Due to brokers for securities purchased                                                               --                    2,513
  Accrued expenses and other liabilities (Note 10)                                                   3,054                    2,245
-----------------------------------------------------------------------------------------------------------------------------------
            Total liabilities                                                                    1,040,905                  879,790
-----------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 11)
Stockholders' equity (Note 12):
   Preferred stock ($0.01 par value; 1,000,000 shares
      authorized; none issued and outstanding)                                                          --                       --
   Common stock ($0.01 par value; 24,000,000 shares
      authorized; 13,636,170 shares issued; 12,336,040
      and 12,377,206 shares outstanding at March 31,
      2006 and March 31, 2005, respectively)                                                           136                      136
   Additional paid-in capital                                                                      105,092                  103,728
   Treasury stock, at cost (1,300,130 and 1,258,964
      shares at March 31, 2006 and March 31, 2005,
      respectively)                                                                                (18,813)                 (18,131)
   Common stock held by Employee Stock Ownership Plan
      ("ESOP") (Note 10)                                                                            (5,549)                  (6,053)
   Unearned stock awards (Note 10)                                                                  (3,252)                  (4,435)
   Retained earnings                                                                                54,960                   54,638
   Accumulated other comprehensive loss, net of taxes
      (Note 13)                                                                                     (3,888)                  (2,723)
-----------------------------------------------------------------------------------------------------------------------------------
            Total stockholders' equity                                                             128,686                  127,160
-----------------------------------------------------------------------------------------------------------------------------------
            Total liabilities and stockholders' equity                                         $ 1,169,591              $ 1,006,950
===================================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


                                       19
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                   Years Ended March 31,
------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)                                                    2006               2005               2004
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>                <C>                <C>
Interest and Dividend Income
  Loans                                                                                $37,395            $29,430            $26,819
  Mortgage-backed and other securities                                                  12,761             11,998             11,538
  Federal funds sold and other overnight deposits                                          972                340                240
  Other earning assets                                                                     313                132                142
------------------------------------------------------------------------------------------------------------------------------------
  Total interest and dividend income                                                    51,441             41,900             38,739
------------------------------------------------------------------------------------------------------------------------------------
Interest Expense
  Deposits (Note 7)                                                                     23,207             13,968             11,004
  Borrowings                                                                             1,390              1,489              1,495
    Other interest-bearing liabilities                                                      23                 20                 48
------------------------------------------------------------------------------------------------------------------------------------
  Total interest expense                                                                24,620             15,477             12,547
------------------------------------------------------------------------------------------------------------------------------------
  Net interest income                                                                   26,821             26,423             26,192
  Provision for loan losses (Note 5)                                                       300                300                275
------------------------------------------------------------------------------------------------------------------------------------
  Net interest income after provision for loan losses                                   26,521             26,123             25,917
------------------------------------------------------------------------------------------------------------------------------------
Non-Interest Income
  Service charges and fees                                                               1,149                953                955
  Income on bank-owned life insurance                                                      381                379                 86
  Gain on sales of real estate                                                             325                 93                 --
  Gain on sales of mortgage loans                                                           --                 22                 --
------------------------------------------------------------------------------------------------------------------------------------
    Total non-interest income                                                            1,855              1,447              1,041
------------------------------------------------------------------------------------------------------------------------------------
Non-Interest Expense
  Compensation and benefits (Note 10)                                                   11,697              9,945              8,733
  Occupancy and equipment                                                                3,018              2,717              2,291
  Data processing service fees                                                           1,230              1,218              1,025
  Advertising and promotion                                                              1,215              1,119              1,020
Merger-related costs                                                                       541                 --                 --
  Other                                                                                  3,508              3,569              3,037
------------------------------------------------------------------------------------------------------------------------------------
  Total non-interest expense                                                            21,209             18,568             16,106
------------------------------------------------------------------------------------------------------------------------------------
  Income before income tax expense                                                       7,167              9,002             10,852
  Income tax expense (Note 9)                                                            3,003              3,533              4,234
------------------------------------------------------------------------------------------------------------------------------------
  Net income                                                                           $ 4,164            $ 5,469            $ 6,618
====================================================================================================================================

Earnings per share (Note 14):
    Basic                                                                              $  0.36            $  0.47            $  0.54
------------------------------------------------------------------------------------------------------------------------------------
    Diluted                                                                               0.35               0.46               0.52
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.


                                       20
<PAGE>

                    SOUND FEDERAL BANCORP INC. AND SUBSIDIARY
           Consolidated Statements of Changes in Stockholders' Equity
                For the Years Ended March 31, 2006, 2005 and 2004
                 (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                                         Accumulated
                                                                         Common                             Other
                                               Additional                Stock     Unearned             Comprehensive      Total
                                       Common    Paid-in    Treasury    Held by     Stock     Retained     (Loss)      Stockholders'
                                        Stock    Capital     Stock        ESOP      Awards    Earnings     Income         Equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>      <C>         <C>         <C>        <C>        <C>         <C>            <C>
Balance at March 31, 2003              $  132   $ 95,395    $     --    $(7,059)   $  (100)   $49,937     $    16        $138,321
Net income                                 --         --          --         --         --      6,618          --           6,618
Other comprehensive income (Note 13)       --         --          --         --         --         --         686             686
                                                                                                                         --------
   Total comprehensive income                                                                                               7,304
Dividends paid ($0.22 per share)           --         --          --         --         --     (2,648)         --          (2,648)
Common stock issued for grants of
  stock awards                              4      5,909          --         --     (5,913)        --          --              --
Purchases of treasury stock
  (540,482 shares)                         --         --      (8,417)        --         --         --          --          (8,417)
Reissuance of treasury stock for
  exercise of stock options
  (81,185 shares)                          --         --       1,267         --         --       (999)         --             268
Tax benefit from exercise of
  stock options                            --        373          --         --         --         --          --             373
Vesting of stock awards and
  related tax benefits                     --        153          --         --        395         --          --             548
ESOP shares committed to be released
  for allocation                           --        727          --        503         --         --          --           1,230
  Tax benefit for dividends on
    unallocated ESOP shares                --         80          --         --         --         --          --              80
------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2004                 136    102,637      (7,150)    (6,556)    (5,618)    52,908         702         137,059
Net income                                 --         --          --         --         --      5,469          --           5,469
Other comprehensive loss (Note 13)         --         --          --         --         --         --      (3,425)         (3,425)
                                                                                                                         --------
  Total comprehensive income                                                                                                2,044
Dividends paid ($0.24 per share)           --         --          --         --         --     (2,891)         --          (2,891)
Purchases of treasury stock
  (877,332 shares)                         --         --     (12,087)        --         --         --          --         (12,087)
Reissuance of treasury stock for
  exercise of stock options
  (77,665 shares)                          --         --       1,106         --         --       (848)         --             258
Tax benefit from exercise of
  stock options                            --        340          --         --         --         --          --             340
Vesting of stock awards                    --        (19)         --         --      1,183         --          --           1,164
ESOP shares committed to be
  released for allocation                  --        702          --        503         --         --          --           1,205
Tax benefit for dividends on
  unallocated ESOP shares                  --         68          --         --         --         --          --              68
------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2005                 136    103,728     (18,131)    (6,053)    (4,435)    54,638      (2,723)        127,160
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                         (Continued)
</TABLE>


                                       21
<PAGE>

                   SOUND FEDERAL BANCORP, INC. AND SUBSIDIARY
      Consolidated Statements of Changes in Stockholders' Equity, continued
                For the Years Ended March 31, 2006, 2005 and 2004
                 (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                                         Accumulated
                                                                         Common                             Other
                                               Additional                Stock     Unearned             Comprehensive      Total
                                       Common    Paid-in    Treasury    Held by     Stock     Retained     (Loss)      Stockholders'
                                        Stock    Capital     Stock        ESOP      Awards    Earnings     Income         Equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>      <C>         <C>         <C>        <C>        <C>         <C>            <C>
Balance at March 31, 2005              $  136   $103,728    $(18,131)   $(6,053)   $(4,435)   $54,638     $(2,723)       $127,160
Net income                                 --         --          --         --         --      4,164          --           4,164
Other comprehensive loss (Note 13)         --         --          --         --         --         --      (1,165)         (1,165)
                                                                                                                         --------
  Total comprehensive income                                                                                                2,999
Dividends paid ($0.285 per share)          --         --          --         --         --     (3,327)         --          (3,327)
Purchases of treasury stock (87,300
  shares)                                  --         --      (1,349)        --         --         --          --          (1,349)
Reissuance of treasury stock for
  exercise of stock options
  (46,134 shares)                          --         --         667         --         --       (515)         --             152
Tax benefit from exercise of
  stock options                            --        265          --         --         --         --          --             265
Vesting of stock awards and related
  tax benefits                             --         53          --         --      1,183         --          --           1,236
ESOP shares committed to be released
  for allocation                           --        973          --        504         --         --          --           1,477
Tax benefit for dividends on
  unallocated ESOP shares                  --         73          --         --         --         --          --              73
------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2006              $  136   $105,092    $(18,813)   $(5,549)   $(3,252)   $54,960     $(3,888)       $128,686
====================================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


                                       22
<PAGE>

                   SOUND FEDERAL BANCORP, INC. AND SUBSIDIARY
                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                                  Years Ended March 31,
------------------------------------------------------------------------------------------------------------------------------------
(In thousands)                                                                           2006              2005              2004
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>               <C>               <C>
Operating Activities
  Net income                                                                          $   4,164         $   5,469         $   6,618
  Adjustments to reconcile net income to net
      cash provided by operating activities:
      Provision for loan losses                                                             300               300               275
      Depreciation, amortization and accretion                                            2,182             2,570             2,549
      ESOP and stock award expense                                                        2,660             2,388             1,625
      Income taxes                                                                        1,004               348              (800)
      Origination of loans held for sale                                                     --            (1,066)               --
      Proceeds from sales of loans held for sale                                             --             1,088                --
      Gain on sales of mortgage loans                                                        --               (22)               --
      Gain on sales of real estate                                                         (325)              (93)               --
     Pension costs                                                                       (1,120)             (510)               81
      Other adjustments, net                                                               (677)             (448)             (777)
------------------------------------------------------------------------------------------------------------------------------------
          Net cash provided by operating activities                                       8,188            10,024             9,571
------------------------------------------------------------------------------------------------------------------------------------
Investing Activities
 Purchases of securities:
     Available for sale                                                                  (1,000)          (31,015)         (198,707)
     Held to maturity                                                                   (52,126)          (82,297)               --
 Proceeds from payments, maturities and calls of securities:
     Available for sale                                                                  59,175            81,894           146,415
     Held to maturity                                                                    17,738             5,274                --
 Net disbursements for loan originations and principal repayments                      (178,946)          (83,164)          (52,027)
 Purchase of mortgage loans                                                              (2,532)               --                --
 Purchases of Federal Home Loan Bank stock                                                 (647)             (435)           (1,162)
 Proceeds from redemption of Federal Home Loan Bank stock                                 3,543                --                --
 Proceeds from sales of real estate                                                         396               174                --
 Purchases of premises and equipment                                                       (405)           (1,519)             (968)
 Purchase of bank-owned life insurance                                                       --                --           (10,000)
------------------------------------------------------------------------------------------------------------------------------------
           Net cash used in investing activities                                       (154,804)         (111,088)         (116,449)
------------------------------------------------------------------------------------------------------------------------------------
Financing Activities
 Net increase in deposits                                                               171,923           123,438           104,070
 Proceeds from borrowings                                                                    --             9,000            47,000
 Repayment of borrowings                                                                (10,000)           (6,000)          (47,000)
 Net  increase (decrease) in mortgagors' escrow funds                                       896               742               (81)
 Purchases of treasury stock                                                             (1,349)          (12,087)           (8,417)
 Proceeds from exercise of stock options                                                    152               258               268
 Payment of cash dividends on common stock                                               (3,327)           (2,891)           (2,648)
------------------------------------------------------------------------------------------------------------------------------------
        Net cash provided by financing activities                                       158,295           112,460            93,192
------------------------------------------------------------------------------------------------------------------------------------
  Increase (decrease) in cash and cash equivalents                                       11,679            11,396           (13,686)
  Cash and cash equivalents at beginning of year                                         42,607            31,211            44,897
------------------------------------------------------------------------------------------------------------------------------------
  Cash and cash equivalents at end of year                                            $  54,286         $  42,607         $  31,211
====================================================================================================================================
Supplemental Information
  Interest paid                                                                       $  24,588         $  15,415         $  12,711
  Income taxes paid                                                                       1,997             3,145             4,921
  Decrease in due to brokers for securities purchased                                    (2,513)           (1,487)           (6,495)
====================================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


                                       23
<PAGE>

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

(1)   Reorganization, Stock Offerings and Pending Merger

      Initial Public 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.  In the Reorganization,
      Sound  Federal  Savings and Loan  Association  converted  from a federally
      chartered  mutual  savings  association  to a  federally  chartered  stock
      savings association. Sound Federal Savings and Loan Association became the
      wholly-owned  subsidiary  of  Sound  Federal  Bancorp,  which  became  the
      majority-owned  subsidiary  of Sound  Federal,  MHC (the  "Mutual  Holding
      Company").

      Second-Step Conversion

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

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

      Pending Merger

      On February 8, 2006,  the Holding  Company  entered into an Agreement  and
      Plan of Merger  (the  "Merger  Agreement")  pursuant  to which it would be
      acquired by Hudson City Bancorp,  Inc. Shareholders of the Holding Company
      will receive  $20.75 in cash for each share of the Holding  Company common
      stock they own. The  acquisition  is subject to the receipt of  regulatory
      and shareholder  approvals.  It is expected that the  acquisition  will be
      completed during the Company's second fiscal quarter.

(2)   Summary of Significant Accounting Policies

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


                                       24
<PAGE>

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

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

      Basis of Presentation

      The consolidated  financial statements include the accounts of the Holding
      Company,  the Bank,  Sound  REIT,  Inc.,  First  Federal  REIT,  Inc.  and
      Mamaroneck  Advisors,  Inc. Sound REIT,  Inc. and First Federal REIT, Inc.
      are real estate  investment  trusts  that hold a portion of the  Company's
      mortgage-related  assets.  On June 8,  2006,  a plan  of  dissolution  was
      adopted for First Federal REIT, Inc. The  dissolution  would result in the
      transfer of substantially  all of the subsidiary's  assets and liabilities
      to the Bank and,  accordingly,  would have an insignificant  effect on the
      Company's consolidated financial statements.  Mamaroneck Advisors, Inc. is
      a wholly-owned subsidiary of the Bank that offered investment products and
      services  to the Bank's  customers.  Beginning  in  December  2003,  these
      services are provided to customers  directly by the Bank. All  significant
      intercompany   accounts  and   transactions   have  been   eliminated   in
      consolidation.

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

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

      Securities

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

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

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

      Allowance for Loan Losses

      The allowance  for loan losses is increased by provisions  for loan losses
      charged to  income.  Losses are  charged  to the  allowance  when all or a
      portion  of a loan is  deemed  to be  uncollectible.  Recoveries  of loans
      previously  charged-off are credited to the allowance for loan losses when
      realized. Management's periodic determination of the allowance is based on
      continuing  reviews  of  the  portfolio,   using  a   consistently-applied
      methodology.  The  allowance  for loan losses  consists of losses that are
      both probable and estimable at the


                                       25
<PAGE>

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

      date of the financial  statements.  In determining  the allowance for loan
      losses,  management considers factors such as the Company's past loan loss
      experience,  known risks in the portfolio,  adverse situations affecting a
      borrower's ability to repay, the estimated value of underlying collateral,
      and current economic conditions.

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

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

      Loans

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

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

      Loan  origination  fees and  certain  direct  loan  origination  costs are
      deferred and the net fee or cost is amortized  to interest  income,  using
      the level-yield  method,  over the  contractual  term of the related loan.
      Unamortized  fees and costs are recognized in interest  income when a loan
      is sold or prepaid.  Loan  prepayment  fees are recognized in non-interest
      income,  at the time of  prepayment,  when the borrower does not refinance
      with the  Company  or when the  terms  (including  effective  yield)  of a
      refinanced loan are at least as favorable as the terms of comparable loans
      to  borrowers of similar  creditworthiness.  Prepayment  fees  included in
      non-interest  income were $194,000,  $164,000 and $180,000 in fiscal years
      2006, 2005 and 2004, respectively.

      Federal Home Loan Bank Stock

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

      Goodwill

      Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and
      Other Intangible Assets, requires that goodwill and intangible assets with
      indefinite useful lives no longer be amortized,  but instead be


                                       26
<PAGE>

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

      tested for impairment at least annually using a fair-value-based approach.
      The Company did not recognize any impairment of goodwill  during the years
      ended March 31, 2006, 2005 and 2004.

      Real Estate Owned

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

      Premises and Equipment

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

      Securities Repurchase Agreements

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

      Income Taxes

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

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


                                       27
<PAGE>

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

      Bank-Owned Life Insurance

      The cash surrender value of bank-owned life insurance ("BOLI") is recorded
      on the Company's  consolidated balance sheet as an asset and the change in
      the cash surrender value is recorded as non-interest income. BOLI policies
      were purchased in  consideration  of the Company's  obligations  under the
      supplemental  executive  retirement plan and the Director Retirement Plan,
      which  are  described  in Note 10.  The  amount  by which  death  benefits
      retained  by the  Company  (net of  split-dollar  endorsements)  exceeds a
      policy's cash surrender  value is recorded in  non-interest  income at the
      time of receipt.  No death  benefits  were  received in fiscal years 2006,
      2005 and 2004.

      Stock-Based Compensation Plans

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

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

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

<TABLE>
<CAPTION>
(In thousands, except per share data)                                                  2006              2005               2004
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>                <C>                <C>
Net income, as reported                                                             $   4,164          $   5,469          $   6,618
Add stock award expense included in reported
   net income, net of related tax effects                                                 718                723                242
Deduct stock award and stock option expense determined
   under the fair-value-based method, net of
   related tax effects                                                                 (1,183)            (1,188)              (768)
------------------------------------------------------------------------------------------------------------------------------------
Pro forma net income                                                                $   3,699          $   5,004          $   6,092
====================================================================================================================================

Earnings per share:
   Basic, as reported                                                               $    0.36          $    0.47          $    0.54
====================================================================================================================================
   Basic, pro forma                                                                 $    0.32          $    0.43          $    0.49
====================================================================================================================================
   Diluted, as reported                                                             $    0.35          $    0.46          $    0.52
====================================================================================================================================
   Diluted, pro forma                                                               $    0.32          $    0.42          $    0.48
====================================================================================================================================
</TABLE>

      The per-share  fair value of stock options was estimated on the grant date
      using the  Black-Scholes  option pricing  model.  Stock option grants were
      made in fiscal 2004 (none in fiscal 2005 and 2006).  The fair value


                                       28
<PAGE>

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

      of the options granted in fiscal 2004 was $4.19 per share,  computed using
      the  Black-Scholes  option  pricing model and the  following  assumptions:
      dividend yield of 1.6%,  volatility rate of approximately  21%,  risk-free
      interest rate of 4.7% and expected option life of 7 years.

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

      SFAS No. 123R applies to all awards  granted after its effective  date and
      to awards  modified,  repurchased,  or cancelled after that date. SFAS No.
      123R is effective as of the beginning of the first annual reporting period
      beginning after June 15, 2005 (i.e.,  the Company's  fiscal year beginning
      April 1,  2006).  The  Company  will  adopt SFAS No.  123R by  recognizing
      compensation expense for (i) any stock options granted after April 1, 2006
      and (ii) the portion of  previously  granted  stock  options for which the
      requisite  service had not been rendered as of April 1, 2006, based on the
      grant-date fair value of those options calculated for purposes of SFAS No.
      123 pro forma disclosures. The additional annual compensation cost for the
      Company's  stock  options  outstanding  at March  31,  2006  that  will be
      recognized in the fiscal year beginning  April 1, 2006, as a result of the
      adoption of SFAS No. 123R, is approximately $557,000 before taxes.

      Earnings Per Share

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

      Segment Information

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


                                       29
<PAGE>

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

(3)   Securities Available for Sale

      The following are summaries of securities available for sale:

<TABLE>
<CAPTION>
                                                                                               Gross Unrealized
                                                                           Amortized       -------------------------         Fair
(In thousands)                                                               Cost            Gains          Losses           Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>             <C>             <C>              <C>
March 31, 2006
Pass-through securities issued by:
      Ginnie Mae                                                           $ 45,941        $     44        $   (437)        $ 45,548
      Fannie Mae                                                             24,122              43            (771)          23,394
      Freddie Mac                                                             9,361              41            (211)           9,191
Collateralized mortgage obligations issued by:
      Ginnie Mae                                                              1,783              --             (46)           1,737
      Fannie Mae                                                             24,917              --          (1,191)          23,726
      Freddie Mac                                                            38,245              --          (1,788)          36,457
------------------------------------------------------------------------------------------------------------------------------------
               Total mortgage-backed securities                             144,369             128          (4,444)         140,053
U.S. Government and agency securities                                        53,688              --          (1,677)          52,011
Municipal securities                                                            866             100              --              966
Mutual fund shares                                                           23,008              --            (583)          22,425
------------------------------------------------------------------------------------------------------------------------------------
               Total securities                                            $221,931        $    228        $ (6,704)        $215,455
====================================================================================================================================
March 31, 2005
Pass-through securities issued by:
      Ginnie Mae                                                           $ 69,759        $    267        $   (221)        $ 69,805
      Fannie Mae                                                             33,896             138            (650)          33,384
      Freddie Mac                                                            13,032              94            (164)          12,962
Collateralized mortgage obligations issued by:
      Ginnie Mae                                                              5,358              --             (89)           5,269
      Fannie Mae                                                             32,621               4          (1,062)          31,563
      Freddie Mac                                                            48,097              --          (1,335)          46,762
------------------------------------------------------------------------------------------------------------------------------------
               Total mortgage-backed securities                             202,763             503          (3,521)         199,745
U.S. Government and agency securities                                        55,058               1          (1,415)          53,644
Municipal securities                                                            860             120              --              980
Mutual fund shares                                                           22,007              23            (245)          21,785
------------------------------------------------------------------------------------------------------------------------------------
               Total securities                                            $280,688        $    647        $ (5,181)        $276,154
====================================================================================================================================
</TABLE>

      Debt  securities  available  for  sale at  March  31,  2006  consisted  of
      adjustable  rate securities and fixed rate securities with amortized costs
      of $72.7 million and $126.2 million,  and weighted average yields of 4.57%
      and 3.75%,  respectively.  Debt securities available for sale at March 31,
      2005 consisted of adjustable  rate  securities  and fixed rate  securities
      with amortized  costs of $108.2 million and $150.5  million,  and weighted
      average yields of 4.36% and 3.72%, respectively.

      There  were no sales of  securities  available  for sale  during the years
      ended March 31, 2006, 2005 and 2004.


                                       30
<PAGE>

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

      The following table  summarizes,  for all securities in an unrealized loss
      position at March 31, 2006 and 2005,  the aggregate  fair values and gross
      unrealized  losses  by  length  of time  those  securities  had  been in a
      continuous unrealized loss position at the respective dates:

<TABLE>
<CAPTION>
                                                     Less Than 12 Months     12 Months or Longer        Total
-------------------------------------------------------------------------------------------------------------------------
                                                      Fair    Unrealized     Fair    Unrealized    Fair      Unrealized
(In thousands)                                        Value     Losses       Value     Losses      Value       Losses
-------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>        <C>         <C>        <C>         <C>        <C>
March 31, 2006
Pass-through securities issued by:
     Ginnie Mae                                     $ 19,397   $   (164)   $ 18,375   $   (273)   $ 37,772   $   (437)
     Fannie Mae                                        4,433        (42)     16,826       (729)     21,259       (771)
     Freddie Mac                                       2,634        (40)      4,751       (171)      7,385       (211)
Collateralized mortgage obligations issued by:
     Ginnie Mae                                           --         --       1,734        (46)      1,734        (46)
     Fannie Mae                                        1,215        (11)     22,511     (1,180)     23,726     (1,191)
     Freddie Mac                                       2,896        (80)     33,561     (1,708)     36,457     (1,788)
U.S. Government and agency securities                  2,506        (53)     49,469     (1,624)     51,975     (1,677)
Mutual fund shares                                     6,862       (146)     15,563       (437)     22,425       (583)
-------------------------------------------------------------------------------------------------------------------------
     Total temporarily-impaired securities          $ 39,943   $   (536)   $162,790   $ (6,168)   $202,733   $ (6,704)
-------------------------------------------------------------------------------------------------------------------------
March 31, 2005
Pass-through securities issued by:
     Ginnie Mae                                     $ 13,254   $    (66)   $ 26,973   $   (155)   $ 40,227   $   (221)
     Fannie Mae                                       15,305       (228)     10,775       (422)     26,080       (650)
     Freddie Mac                                       5,433        (74)      2,959        (90)      8,392       (164)
Collateralized mortgage obligations issued by:
     Ginnie Mae                                        2,670        (37)      2,599        (52)      5,269        (89)
     Fannie Mae                                       17,337       (387)     13,231       (675)     30,568     (1,062)
     Freddie Mac                                      28,511       (588)     18,251       (747)     46,762     (1,335)
U.S. Government and agency securities                 40,997       (980)     12,341       (435)     53,338     (1,415)
Mutual fund shares                                        --         --      15,756       (245)     15,756       (245)
-------------------------------------------------------------------------------------------------------------------------
     Total temporarily-impaired securities          $123,507   $ (2,360)   $102,885   $ (2,821)   $226,392   $ (5,181)
=========================================================================================================================
</TABLE>

      The  Company   invests   primarily   in  debt   securities   comprised  of
      mortgage-backed  securities  issued by Ginnie Mae,  Fannie Mae and Freddie
      Mac, as well as U.S.  Government and Agency  securities.  The Company also
      invests in two mutual  funds that  invest  primarily  in  mortgage-related
      assets.  The  unrealized  losses on debt  securities at March 31, 2006 and
      2005 were caused by increases  in market  yields  subsequent  to purchase.
      There were no  individual  securities  with  unrealized  losses  that were
      significant  dollar amounts at March 31, 2006 and 2005. At March 31, 2006,
      a total of 151 securities  were in a continuous  unrealized  loss position
      for less than 12 months,  and 261  securities for 12 months or longer (174
      securities and 134  securities,  respectively,  at March 31, 2005).  There
      were no debt  securities  past due or  securities  for which  the  Company
      currently believes it is not probable that it will collect all amounts due
      according to the  contractual  terms of the security.  Because the Company
      has the ability and intent to hold securities with unrealized losses until
      a  market  price  recovery  (which,  for  debt  securities  may  be  until
      maturity),   the  Company  did  not  consider   these   securities  to  be
      other-than-temporarily impaired at March 31, 2006 and 2005.

      The  following is a summary of the  amortized  cost and fair value of debt
      securities  available  for sale at March 31, 2006,  with amounts  shown by
      remaining term to contractual maturity for categories other than mortgage-


                                       31
<PAGE>

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

      backed securities. Actual maturities may differ from these amounts because
      certain issuers have the right to call or redeem their  obligations  prior
      to contractual maturity.

                                                           Amortized    Fair
(In thousands)                                                Cost      Value
--------------------------------------------------------------------------------
Mortgage-backed securities                                  $144,369   $140,053
U.S. Government and agency
      securities due:
      Less than one year                                       6,500      6,378
      Over one to five years                                  37,372     36,045
      Over five to ten years                                   3,148      3,095
      Over ten years                                           6,668      6,493
Municipal securities due:
      Over five to ten years                                     336        370
      Over ten years                                             530        596
--------------------------------------------------------------------------------
      Total debt securities                                 $198,923   $193,030
================================================================================

(4)   Securities Held to Maturity

      The following is a summary of securities held to maturity:

<TABLE>
<CAPTION>
                                                              Gross Unrealized
                                                Amortized   --------------------      Fair
(In thousands)                                     Cost       Gains     Losses       Value
-------------------------------------------------------------------------------------------
<S>                                              <C>        <C>        <C>         <C>
March 31, 2006
Mortgage-backed securities issued by:
    Ginnie Mae                                   $ 32,489   $     24   $   (553)   $ 31,960
    Fannie Mae                                      7,528         65        (20)      7,573
    Freddie Mac                                     1,184         --        (22)      1,162
Collateralized mortgage obligations issued by:
    Fannie Mae                                      6,966         --       (222)      6,744
    Freddie Mac                                    17,136         --       (449)     16,687
-------------------------------------------------------------------------------------------
          Total mortgage-backed securities         65,303         89     (1,266)     64,126
U.S. Government and agency securities              45,943         --       (659)     45,284
-------------------------------------------------------------------------------------------
       Total                                     $111,246   $     89   $ (1,925)   $109,410
===========================================================================================
March 31, 2005
Mortgage-backed securities issued by:
    Ginnie Mae                                   $ 35,268   $     62   $   (250)   $ 35,080
    Fannie Mae                                      2,339          8         (3)      2,344
    Freddie Mac                                     1,577         --        (21)      1,556
Collateralized mortgage obligations issued by:
    Fannie Mae                                      8,796         --       (126)      8,670
    Freddie Mac                                    11,797         --       (210)     11,587
-------------------------------------------------------------------------------------------
          Total mortgage-backed securities         59,777         70       (610)     59,237
U.S. Government and agency securities              19,712         --       (221)     19,491
-------------------------------------------------------------------------------------------
       Total                                     $ 79,489   $     70   $   (831)   $ 78,728
===========================================================================================
</TABLE>

      The  amortized  cost of the  portfolio  at March  31,  2006  consisted  of
      adjustable  rate securities and fixed rate securities with amortized costs
      of $41.2 million and $70.0 million, with weighted average yields of 4.44%


                                       32
<PAGE>

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

      and 4.26%,  respectively.  Adjustable  rate and fixed rate  securities  at
      March 31, 2005 totaled  $39.2  million and $40.3  million,  with  weighted
      average yields of 4.63% and 3.86%, respectively.

      There were no sales of securities  held to maturity during the years ended
      March 31, 2006, 2005 and 2004.

      The following table  summarizes,  for all securities in an unrealized loss
      position at March 31, 2006 and 2005,  the aggregate  fair values and gross
      unrealized  losses  by  length  of time  those  securities  had  been in a
      continuous unrealized loss position at the respective dates:

<TABLE>
<CAPTION>
                                                     Less Than 12 Months    12 Months or Longer         Total
-----------------------------------------------------------------------------------------------------------------------
                                                       Fair   Unrealized    Fair     Unrealized     Fair     Unrealized
(In thousands)                                        Value     Losses      Value      Losses       Value      Losses
-----------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>        <C>         <C>        <C>         <C>        <C>
March 31, 2006
Pass-through securities issued by:
     Ginnie Mae                                     $ 15,630   $   (159)   $ 14,134   $   (394)   $ 29,764   $   (553)
     Fannie Mae                                        1,284        (16)        471         (4)      1,755        (20)
     Freddie Mac                                          --         --       1,162        (22)      1,162        (22)
Collateralized mortgage obligations issued by:
     Fannie Mae                                        1,874        (44)      4,870       (178)      6,744       (222)
     Freddie Mac                                       8,579       (138)      8,108       (311)     16,687       (449)
U.S. Government and agency securities                 30,654       (358)     14,630       (301)     45,284       (659)
-----------------------------------------------------------------------------------------------------------------------
     Total temporarily-impaired securities          $ 58,021   $   (715)   $ 43,375   $ (1,210)   $101,396   $ (1,925)
=======================================================================================================================
March 31, 2005
Pass-through securities issued by:
     Ginnie Mae                                     $ 19,627   $   (250)   $     --   $     --    $ 19,627   $   (250)
     Fannie Mae                                          674         (3)         --         --         674         (3)
     Freddie Mac                                       1,556        (21)         --         --       1,556        (21)
Collateralized mortgage obligations issued by:
     Fannie Mae                                        8,670       (126)         --         --       8,670       (126)
     Freddie Mac                                      11,587       (210)         --         --      11,587       (210)
U.S. Government and agency securities                 17,491       (221)         --         --      17,491       (221)
-----------------------------------------------------------------------------------------------------------------------
     Total temporarily-impaired securities          $ 59,605   $   (831)   $     --   $     --    $ 59,605   $   (831)
=======================================================================================================================
</TABLE>

      The  Company   invests   primarily   in  debt   securities   comprised  of
      mortgage-backed  securities  issued by Ginnie Mae,  Fannie Mae and Freddie
      Mac, as well as U.S.  Government  and Agency  securities.  The  unrealized
      losses at March  31,  2006 and 2005 were  caused  by  increases  in market
      yields  subsequent to purchase.  There were no individual  securities with
      unrealized  losses that were significant  dollar amounts at March 31, 2006
      and 2005. At March 31, 2006, a total of 55 securities were in a continuous
      unrealized loss position for less than 12 months, and 41 securities for 12
      months or longer.  At March 31, 2005, a total of 49  securities  were in a
      continuous unrealized loss position for less than 12 months. There were no
      debt  securities  past due or securities  for which the Company  currently
      believes it is not probable that it will collect all amounts due according
      to the  contractual  terms of the  security.  Because  the Company has the
      ability  and  intent  to hold  securities  with  unrealized  losses  until
      maturity,   the  Company  did  not  consider   these   securities   to  be
      other-than-temporarily impaired at March 31, 2006 and 2005.

      The  following  is a  summary  of the  amortized  cost and  fair  value of
      securities  held to maturity at March 31, 2006,  with  information on U.S.
      Government and agency securities shown by remaining term to contractual


                                       33
<PAGE>

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

      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
(In thousands)                                                Cost        Value
--------------------------------------------------------------------------------
Mortgage-backed securities                                   $ 65,303   $ 64,126
U. S.  Government and agency securities:
         Less than one year                                     4,000      3,955
         Over one to five years                                37,582     37,038
         Over five to ten years                                 3,496      3,452
         Over ten years                                           865        839

--------------------------------------------------------------------------------
              Total                                          $111,246   $109,410
================================================================================

(5)   Loans

      Loans are summarized as follows:

                                                                March 31,
--------------------------------------------------------------------------------
(In thousands)                                              2006         2005
--------------------------------------------------------------------------------
Mortgage loans:
   Residential properties:
       One-to-four family                                $ 569,415    $ 441,655
       Home equity lines of credit                          54,449       42,052
       Multi-family                                          8,124        9,807
   Commercial properties                                    61,945       45,645
   Construction loans                                       40,371       17,416
--------------------------------------------------------------------------------
                                                           734,304      556,575
--------------------------------------------------------------------------------
Consumer loans:
   Secured personal loans                                    1,286        1,164
   Other loans                                               1,355        1,004
Commercial loans                                             4,978        2,932
--------------------------------------------------------------------------------
                                                             7,619        5,100
--------------------------------------------------------------------------------
      Total loans                                          741,923      561,675
Deferred loan origination costs, net                         2,975        2,087
Allowance for loan losses                                   (3,309)      (3,011)
--------------------------------------------------------------------------------
      Total loans, net                                   $ 741,589    $ 560,751
================================================================================

      Gross  principal  balances at March 31, 2006 consisted of fixed rate loans
      of $402.6  million  and  adjustable  rate  loans of $339.3  million,  with
      weighted average yields of 6.15% and 5.55%,  respectively.  Fixed rate and
      adjustable  rate loans at March 31, 2005 totaled $349.1 million and $212.5
      million,  with weighted  average yields of 6.05% and 5.10%,  respectively.
      There were no loans held for sale at March 31, 2006 and 2005.

      Adjustable rate loans are primarily one-to-four family mortgage loans with
      fixed rates for initial terms of three,  five, seven or ten years followed
      by one-year rate  adjustment  periods for the remaining  term of the loan.
      Total adjustable rate loans include  one-to-family  loans of $90.1 million
      at March 31,  2006 ($7.8  million  at March 31,  2005)  that  provide  for
      interest-only payments during the initial fixed rate period. Interest-only
      loans are  subject to the same  underwriting  standards  as the  Company's
      other  adjustable  rate  mortgage  loans,  except  that a  more  stringent
      loan-to-value  ratio  requirement  applies  to  interest-only  loans.  The
      Company's  interest-only loans do not provide for negative amortization of
      the principal balance.

      The  Company  primarily  originates  mortgage  loans  secured by  existing
      single-family   residential   properties.   The  Company  also  originates
      multi-family and commercial mortgage loans, construction loans, commercial
      loans and consumer loans. Substantially all of the mortgage loan portfolio
      is secured by real estate  properties  located in  Westchester  and Putnam
      Counties in New York, and Fairfield County, Connecticut.


                                       34
<PAGE>

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

      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:

-------------------------------------------------------------------------
           (In thousands)                    2006      2005       2004
-------------------------------------------------------------------------
Balance at beginning of year               $ 3,011    $ 2,712    $ 2,442
Provision for loan losses                      300        300        275
Charge-offs                                     (2)        (1)        (5)
-------------------------------------------------------------------------
Balance at end of year                     $ 3,309    $ 3,011    $ 2,712
=========================================================================

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

------------------------------------------------------------------
(In thousands)                    2006         2005          2004
------------------------------------------------------------------
Mortgage loans:
   One-to-four family            $2,075       $  510        $1,359
   Home equity lines of credit      809           70           617
Consumer loans                        9           --             5
------------------------------------------------------------------
   Total nonaccrual loans        $2,893       $  580        $1,981
==================================================================

      Gross  interest  income  that would have been  recorded  if the  foregoing
      nonaccrual loans had remained current in accordance with their contractual
      terms totaled $189,000, $40,000 and $124,000 for the years ended March 31,
      2006,  2005 and 2004,  respectively,  compared to interest income actually
      recognized of $63,000, $16,000 and $71,000, respectively.

      The Company  had no  impaired  loans at March 31, 2006 and 2005 within the
      scope of SFAS No. 114, Accounting by Creditors for Impairment of a Loan.

      Provisions  for losses and other  activity in the  allowance for losses on
      real  estate  owned were  insignificant  during the years  ended March 31,
      2006, 2005 and 2004.

(6)   Premises and Equipment

      A summary of premises and equipment at March 31 follows:

----------------------------------------------------------------------
(In thousands)                                     2006        2005
----------------------------------------------------------------------
Land                                             $    592    $    592
Buildings and improvements                          4,406       4,313
Leasehold improvements                              3,222       3,217
Furniture and equipment                             3,642       3,508
----------------------------------------------------------------------
                                                   11,862      11,630
Less accumulated depreciation and amortization     (6,316)     (5,416)
----------------------------------------------------------------------
       Premises and equipment, net               $  5,546    $  6,214
======================================================================


                                       35
<PAGE>

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

(7)   Deposits

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

<TABLE>
<CAPTION>
                                                                           2006                2005
-------------------------------------------------------------------------------------------------------------
(Dollars in thousands)                                               Rate       Amount    Rate      Amount
-------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>     <C>          <C>     <C>
Savings and club accounts                                            0.58%   $  129,640   0.51%   $  150,455
Money market accounts                                                2.30        56,147   0.97        52,881
NOW accounts                                                         0.75        74,308   0.35        61,357
Commercial checking                                                    --        20,415     --        14,201
-------------------------------------------------------------------------------------------------------------
Total                                                                0.93       280,510   0.54       278,894
-------------------------------------------------------------------------------------------------------------
Certificates of deposit by remaining term to contractual maturity:
  Within one year                                                    3.70       574,166   2.30       260,659
  After one but within two years                                     4.08       105,274   3.15       199,952
  After two but within three years                                   3.74        13,334   3.60        59,822
  After three years                                                  4.44        30,407   4.23        32,441
-------------------------------------------------------------------------------------------------------------
Total                                                                3.78       723,181   2.86       552,874
-------------------------------------------------------------------------------------------------------------
Total deposits                                                       2.73%   $1,003,691   1.90%   $  831,768
=============================================================================================================
</TABLE>

      Certificates  of deposit  with  denominations  of $100,000 or more totaled
      $195.0   million   and  $138.7   million  at  March  31,  2006  and  2005,
      respectively.

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

(In thousands)                    2006     2005       2004
------------------------------------------------------------
Savings and club accounts       $   767   $   783   $   856
Money market and NOW accounts       866       526       547
Certificates of deposit          21,574    12,659     9,601
------------------------------------------------------------
        Total                   $23,207   $13,968   $11,004
============================================================

(8)   Borrowings

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

                                                    March 31,
Maturity Date                        Coupon   -------------------
(Dollars in thousands)                Rate     2006       2005
----------------------------------------------------------------
January 2008 (1)                      5.42%   $10,000   $10,000
December 2008 (1)                     4.72      5,000     5,000
June 2005                             2.47         --     3,000
March 2006                            2.27         --     7,000
March 2007                            2.65      7,000     7,000
March 2008                            4.13      6,000     6,000
                                              ------------------
Total borrowings                              $28,000   $38,000
                                              ==================
Weighted average interest rate                   4.33%     3.80%
Accrued interest payable                      $   147   $   165

(1)   Callable quarterly.


                                       36
<PAGE>

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

      The securities  transferred to the FHLB in repurchase  agreements  include
      U.S.  Government and agency securities and  mortgage-backed  securities of
      $14.9 million and $14.2  million,  respectively,  at March 31, 2006 ($14.1
      million  and $23.7  million,  respectively,  at March 31,  2005).  Accrued
      interest  receivable on these securities  totaled $239,000 and $258,000 at
      March 31, 2006 and 2005, respectively.

      In  addition  to  securities  repurchase  agreements,  the  Bank  may have
      outstanding borrowings from the FHLB of up to approximately $100.0 million
      at March 31, 2006, in a combination  of term advances and overnight  funds
      secured by the Bank's  investment in FHLB stock and by a blanket  security
      agreement.  This  agreement  requires  the Bank to maintain as  collateral
      certain qualifying assets (such as one-to-four family residential mortgage
      loans)  with a fair  value,  as  defined,  at  least  equal to 110% of any
      outstanding advances.  There were no such borrowings  outstanding at March
      31, 2006 and 2005.

(9)   Income Taxes

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

(In thousands)                            2006       2005       2004
----------------------------------------------------------------------
Federal:
       Current                           $ 2,329   $ 3,129    $ 3,627
       Deferred                              285       (39)        11
----------------------------------------------------------------------
                                           2,614     3,090      3,638
----------------------------------------------------------------------
State:
       Current                               306       458        575
       Deferred                               83       (15)        21
----------------------------------------------------------------------
                                             389       443        596
----------------------------------------------------------------------
Total:
       Current                             2,635     3,587      4,202
       Deferred                              368       (54)        32
----------------------------------------------------------------------
                                         $ 3,003   $ 3,533    $ 4,234
======================================================================

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

(Dollars in thousands)                            2006        2005        2004
--------------------------------------------------------------------------------
Taxes at Federal statutory rate                 $ 2,437     $ 3,061     $ 3,690
State tax expense, net of Federal tax benefit       257         292         390
Nondeductible ESOP expense                          331         239         248
Nondeductible merger costs                          149          --          --
Increase in cash surrender value of BOLI           (129)       (129)        (29)
Other reconciling items, net                        (42)         70         (65)
--------------------------------------------------------------------------------
Actual income tax expense                       $ 3,003     $ 3,533     $ 4,234
================================================================================
Effective income tax rate                          41.9%       39.2%       39.0%


                                       37
<PAGE>

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

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

(In thousands)                                                 2006     2005
--------------------------------------------------------------------------------
Deferred tax assets:
       Net unrealized loss on securities available for sale   $2,588   $1,811
       Allowance for loan losses                               1,324    1,204
       Deferred compensation                                     627      571
       Director retirement plan                                  489      340
       Accrued pension costs                                     214      173
       Stock benefit plan accruals                               197      197
       Other deductible temporary differences                    208      144
--------------------------------------------------------------------------------
                 Total deferred tax assets                     5,647    4,440
--------------------------------------------------------------------------------

Deferred tax liabilities:
       Prepaid pension costs                                   1,671    1,223
       Deferred loan costs                                     1,190      835
       Purchase accounting adjustment on buildings               141      146
--------------------------------------------------------------------------------
                 Total deferred tax liabilities                3,002    2,204
--------------------------------------------------------------------------------
Net deferred tax asset                                        $2,645   $2,236
================================================================================

      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, 2006 and 2005.

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

      The Bank's  base-year  tax bad debt  reserves  totaled  $9.0  million  for
      Federal tax  purposes at both March 31, 2006 and 2005,  and $14.5  million
      and $14.0  million  for New York State tax  purposes at March 31, 2006 and
      2005,  respectively.  In  accordance  with  SFAS  No.  109,  deferred  tax
      liabilities have not been recognized with respect to these reserves, since
      the Company does not expect that these amounts will become  taxable in the
      foreseeable  future.  Under  the tax laws,  events  that  would  result in
      taxation of these reserves  include (i) redemptions of the Bank's stock or
      certain excess  distributions by the Bank to the Holding Company, and (ii)
      failure of the Bank to maintain a  specified  qualifying  assets  ratio or
      meet other thrift  definition  tests for New York State tax purposes.  The
      unrecognized deferred tax liabilities with respect to the Bank's base-year
      reserves totaled $4.1 million and $3.9 million at March 31, 2006 and 2005,
      respectively.


                                       38
<PAGE>

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

(10)  Employee Benefit and Stock-Based Compensation Plans

      Pension Plans

      The Company maintains two  non-contributory  defined benefit pension plans
      that cover  substantially all full-time employees who meet certain age and
      service  requirements.  Benefits  are  based  on the  employee's  years of
      accredited  service and  average  compensation  for the three  consecutive
      years that produce the highest average. The Company's funding policy is to
      contribute  the  amounts  required  by  applicable  regulations,  although
      additional  amounts may be contributed from time to time. The Company does
      not expect to make any contributions to the plans in fiscal 2007.

      Plan assets are invested in the Guaranteed Deposit Fund ("GDF") which is a
      group annuity insurance product issued by Prudential  Retirement Insurance
      and Annuity  Company  ("PRIAC").  Deposits to the GDF are  deposited  into
      PRIAC's general account.  Payment  obligations  under the GDF represent an
      insurance claim  supported by all general  account  assets.  The guarantee
      from  PRIAC is based on the  claims-paying  ability  of PRIAC  and not the
      value of  securities  held in the GDF.  As such,  the GDF does not operate
      like a mutual fund, annuity product or other similar  investment.  The GDF
      is an  intermediate-term,  high-grade fixed income portfolio consisting of
      commercial  mortgages,  private  placement  bonds,  publicly  traded  debt
      securities and asset-backed  securities.  The underlying securities in the
      GDF have an average life of 4.5 years.

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

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


                                       39
<PAGE>

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

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

(In thousands)                                             2006         2005
--------------------------------------------------------------------------------
Change in projected benefit obligations:
       Beginning of year                                 $ 11,692    $ 10,451
       Service cost                                           459         366
       Interest cost                                          687         638
       Actuarial loss                                       1,199         747
       Benefits paid                                         (521)       (510)
--------------------------------------------------------------------------------
       End of year                                         13,516      11,692
--------------------------------------------------------------------------------
Change in fair value of plan assets:
       Beginning of year                                   11,040      10,239
       Actual return on plan assets                           273         246
       Employer contributions                               1,712       1,065
       Benefits paid                                         (521)       (510)
--------------------------------------------------------------------------------
       End of year                                         12,504      11,040
--------------------------------------------------------------------------------
Funded status at the measurement date                      (1,012)       (652)
Employer contributions after the measurement date              --         150
Unrecognized net actuarial loss (1)                         5,155       3,520
Unrecognized past service liability                            34          39
--------------------------------------------------------------------------------
Prepaid pension costs at March 31                        $  4,177    $  3,057
================================================================================

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

      The plans'  accumulated  benefit  obligations were $11.5 million and $10.1
      million at March 31, 2006 and 2005, respectively.

      Pension benefits  expected to be paid for the fiscal years ending March 31
      are  $629,000  in 2007,  $648,000 in 2008,  $680,000 in 2009,  $709,000 in
      2010,  $729,000 in 2011 and a total of $4.2  million in  2012-2016.  These
      amounts  are based on the same  assumptions  used to measure  the  benefit
      obligation  at  March  31,  2006 and  include  estimated  future  employee
      service.


                                       40
<PAGE>

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

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

(Dollars in thousands)                               2006       2005     2004
--------------------------------------------------------------------------------
Service cost                                         $ 459     $ 366     $ 341
Interest cost                                          687       638       623
Expected return on plan assets                        (924)     (900)     (700)
Recognized net actuarial loss                          208       108       111
Amortization of prior service cost and net
   transition obligation                                 5         5         5
--------------------------------------------------------------------------------
   Net periodic pension expense                      $ 435     $ 217     $ 380
================================================================================
Weighted-average assumptions used to determine
  projected benefit obligations at
  March 31:
   Discount rate                                      5.75%     6.00%     6.25%
   Rate of compensation increase                      3.00%     3.50%     3.50%
Weighted-average assumptions used to determine net
  periodic pension expense for
  the years ended March 31:
   Discount rate                                      6.00%     6.25%     6.50%
   Expected long-term rate of
        return on plan assets                         8.50%     8.50%     8.50%
   Rate of compensation increase                      3.50%     3.50%     4.00%

      The Company also has a supplemental  executive  retirement plan which is a
      non-qualified  plan  providing  benefits  to certain  key  employees.  The
      supplemental  benefits  represent the  difference  between the pension and
      ESOP  benefits  the  executive  would be entitled  to receive  under those
      plans,  without considering the applicable  limitations under the tax law,
      and the actual benefits after  considering such  limitations.  The accrued
      liability for the supplemental plan was $536,000 and $431,000 at March 31,
      2006 and 2005, respectively, and the related expense was $105,000, $98,000
      and  $38,000  for  the  years  ended  March  31,  2006,   2005  and  2004,
      respectively.

      Director Retirement Plan

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

      Under the former Director  Emeritus Plan,  benefit  payments would be made
      for a period not to exceed 15 years or to age 85 or until the death of the
      director  emeritus,  whichever  came first.  Directors  would  qualify for
      emeritus  status  upon  attaining  age 70 with at  least 15 years of board
      service.


                                       41
<PAGE>

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

      The following table  summarizes  changes in the plan's  projected  benefit
      obligation.  The table also provides a reconciliation of the funded status
      to the accrued benefit cost recognized in the consolidated balance sheets.
      A  discount  rate of 5.75% was used to  determine  the  projected  benefit
      obligation.

(In thousands)                                                2006      2005
--------------------------------------------------------------------------------
Change in projected benefit obligation:
      Beginning of year                                     $ 2,024    $ 1,633
      Service cost                                              165         48
      Interest cost                                             128        104
      Actuarial loss                                            209        282
      Benefits paid                                             (43)       (43)
--------------------------------------------------------------------------------
      End of year                                             2,483      2,024
Fair value of plan assets                                        --         --
--------------------------------------------------------------------------------
Funded status                                                (2,483)    (2,024)
Unrecognized net actuarial loss (gain)                          129        (92)
Unrecognized prior service cost                               1,132      1,265
--------------------------------------------------------------------------------
Accrued benefit cost at end of year                         $(1,222)   $  (851)
================================================================================

      The components of the net periodic expense for the plan were as follows:

(Dollars in thousands)                       2006      2005       2004
--------------------------------------------------------------------------------
Service cost                                 $ 165     $  48     $  11
Interest cost                                  128       104        48
Recognized net actuarial gain                  (12)      (40)       --
Amortization of prior service cost             133       133        79
--------------------------------------------------------------------------------
  Net periodic expense                       $ 414     $ 245     $ 138
================================================================================

      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.

      Employee Stock Ownership Plan

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


                                       42
<PAGE>

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

      make principal and interest payments on the loans,  which had total unpaid
      principal  balances of $6.1 million and $6.4 million at March 31, 2006 and
      2005, respectively.

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

      ESOP expense was $1.5 million, $1.2 million and $1.2 million for the years
      ended March 31, 2006,  2005 and 2004,  respectively.  The cost of the ESOP
      shares that have not yet been  allocated  or  committed  to be released to
      participants  is deducted from  stockholders'  equity  (635,402 shares and
      698,606 shares at March 31, 2006 and 2005,  respectively).  The fair value
      of these shares was approximately $13.1 million and $10.8 million at March
      31, 2006 and 2005, respectively.

      Stock Options

      In October 1999, the stockholders  approved the Sound Federal Bancorp 1999
      Stock Option Plan (the "Stock  Option  Plan") and option  grants were made
      for 583,048 shares at an exercise price of $3.298 per share. These options
      have a 10-year term and were fully vested at March 31, 2006 and 2005. Each
      option  entitles  the holder to purchase  one share of common  stock at an
      exercise  price equal to the fair  market  value of the stock on the grant
      date.

      In February 2004,  the  stockholders  approved the Sound Federal  Bancorp,
      Inc.  Incentive  Stock  Benefit Plan (the "ISB Plan").  A total of 700,266
      shares of authorized but unissued  common stock were reserved for issuance
      under this plan. In February 2004,  initial grants were made under the ISB
      Plan for 665,253 shares at an exercise price of $15.20 per share.  Options
      have a  10-year  term and may be either  non-qualified  stock  options  or
      incentive stock options. The options vest at a rate of 20% on each of five
      annual vesting dates,  with the first vesting  occurring in February 2004.
      Each option  entitles  the holder to purchase one share of common stock at
      an exercise price equal to the fair market value of the stock on the grant
      date. At March 31, 2006 and 2005,  there were 35,013 shares  available for
      future option grants.

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

      Stock option activity is summarized below:

                             Options Outstanding           Options Exercisable
--------------------------------------------------------------------------------
                                    Weighted Average            Weighted Average
                            Number    Exercise Price    Number    Exercise Price
--------------------------------------------------------------------------------
At March 31, 2003          530,482       $ 3.298       428,818         $3.298
Granted                    665,253        15.200
Exercised                  (81,185)        3.298
-----------------------------------
At March 31, 2004        1,114,550        10.402       582,347          6.014
Exercised                  (77,665)        3.298
-----------------------------------
At March 31, 2005        1,036,885        10.934       637,724          8.264
Exercised                  (46,134)        3.298
-----------------------------------
At March 31, 2006          990,751        11.290       724,641          9.854
===================================


                                       43
<PAGE>

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

      Additional  information for  outstanding and exercisable  options at March
      31, 2006 follows:

                                                Options              Options
Exercise Price                                Outstanding          Exercisable
--------------------------------------------------------------------------------
 $ 3.298                                         325,498             325,498
  15.200                                         665,253             399,143
--------------------------------------------------------------------------------
                                                 990,751             724,641
================================================================================

      Stock Awards

      The Company granted stock awards pursuant to the Recognition and Retention
      Plan (the "RRP")  established in October 1999 and the ISB Plan established
      in February  2004.  The purpose of both plans is to provide  officers  and
      directors of the Company with a  proprietary  interest in the Company in a
      manner  designed to encourage their  retention.  Through March 31, 2006, a
      total of 389,037 and 291,524  shares have been awarded  under the ISB Plan
      and RRP,  respectively.  The awards  vest at a rate of 20% on each of five
      annual vesting dates.  The shares awarded pursuant to the RRP became fully
      vested  during the year ended March 31, 2004.  The first  vesting date for
      shares  awarded  under  the ISB Plan was in  November  2004.  The  expense
      recognized  for stock awards  amounted to $1.2  million,  $1.2 million and
      $395,000 for the years ended March 31, 2006, 2005 and 2004, respectively.

(11)  Commitments and Contingencies

      Off-Balance Sheet Financial Instruments

      The Company's  off-balance  sheet financial  instruments at March 31, 2006
      and 2005 were limited to loan origination commitments of $42.2 million and
      $66.0 million, respectively, and unused lines of credit (principally fixed
      rate home equity  lines)  extended to customers of $53.4 million and $47.6
      million, respectively. Substantially all of these commitments and lines of
      credit  have been  provided  to  customers  within the  Company's  primary
      lending area  described in Note 5. Loan  origination  commitments at March
      31, 2006 consisted of adjustable rate and fixed rate  commitments of $30.6
      million and $11.6 million,  respectively,  with weighted average yields of
      7.19% and 6.10%,  respectively.  Loan origination commitments at March 31,
      2005  consisted of  adjustable  rate and fixed rate  commitments  of $34.9
      million and $31.1 million,  respectively,  with weighted average yields of
      5.79% and 6.15%, respectively.

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


                                       44
<PAGE>

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

      Operating Lease Commitments

      The Company is obligated  under  non-cancelable  operating  leases for ten
      branch  offices and the  Company's  corporate  office.  Rent expense under
      operating leases was $1.1 million, $1.0 million and $808,000 for the years
      ended March 31, 2006, 2005 and 2004, respectively.  At March 31, 2006, the
      future minimum rental payments under  operating  lease  agreements for the
      fiscal years  ending  March 31 are $1.1  million in 2007,  $1.1 million in
      2008, $905,000 in 2009, $667,000 in 2010, $357,000 in 2011, and a total of
      $2.2 million for 2012 and thereafter.

      Legal Proceedings

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

(12)  Regulatory Matters

      Regulatory Capital Requirements

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

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

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

      Management  believes that, as of March 31, 2006 and 2005, 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.


                                       45
<PAGE>

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

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

                                                   OTS Requirements
                                          --------------------------------------
                                                              Classification
                                               Minimum              as Well
                           Bank Actual    Capital Adequacy       Capitalized
--------------------------------------------------------------------------------
(Dollars in thousands)   Amount    Ratio    Amount   Ratio    Amount    Ratio
--------------------------------------------------------------------------------
March 31, 2006
Tangible capital        $107,796    9.3%   $ 17,311   1.5%
Tier I (core) capital    107,796    9.3      46,163   4.0    $ 57,704    5.0%
Risk-based capital:
         Tier I          107,796   19.7      21,931   4.0      32,897    6.0
         Total           111,105   20.3      43,863   8.0      54,829   10.0
March 31, 2005
Tangible capital        $101,814   10.3%   $ 14,888   1.5%
Tier I (core) capital    101,814   10.3      39,703   4.0    $ 49,627    5.0%
Risk-based capital:
         Tier I          101,814   22.9      17,729   4.0      26,591    6.0
         Total           104,825   23.6      35,455   8.0      44,319   10.0

      Dividend Limitations

      Under OTS regulations, savings associations such as the Bank generally may
      declare  annual cash dividends up to an amount equal to net income for the
      current  year  plus  retained  net  income  for the two  preceding  years.
      Dividends in excess of this amount require OTS approval.  Unlike the Bank,
      the Holding  Company is not subject to OTS  regulatory  limitations on the
      payment of dividends to its  shareholders.  At March 31, 2006,  the Bank's
      retained net income for fiscal 2006 and 2005 was $10.1 million.

      Stock Repurchase Program

      In June 2004, the Company  announced a program to repurchase up to 658,844
      shares of its common  stock.  Through  March 31,  2006, a total of 337,300
      shares had been  purchased  at an average  price of $15.16 per share.  The
      repurchase program has no expiration date. However, under the terms of the
      Merger Agreement,  the Company has agreed to not repurchase any additional
      shares.

      Liquidation Rights

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


                                       46
<PAGE>

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

      liquidation  account.  The Bank may not pay cash  dividends  or make other
      capital  distributions  if the  effect  thereof  would  be to  reduce  its
      stockholder's equity below the amount of the liquidation account.

(13)  Comprehensive Income (Loss)

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

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

(In thousands)                                      2006       2005       2004
--------------------------------------------------------------------------------
Net unrealized holding loss arising during
    the period on securities available for sale   $(1,942)   $(5,677)   $(2,352)
Reversal of adjustment for additional
    minimum pension liability                          --         --      3,468
Related deferred income tax effect                    777      2,252       (430)
--------------------------------------------------------------------------------
Other comprehensive (loss) income                 $(1,165)   $(3,425)   $   686
================================================================================

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

(In thousands)                                                 2006       2005
--------------------------------------------------------------------------------
Net unrealized holding loss on securities
  available for sale                                         $(6,476)   $(4,534)
Related deferred income taxes                                  2,588      1,811
--------------------------------------------------------------------------------
Accumulated other comprehensive loss                         $(3,888)   $(2,723)
================================================================================


                                       47
<PAGE>

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

(14)  Earnings Per Share

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

                                                 Years Ended March 31,
--------------------------------------------------------------------------------
(In thousands, except per share data)          2006       2005      2004
--------------------------------------------------------------------------------
Net income                                    $ 4,164   $ 5,469   $ 6,618
================================================================================
Weighted average common shares
       outstanding for computation of
       basic EPS (1)                           11,471    11,651    12,367
Common-equivalent shares for the
       dilutive effect of stock options and
       stock awards (2)                           330       267       346
--------------------------------------------------------------------------------
Weighted average common shares for
       computation of diluted EPS              11,801    11,918    12,713
================================================================================
Earnings per common share:
       Basic                                  $  0.36   $  0.47   $  0.54
       Diluted                                   0.35      0.46      0.52
================================================================================

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

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

(15)  Fair Values of Financial Instruments

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

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


                                       48
<PAGE>

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

      The  following is a summary of the  carrying  amounts and  estimated  fair
      values of the Company's financial assets and liabilities at March 31:

                                                     2006              2005
--------------------------------------------------------------------------------
                                              Carrying  Fair    Carrying   Fair
(In millions)                                  Amount   Value    Amount    Value
--------------------------------------------------------------------------------
Financial assets:
      Cash and cash equivalents                $ 54.3   $ 54.3   $ 42.6   $ 42.6
      Securities available for sale             215.5    215.5    276.2    276.2
      Securities held to maturity               111.2    109.4     79.5     78.7
      Loans, net                                741.6    735.4    560.8    563.0
      Accrued interest receivable                 5.3      5.3      4.3      4.3
      FHLB stock                                  2.8      2.8      5.7      5.7
Financial liabilities:
      Savings certificate accounts              723.2    723.2    552.9    552.9
      Other deposit accounts                    280.5    280.5    278.9    278.9
      Borrowings                                 28.0     27.6     38.0     37.9
      Mortgagors' escrow funds                    6.2      6.2      5.3      5.3
================================================================================

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

      Securities

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

      Loans

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

      Deposit Liabilities

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

      Borrowings

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


                                       49
<PAGE>

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

      Other Financial Instruments

      The remaining  financial  assets and  liabilities  listed in the preceding
      table have fair values that approximate the respective carrying amounts in
      the  consolidated  balance sheets because the  instruments  are payable on
      demand or have  short-term  maturities  and present  relatively low credit
      risk  and  interest  rate  risk.  Fair  values  of  the  loan  origination
      commitments and unused lines of credit described in Note 11 were estimated
      based on an analysis of the interest rates and fees  currently  charged to
      enter into similar  transactions,  considering  the remaining terms of the
      instruments and the creditworthiness of the potential borrowers.  At March
      31, 2006 and 2005, the fair values of these  instruments  approximated the
      related carrying amounts.

(16)  Parent Company Condensed Financial Statements

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

Condensed Balance Sheets                                           March 31,
--------------------------------------------------------------------------------
(In thousands)                                                 2006       2005
--------------------------------------------------------------------------------
Assets
Interest-bearing deposits at subsidiary bank                 $  3,911   $ 10,416
Loans receivable from ESOP                                      6,065      6,448
Investment in subsidiary bank                                 117,895    113,065
Due from subsidiary bank                                        4,952        826
Other assets                                                    1,496      2,504
--------------------------------------------------------------------------------
  Total assets                                               $134,319   $133,259
================================================================================
Liabilities                                                  $  5,633   $  6,099
Stockholders' Equity                                          128,686    127,160
--------------------------------------------------------------------------------
  Total liabilities and stockholders' equity                 $134,319   $133,259
================================================================================

Condensed Statements of Income                 Years Ended March 31,
--------------------------------------------------------------------------
(In thousands)                              2006       2005       2004
--------------------------------------------------------------------------
Interest income                           $   412    $   339    $   499
Non-interest expenses                        (946)      (381)      (397)
--------------------------------------------------------------------------
 Income (loss) before income taxes and
    equity in undistributed earnings of
    subsidiary bank                          (534)       (42)       102
Income tax expense (benefit)                  (55)       (12)        90
--------------------------------------------------------------------------
Income (loss) before equity in
    undistributed earnings of
    subsidiary bank                          (479)       (30)        12
Equity in undistributed earnings of
    subsidiary bank                         4,643      5,499      6,606
--------------------------------------------------------------------------
Net income                                $ 4,164    $ 5,469    $ 6,618
==========================================================================


                                       50
<PAGE>

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

<TABLE>
<CAPTION>
Condensed Statements of Cash Flows                                Years Ended March 31,
----------------------------------------------------------------------------------------------
(In thousands)                                                2006        2005        2004
----------------------------------------------------------------------------------------------
<S>                                                         <C>         <C>         <C>
Operating Activities
Net income                                                  $  4,164    $  5,469    $  6,618
Adjustments to reconcile net income to
    net cash (used in) provided by  operating activities:
         Equity in undistributed earnings of
              subsidiary bank                                 (4,643)     (5,499)     (6,606)
         (Increase) decrease in due from subsidiary bank      (4,126)      3,364      (3,581)
         Other                                                 2,241        (279)       (158)
----------------------------------------------------------------------------------------------
              Net cash (used in) provided by
                   operating activities                       (2,364)      3,055      (3,727)
----------------------------------------------------------------------------------------------
Investing Activities
ESOP loan repayments                                             383         370         367
----------------------------------------------------------------------------------------------
              Net cash provided by investing activities          383         370         367
----------------------------------------------------------------------------------------------
Financing Activities
Purchases of treasury stock                                   (1,349)    (12,087)     (8,417)
Proceeds from exercise of stock options                          152         258         268
Payment of cash dividends on common stock                     (3,327)     (2,891)     (2,648)
----------------------------------------------------------------------------------------------
              Net cash used in financing activities           (4,524)    (14,720)    (10,797)
----------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents                     (6,505)    (11,295)    (14,157)
Cash and cash equivalents at beginning of year                10,416      21,711      35,868
----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                    $  3,911    $ 10,416    $ 21,711
==============================================================================================
</TABLE>


                                       51
<PAGE>

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

(17)  Quarterly Results of Operations (Unaudited)

      The  following is a condensed  summary of quarterly  results of operations
      for the years ended March 31, 2006 and 2005:

                                            First    Second     Third     Fourth
(In thousands, except per share data)      Quarter   Quarter   Quarter   Quarter
--------------------------------------------------------------------------------
Year Ended March 31, 2006
Interest and dividend income               $11,554   $12,338   $13,378   $14,171
Interest expense                             5,034     5,790     6,655     7,141
--------------------------------------------------------------------------------
Net interest income                          6,520     6,548     6,723     7,030
Provision for loan losses                       75        75        75        75
Non-interest income                            369       778       346       362
Non-interest expense                         4,970     5,034     5,245     5,960
--------------------------------------------------------------------------------
Income before income tax expense             1,844     2,217     1,749     1,357
Income tax expense                             720       858       703       722
--------------------------------------------------------------------------------
Net income                                 $ 1,124   $ 1,359   $ 1,046   $   635
================================================================================
Basic earnings per common share            $  0.10   $  0.12   $  0.09   $  0.06
Diluted earnings per common share             0.10      0.12      0.09      0.05
================================================================================
Year Ended March 31, 2005
Interest and dividend income               $ 9,769   $10,485   $10,728   $10,918
Interest expense                             3,311     3,779     4,053     4,334
--------------------------------------------------------------------------------
Net interest income                          6,458     6,706     6,675     6,584
Provision for loan losses                       75        75        75        75
Non-interest income                            352       310       382       403
Non-interest expense                         4,292     4,601     4,600     5,075
--------------------------------------------------------------------------------
Income before income tax expense             2,443     2,340     2,382     1,837
Income tax expense                             946       909       956       722
--------------------------------------------------------------------------------
Net income                                 $ 1,497   $ 1,431   $ 1,426   $ 1,115
================================================================================
Basic earnings per common share            $  0.13   $  0.12   $  0.12   $  0.10
Diluted earnings per common share             0.12      0.12      0.12      0.10
================================================================================


                                       52