EXHIBIT 13ANNUAL
REPORT TO SHAREHOLDERS

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Table of Contents

|Letter to
Shareholders                                                                |  |  |  | 1 
|------------------------------------------------------------------------------------- |  |  |  | --
|Selected
Financial and Other Data                                                     |  |  |  | 2 
|Managements Discussion and Analysis of Financial Condition and Results of Operations |  |  |  | 4 
|Management
Responsibility Statement                                                   |  |  |  | 13
|Report of
Independent Registered Public Accounting Firm                               |  |  |  | 15
|Consolidated
Financial Statements                                                     |  |  |  | 17
|Directors
and Executive Officers                                                      |  |  |  | 46
|Shareholder
Information                                                               |  |  |  | 47

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Dear Shareholder,



Our 2005 Annual Report covers our first two years as
a publicly traded company. We are pleased to report net income for fiscal year 2005 was $2,033,902 or $1.28 per share ($1.27 fully diluted) an increase
of 47% from fiscal year 2004. Included in net income for the year is $340,000 or $0.21 per share of non-recurring income from the proceeds of a
litigation settlement. Net interest income for the year totaled $7.0 million compared to $6.2 million for the prior fiscal year. The return on average
assets increased in 2005 to 1.12% from 0.92% in the prior year.




Atlantic Liberty Financial Corporations share
price on March 31, 2005 was $23.05 up from $19.34 at March 31, 2004, representing an annual return of over 19%, for our valued shareholders. Atlantic
Liberty Financial Corporation shareholders who purchased stock in the initial public offering have enjoyed a 130% increase, excluding the impact of
cash dividends, in their initial $10 investment. Based on our closing price of $23.05 the Companys market capitalization as at March
31, 2005 was approximately $38.8 million




Our Board of Directors continues to be cognizant of
the need for a structured capital management program. With the initial declaration of a $0.05 per share dividend after only three quarters as a public
company, the Board of Directors has increased the dividend per share twice, to our present level of $0.07 per share. This represents a cumulative
increase of 40% in dividends paid to our shareholders. Atlantic Liberty Financial Corporation continues to utilize our Stock Repurchase Program to
further enhance shareholder value. At the end of fiscal year 2005, we had repurchased a total of 47,591 shares or 56% of our approved 5% repurchase
program.




On the asset side of our balance sheet, the quality
of assets remains high. The proportion of non-performing loans to total loans was .07%, compared to .08% for fiscal year 2004. Our loan production
during the year totaled $31.8 million and our overall portfolio increased 6.2%. Growth was experienced in the commercial, multi-family as well as the
14 family portfolio.




Your Companys fundamental business and growth
goals remain basically unchanged as we face a changing economic landscape. The initiatives for continued growth and increased profitability remain the
cornerstone of managements business plan for fiscal year 2005-2006. The market areas where we conduct business continue to experience strong
economic growth. My expectations going forward are based on the solid asset base we enjoy, the strong market areas in which we are located and
emphasizing what we do best, serving our loyal customer base and our local communities.




We are proud of our record to date and our greatest
asset, our dedicated staff. Our employees high level of personal service to our customers is invariably Atlantic Libertys competitive edge,
it separates us from our competitors. We recognize the performance of our staff and officers who on a daily basis make that extra effort and enable us
to achieve financial success.




On behalf of our Board, management and staff we
thank you our loyal shareholders for your continued investment in Atlantic Liberty Financial Corp.




Sincerely,
/s/ BARRY M. DONOHUE
Barry M. Donohue President &
CEO


1

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Atlantic Liberty Financial Corp.

SELECTED FINANCIAL AND OTHER DATA

Selected Financial Condition Data:






|                                            |  |  |  | At March 31, |        
|------------------------------------------- |  |  |  | ------------ | -------
|
|
|Total
assets                                |  |  |  | $            | 183,974
|Loans
receivable, net (1)                   |  |  |  |              | 120,148
|Mortgage-backed securities held to maturity |  |  |  |              | 41,978 
|Securities
available for sale               |  |  |  |              | 2,940  
|Investment
securities held to maturity      |  |  |  |              | 4,008  
|Deposits                                    |  |  |  |              | 109,103
|Total
borrowings                            |  |  |  |              | 43,350 
|Stockholders Equity                        |  |  |  |              | 27,827 






|(1) |  | Net of allowance for loan losses and deferred loan
fees
|--- |  | -------------------------------------------------------

Selected Operating Data:






|                                                    |  |  |  | Years ended March 31, |      
|--------------------------------------------------- |  |  |  | --------------------- | -----
|
|
|Total interest
income                               |  |  |  | $                     | 9,817
|Total interest
expense                              |  |  |  |                       | 2,829
|Net interest
income                                 |  |  |  |                       | 6,988
|Provision for
loan losses                           |  |  |  |                       | 125  
|Net interest
income after provision for loan losses |  |  |  |                       | 6,863
|Non-interest
income                                 |  |  |  |                       | 1,468
|Non-interest
expense                                |  |  |  |                       | 4,801
|Income before
taxes                                 |  |  |  |                       | 3,530
|Income tax
provision                                |  |  |  |                       | 1,496
|Net
income                                          |  |  |  | $                     | 2,034
|Net income per
share  Basic                        |  |  |  | $                     | 1.28 
|Net income per
share  Fully Diluted                |  |  |  | $                     | 1.27 

2

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Performance Ratios:






|                                                                                 |  |  |  | At or for the years ended March 31, |     
|-------------------------------------------------------------------------------- |  |  |  | ----------------------------------- | ----
|
|
|Return on
assets (ratio of net income to average total assets)                   |  |  |  |                                     | 1.12
|Return on
equity (ratio of net income to average equity)                         |  |  |  |                                     | 7.50
|Interest rate
spread (1)                                                         |  |  |  |                                     | 3.74
|Net interest
margin (2)                                                          |  |  |  |                                     | 4.00
|Ratio of
non-interest expense to average total assets                            |  |  |  |                                     | 2.64
|Ratio of
average interest-earning assets to average interest-bearing liabilities |  |  |  |                                     | 1.16

Asset Quality Ratios:






|                                                       |  |  |  | At or for the years ended March 31, |       
|------------------------------------------------------ |  |  |  | ----------------------------------- | ------
|
|Non-performing
assets to total assets at end of period |  |  |  |                                     | 0.09  
|Allowance for
loan losses to non performing loans      |  |  |  |                                     | 832.60
|Allowance for
loan losses to total loans receivable    |  |  |  |                                     | 0.61  
|                                                      
|Capital
Ratios:                                        |  |  |  |                                     |       
|Stockholders equity to total assets at end of period  |  |  |  |                                     | 15.13 
|Average
stockholders equity to average assets         |  |  |  |                                     | 14.89 
|                                                      
|Other
Data:                                            |  |  |  |                                     |       
|Number of
full-service offices                         |  |  |  |                                     | 2     






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

|(2) |  | Net interest income divided by average interest earning
assets.
|--- |  | ---------------------------------------------------------------

3

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



The Company is a Delaware Corporation, which began
operations on October 22, 2002 following the completion of Atlantic Liberty Savings, F.A.s (The Bank) conversion from mutual to stock
ownership. On that date, the Company sold 1,710,984 shares of common stock at $10 per share and received net proceeds of $14.8 million, exclusive of
conversion expenses of $900,000 and $1.4 million to fund the purchase of shares for our employee stock ownership plan. Approximately 50% of the net
proceeds were used by the Company to acquire all of the capital stock of the Association.




Our results of operations depend primarily on our
net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of
loans, mortgage-backed securities, investment securities and other interest-earning assets, and the interest we pay on our interest-bearing
liabilities, consisting primarily of savings accounts and time deposits and advances from the Federal Home Loan Bank of New York (FHLB). Our results of
operations are also affected by our provisions for loan losses, non-interest income and non interest expense. Non interest income consists primarily of
fees and service charges. Non interest expense consists primarily of salaries and employee benefits, occupancy, equipment, data processing and deposit
insurance premiums, professional fees, and other operating expenses. Our results of operations also may be affected significantly by general and local
economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.


Comparison of Financial Condition at March 31, 2005 and March 31,
2004



Our total assets at March 31, 2005 were $184.0
million an increase of $24.0 million or 15.0% from $160.0 million at March 31, 2004. The increase reflects growth in loans receivable, investment
securities held to maturity and mortgage-backed securities held to maturity. The growth in assets was primarily funded by net increases in advances
from the Federal Home Loan Bank of New York (FHLB) and deposits. Loans increased by $7.0 million or 6.2% to $120.1 million at March 31, 2005 from
$113.1 million at March 31, 2004. The increase in loans resulted principally from increases in multi-family and commercial real estate mortgage loans,
including $10.4 million purchased from other financial institutions. Mortgage-backed securities held to maturity increased $11.3 million or 36.8% to
$42.0 million at March 31, 2005 from $30.7 million at March 31, 2004 reflecting $20.0 million of new purchases, partially offset by pre-payments and
amortization of $8.7 million. The increase in mortgage-backed securities held to maturity reflects managements decision to implement a leveraged
strategy, which resulted in a positive interest rate spread. The underlying assets are principally adjustable rate mortgages which, over time, should
re-price in accordance with the movement of interest rates. Repayments of mortgage-backed securities may not be able to be reinvested at an equivalent
or higher yield. Investment securities held to maturity increased $2.0 million to $4.0 million at March 31, 2005 from $2.0 million at March 31, 2004.
The new investment securities provide a higher yield than overnight funds. The increase in assets was primarily funded by a net increase in advances
from the FHLB of $20.2 million to $43.4 million at March 31, 2005 from $23.2 million at March 31, 2004. In addition, deposits of $109.1 million at
March 31, 2005 increased $1.2 million or 1.1% from $107.9 million at March 31, 2004.




Stockholders equity increased $1.6 million, or
6.1% to $27.8 million at March 31, 2005 reflecting net income for the year ended March 31, 2005 of $2.0 million, partially offset by the payment of
cash dividends of $428,000.




During the fiscal year ended March 31, 2005, the
company purchased 28,191 shares of common stock for $595,000 in accordance with a previously approved stock repurchase plan and used 19,831 of the
treasury shares to fund vested restricted stock awards and the exercise of employee stock options. At March 31, 2005, the company has 27,760 treasury
shares.


Comparison of Operating Results for the years ended March 31, 2005 and March 31,
2004.



General. Net income for the year ended March
31, 2005 increased 47.1% to $2,034,000 or $1.28 per share ($1.27 on a fully diluted basis) from $1,383,000 or $0.87 per share ($0.86 on a fully diluted
basis) for the year ended March 31, 2004. Earnings for the year ended March 31, 2005 include $340,000, or $0.21 per share of non-recurring income
received in connection with the settlement of litigation. The increase in net income was primarily


4

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due to increases of $749,000 in net
interest income and  $1,054,000 in non-interest income, partially offset by increases of
$625,000 in non-interest expense, $125,000 in the provision for loan losses and  $402,000
in income tax expense.



Interest Income. Interest income increased by
$1.4 million or 16.7% to $9.8 million for the year ended March 31, 2005 from $8.4 million for the year ended March 31, 2004. The increase in interest
income resulted primarily from increases of $443,000 in interest received from loans, $851,000 in interest received on mortgage-backed securities held
to maturity, $40,000 in interest on securities available for sale, $42,000 in interest on securities held to maturity, and $52,000 in interest received
on other interest-earning assets. The increase in interest income reflected a $31.6 million or 22.1% increase in the average balance of
interest-earning assets to $174.7 million from $143.1 million. Partially offsetting the increase in average interest-earning assets was a 24 basis
point decrease in the average yield on interest earning assets to 5.62% for the year ended March 31, 2005 from 5.86% for the year ended March 31, 2004
reflecting a decrease in market interest rates generally.




Interest income from loans increased $443,000 or
6.2% to $7.6 million for the year ended March 31, 2005 from $7.2 million for the year ended March 31, 2004. The average yield on loans declined 26
basis points to 6.47% for the year ended March 31. 2005 from 6.73% for the year ended March 31, 2004 reflecting a decrease in market interest rates
generally. The effect of the decline was more than offset by a $11.1 million or 10.4% increase in the average balance of loans outstanding to $117.5
million for the year ended March 31, 2005 from $106.4 million for the year ended March 31, 2004.




Interest income from mortgage-backed securities held
to maturity increased $851,000 or 88.7% to $1.8 million for the year ended March 31, 2005 from $1.0 million for the year ended March 31, 2004. The
increase was due to an increase in average mortgage-backed securities held to maturity of $17.8 million or 65.2% to $45.1 million for the year ended
March 31, 2005 from $27.3 million for the year ended March 31, 2004, as well as 50 basis point increase in the average yield to 4.01% from
3.51%.




Interest income on securities available for sale
increased $40,000 or 38.8% to $143,000 for the year ended March 31, 2005, from $103,000 for the year ended March 31, 2004. The increase in interest
income on securities available for sale was due to an increase in the average balance of securities available for sale to $2.9 million from $2.4
million, as well as an increase of 64 basis points in the average yield to 5.01% for the year ended March 31, 2005 from 4.37% during fiscal
2004.




Interest income on securities held to maturity
increased $42,000 or 42.9% to $140,000 for the year ended March 31, 2005 from $98,000 for the year ended March 31, 2004. The increase in interest
income on securities held to maturity was due to an increase in the average balance of securities held to maturity to $2.3 million from $1.6 million,
partially offset by a decrease of 24 basis points in the average yield to 5.96% for the year ended March 31, 2005 from 6.20% during fiscal
2004.




Interest income on other interest earning assets,
consisting of cash and cash equivalents and Federal Home Loan Bank stock, increased $52,000 or 75.4% to $121,000 for the year ended March 31, 2005 from
$69,000 for the prior fiscal year. The increase reflects an increase of $1.5 million in average other interest-earning assets to $7.0 million for the
year ended March 31, 2005 from $5.5 million as well as an increase in the average yield on other interest-earning assets to 1.74% from
1.26%.




Interest Expense. Total interest expense
increased by $679,000 or 31.6% to $2.8 million for the year ended March 31, 2005 from $2.2 million for the year ended March 31, 2004. The increase in
interest expense resulted from a $30.7 million increase in the average balance of interest-bearing liabilities to $150.6 million for the year ended
March 31, 2005 from $119.9 million for the year ended March 31, 2004 as well as an increase in the average cost of our interest bearing liabilities to
1.88% from 1.79%.




Interest expense on deposits decreased $74,000 or
4.3% to $1,666,000 for the year ended March 31, 2005 from $1,740,000 million for the year ended March 31, 2004. The average balance of certificates of
deposit accounts decreased $3.0 million from $57.1 million for the year ended March 31, 2004 to $54.1 million for the year ended March 31, 2005, and
the average cost of such accounts decreased to 2.20% from 2.35%. As a partial offset, the average balance of transaction and savings deposits increased
$4.9 million or 10.2% to $52.9 million for the year ended March 31, 2005 from $48.0 million for the year ended March 31, 2004, and the average cost on
such accounts increased 7 basis points to 0.90% from 0.83%.


5

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Interest expense on advances and other borrowed
funds increased $753,000 or 183.2% to $1.2 million for the year ended March 31, 2005, from $411,000 for the year ended March 31, 2004. The increase
reflects an increase in the average FHLB advances and other borrowed funds of $28.8 million to $43.6 million for the year ended March 31, 2005, from
$14.8 million during the prior period partially offset by a decrease of 11 basis points in the average cost of such funds to 2.67% for the year ended
March 31, 2005 from 2.78% for the prior year.




Net Interest Income. Net interest income
increased $749,000, or 12.0%, to $7.0 million for the year ended March 31, 2005 from $6.2 million for the year ended March 31, 2004. The increase
primarily resulted from an increase of $31.6 million in interest earning assets, partially offset by a decrease in our net interest spread of 33 basis
points to 3.74% from 4.07%. Net interest margin for the year ended March 31, 2005 decreased 36 basis points to 4.00% from 4.36% in the prior fiscal
year.




Provision for Loan Losses. We establish
provisions for loan losses, which are charged to operations, at a level management believes is appropriate to absorb probable and reasonably estimable
credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the
nature and volume of the loan portfolio, adverse situations that may affect the borrowers ability to repay, estimated value of any underlying
collateral, peer group information, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are
susceptible to significant revision as more information becomes available or as future events change. Based on our evaluation of these factors,
management made a provision for loan losses of $125,000 for the year ended March 31, 2005. No provision was made for the year ended March 31,
2004.




We used the same methodology and generally similar
assumptions in assessing the adequacy of the allowance for loan losses for both periods. The allowance for loan losses was $737,000 or 0.61% of loans
outstanding at March 31, 2005 as compared with $582,000 or 0.51% of loans outstanding at March 31, 2004. During the years ended March 31, 2005, and
2004 we recorded $30,000 and $98,000, respectively, in recoveries of previously charged off loans. The allowance for loan losses represented 832.6% of
non-performing loans at March 31, 2005 and 603.7% of non-performing loans at March 31, 2004. The level of the allowance is based on estimates and the
ultimate losses may vary from the estimates.




Management assesses the allowance for loan losses on
a quarterly basis and makes provisions for loan losses as necessary in order to maintain the adequacy of the allowance. While management uses available
information to recognize losses on loans, future loan loss provisions may be necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require us to
recognize additional provisions based on their judgment of information available to them at the time of their examination. The allowance for loan
losses as of March 31, 2005 is maintained at a level that represents managements best estimate of inherent losses in the loan portfolio, and such
losses were both probable and reasonably estimable.




Non-Interest Income. Non-interest income
increased $1.1 million or 254.6% to $1.5 million for the year ended March 31, 2005, as compared to $414,000 for the year ended March 31, 2004. Income
from fees and service charges increased by $208,000 or 95.0% to $427,000 from $219,000. The increase was primarily attributed to increases of $11,000
in checking account fees, $190,000 in loan prepayment penalties and other miscellaneous mortgage fees and $6,000 in net appraisal fees. Miscellaneous
non-interest income increased $846,000 or 433.8% to $1.0 million from $195,000 principally due to a non-recurring litigation settlement of $825,000 and
the receipt of $33,000 in life insurance proceeds, partially offset by a decrease of $12,000 in income from the Banks investment in Bank Owned
Life Insurance.




Non-Interest Expense. Non-interest expense
for the year ended March 31, 2005 was $4.8 million compared to $4.2 million for the year ended March 31, 2004, an increase of $600,000 or 15.0%. The
increase was primarily attributable to increases of $348,000 in salaries and employee benefits, $71,000 in directors compensation, $39,000 in
equipment expense, $111,000 in legal fees and $57,000 in miscellaneous expense. The increase of $348,000 or 14.0% in salaries and employee benefits
includes increases of $120,000 in salaries and bonuses, $17,000 in ESOP expenses and $209,000 in management recognition plan expenses. The increase in
directors compensation of $71,000 or 43.6% is primarily attributable to the adoption of a Directors Retirement Plan during the year ended
March 31, 2005. The increase in equipment expenses of $39,000 or 10.4% is primarily attributable to an increase


6

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of $27,000 in fees paid to the companys
data service provider as well as miscellaneous increases in furniture and furniture depreciation and expenses. The $111,000 increase in legal fees
resulted primarily from fees incurred in connection with the Companys litigation settlement. Miscellaneous expenses, increased $57,000 or 7.5%,
primarily due to increases of $21,000 in new home equity loan expenses absorbed by the company as part of a promotion, and $7,000 in charitable
contributions as well as a decrease of $17,000 in fees received from mutual fund sales. Miscellaneous expense also consists of telephone, postage,
office supply and various other non classifiable operating expenses.




Provision for Income Taxes. The provision for
income taxes for the year ended March 31, 2005 increased to $1.5 million from $1.1 million for the year ended March 31, 2004. The increase in the
provision for income taxes is primarily due to our higher level of income before taxes of $3.5 million for the year ended March 31, 2005 compared with
$2.5 million in the prior period.


7

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Average Balance Sheet



The following tables present for the periods
indicated the total dollar amount of interest income on average interest-earning assets and the resultant yields, as well as the interest expense on
average interest-bearing liabilities, expressed both in dollars and rates. All average balances are derived from daily balances. Non-accruing loans
have been included in the table as loans carrying a zero yield.







|                                                                 |  |  |  |   |         |  |  | Years Ended March 31, |     
|---------------------------------------------------------------- |  |  |  | - | ------- |  |  | --------------------- | ----
|
|
|
|Interest-earning
assets:                                         |  |  |  |   |         |  |  |                       |     
|Loan receivable
(1)                                              |  |  |  | $ | 120,148 |  |  |                       | 6.29
|Mortgage-backed
securities held to maturity (2)                  |  |  |  |   | 41,977  |  |  |                       | 3.99
|Securities
available for sale (2)                                |  |  |  |   | 2,940   |  |  |                       | 5.17
|Investment
securities held to maturity (2)                       |  |  |  |   | 4,008   |  |  |                       | 5.57
|Other interest
earnings assets (3)                               |  |  |  |   | 7,271   |  |  |                       | 2.48
|Total
interest-earning assets                                    |  |  |  | $ | 176,344 |  |  |                       | 5.55
|Non-interest
earning assets                                      |  |  |  |   | 7,630   |  |  |                       |     
|Total
assets                                                     |  |  |  | $ | 183,974 |  |  |                       |     
|Interest-bearing
liabilities:                                    |  |  |  |   |         |  |  |                       |     
|Interest-bearing
deposits:                                       |  |  |  |   |         |  |  |                       |     
|NOW and money
market accounts                                    |  |  |  | $ | 32,058  |  |  |                       | 1.07
|Savings and club
accounts                                        |  |  |  |   | 22,201  |  |  |                       | 0.75
|Certificates of
Deposit                                          |  |  |  |   | 52,859  |  |  |                       | 2.30
|Advances and
other borrowed funds (4)                            |  |  |  |   | 44,412  |  |  |                       | 2.74
|Total
interest-bearing liabilities                               |  |  |  | $ | 151,530 |  |  |                       | 1.95
|Non-interest
bearing deposits                                    |  |  |  | $ | 1,985   |  |  |                       |     
|Non-interest
bearing liabilities                                 |  |  |  |   | 2,632   |  |  |                       |     
|Total
liabilities                                                |  |  |  | $ | 156,147 |  |  |                       |     
|Stockholders
equity                                              |  |  |  | $ | 27,827  |  |  |                       |     
|Total
liabilities and stockholders equity                        |  |  |  | $ | 183,974 |  |  |                       |     
|Net interest
income/interest rate spread                         |  |  |  |   |         |  |  |                       | 3.60
|Net interest
earning assets/net yield on interest-bearing assets |  |  |  | $ | 24,814  |  |  |                       |     
|Ratio of
interest-earning assets to interest-bearing liabilities |  |  |  |   |         |  |  |                       | 1.16

---

|(1) |  | Net of allowance for loan loss and net deferred fees and
costs.
|--- |  | ---------------------------------------------------------------

|(2) |  | Amounts shown are at amortized cost.
|--- |  | ------------------------------------

|(3) |  | Includes stock in the FHLB of New York.
|--- |  | ---------------------------------------

|(4) |  | Includes mortgage escrow funds.
|--- |  | -------------------------------

8

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Rate/Volume Analysis



The following table presents the dollar amount of
changes in interest income and interest expense for major components of interest- earning assets and interest-bearing liabilities. It distinguishes
between the changes related to changes in outstanding balances and those due to the changes in interest rates. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on multiplied by old volume). For purposes of this table, changes attributable to both
rate and volume, which cannot be segregated, have


|                                            |  |  |  | Years Ended March 31, |      
|------------------------------------------- |  |  |  | --------------------- | -----
|
|
|
|
|Interest-earning assets:                    |  |  |  |                       |      
|Loan
receivable                             |  |  |  | $                     | 748  
|Mortgage-backed securities held to maturity |  |  |  |                       | 625  
|Securities
available for sale               |  |  |  |                       | 22   
|Investement
securities held to maturity     |  |  |  |                       | 48   
|Other
interest earnings assets              |  |  |  |                       | 19   
|Total
interest-earning assets               |  |  |  | $                     | 1,462
|                                           
|Interest-bearing liabilities:               |  |  |  |                       |      
|Transaction
accounts                        |  |  |  | $                     | 46   
|Savings
accounts                            |  |  |  |                       | (1   
|Certificate
accounts                        |  |  |  |                       | (72  
|Borrowings                                  |  |  |  |                       | 801  
|Total
interest-bearing liabilities          |  |  |  | $                     | 774  
|Net interest
income                         |  |  |  | $                     | 688  

9

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Management of Market Risk



General. The majority of our assets and
liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of
mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy
is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, our board of
directors has established an Asset/Liability Management Committee which is responsible for evaluating the interest rate risk inherent in our assets and
liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and
performance objectives, and for managing the risk consistent with the guidelines approved by the board of directors. Senior management monitors the
level of interest rate risk on a regular basis and the Asset/Liability Management Committee, which consists of senior management operating under a
policy adopted by the board of directors, meets as needed to review our asset/liability policies and interest rate risk position. We have sought to
manage our interest rate risk by more closely matching the maturities of our interest rate sensitive assets and liabilities. In particular, we offer
one, three, and five year adjustable rate mortgage loans, a loan product that has a fixed rate of interest for seven years and which adjusts annually
thereafter, and three and five year balloon loans. We also invest in mortgage-backed securities, which generally reprice within one and three years. We
do not solicit high-rate jumbo certificates of deposit or brokered funds.




Net Portfolio Value. In past years, many
savings associations have measured interest rate sensitivity by computing the gap between the assets and liabilities which are expected to
mature or reprice within certain time periods, based on assumptions regarding loan prepayment and deposit decay rates formerly provided by the Office
of Thrift Supervision. However, the Office of Thrift Supervision now requires the computation of amounts by which the net present value of an
institutions cash flow from assets, liabilities and off balance sheet items (the institutions net portfolio value or NPV) would
change in the event of a range of assumed changes in market interest rates. The Office of Thrift Supervision provides all institutions that file a
Consolidated Maturity/Rate Schedule as a part of their quarterly Thrift Financial Report with an interest rate sensitivity report of net portfolio
value. The Office of Thrift Supervision simulation model uses a discounted cash flow analysis and an option-based pricing approach to measure the
interest rate sensitivity of net portfolio value. Historically, the Office of Thrift Supervision model estimated the economic value of each type of
asset, liability and off-balance sheet contract under the assumption that the United States Treasury yield curve increases or decreases instantaneously
by 100 to 300 basis points in 100 basis point increments. However, given the current low level of market interest rates, we did not receive a NPV
calculation for an interest rate decrease of greater than 100 basis points. A basis point equals one-hundredth of one percent, and 100 basis points
equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the Change in Interest
Rates column below. The Office of Thrift Supervision provides us the results of the interest rate sensitivity model, which is based on
information we provide to the Office of Thrift Supervision to estimate the sensitivity of our net portfolio value.




The table below sets forth, as of March 31, 2005,
the latest date for which the Office of Thrift Supervision has provided the Bank with an interest rate sensitivity report of net portfolio value, the
estimated changes in our net portfolio value that would result form the designated instantaneous changes in the United States Treasury yield
curve.


|Net Portfolio Value |  | Net Portfolio Value as a % of Present Value of
Assets/Liabilities | 
|------------------- |  | ----------------------------------------------------------------- | 
|
|
|+300                |  |                                                                   | 
|+200                |  |                                                                   | 
|+100                |  |                                                                   | 
|0                   |  |                                                                   | 
|100                |  |                                                                   | 
|200                |  |                                                                   | 

10

---



The table above indicates that at March 31, 2005, in
the event of a 100 basis point decrease in interest rates, we would experience a 7% increase in net portfolio value. In the event of a 200 basis point
increase in interest rates, we would experience a 19% decrease in net portfolio value.




Certain shortcomings are inherent in the methodology
used in the above interest rate risk measurement. Modeling changes in net portfolio value require making certain assumptions that may or may not
reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net portfolio value table
presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the
period being measured and assumes that 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 net portfolio value table provides an indication of our interest rate risk
exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market
interest rates on its net interest income and will differ from actual results.


Liquidity and Capital Resources



Liquidity. The Bank must maintain an adequate
level of liquidity to ensure the availability of sufficient funds to fund loan originations and deposit withdrawals, to satisfy other financial
commitments, and to take advantage of investment opportunities. The Bank invests excess funds in overnight deposits and other short-term
interest-bearing assets to provide liquidity to meet these needs. At March 31, 2005, cash and cash equivalents totaled $6.4 million. At March 31, 2005,
the Bank had commitments to fund loans of $13.1 million, which included $5.1 million of undisbursed construction loans. At March 31, 2005, certificates
of deposit represented 48.5% of total deposits. The Bank expects to retain these deposit accounts. In addition, the Bank could borrow up to $11.8
million from the FHLB without providing additional collateral. The Bank considers its liquidity and capital resources sufficient to meet its
outstanding short-term and long-term needs.




Capital Resources. The Bank is subject to
various regulatory capital requirements administered by federal regulatory agencies.




The following table summarizes the Banks
regulatory capital requirements versus actual capital as of March 31, 2005:


|                                             |  |  |  | ACTUAL |      | REQUIRED |  | EXCESS |     
|-------------------------------------------- |  |  |  | ------ | ---- | -------- |  | ------ | ----
|
|Core
capital(to adjusted total assets)       |  |  |  | $      | 21.0 |          |  |        | 11.6
|Risk-based
capital To (risk-weighted assets) |  |  |  | $      | 21.7 |          |  |        | 21.7

Impact of Inflation and Changing Prices



The consolidated financial statements and related
notes of Atlantic Liberty Financial Corp. and Subsidiary have been prepared in accordance with accounting principles generally accepted in the United
States of America (GAAP). GAAP generally requires the measurement of financial position and operating results in terms of historical
dollars without consideration for changes 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, our assets and liabilities are primarily monetary in nature As a result, changes in
market interest rates have a greater impact on performance than the effects of inflation.


11

---

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995



This report contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. The company intends such forward-looking statements to be covered by the safe harbor provision for forward-looking statements contained in the
Private Securities Reform Act of 1995 as amended and is including these statements for purposes of these safe harbor provisions. Forward-looking
statements, which are based on certain assumptions and describe future plans, strategies, and expectations of the Company, are generally identifiable
by use of the words believe, expect, intend, anticipate, estimate, project, or
similar expressions. The Companys ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors
that could have a material adverse affect on the operation and future prospects of the Company and its wholly-owned subsidiaries include, but are not
limited to, changes in: interest rates; general economic conditions; legislative/regulatory provision; monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve Board; the quality or composition of the loan or investment portfolios;
demand for loan products; deposit flows; competition; demand for financial services in the Companys market area; and accounting principles,
policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements, and undue reliance should not be
placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the
Companys financial results, is included in the companys filings with the Securities and Exchange Commission.


12

---

MANAGEMENT RESPONSIBILITY STATEMENT



Management of
the Atlantic Liberty Financial Corp. and Subsidiary is responsible for the preparation of the consolidated financial statements and all other financial
information included in this report. The consolidated financial statements were prepared in accordance with accounting principles generally accepted in
the United States of America applied on a consistent basis. All financial information included in the report agreed with the financial statements. In
preparing the consolidated financial statements, management makes informed estimates and judgments with consideration given to materiality about the
expected results of various events and transactions.


Management maintains a system of internal accounting controls that includes
personnel selection, appropriate division of responsibilities, and formal procedures and policies consistent with high standards of accounting and
administrative practice. Consideration has been given to the necessary balance between the cost of systems of internal control and the benefits
derived.

Management reviews its system of accounting and internal control in light of
changes in conditions and operations as well as in response to recommendations from the independent certified public accountants. Management believes
the accounting and internal control systems provide reasonable assurance that assets are safeguarded and financial information is reliable.

The Board of Directors, through its Audit Committee of non-management Directors, is
responsible for determining that management fulfills its responsibilities in the preparation of the consolidated financial statements and the control
operations. The Board appoints the independent certified public accountants. The Audit Committee meets with management and the independent certified
public accountants, approves the overall scope of audit work and related fee arrangements, and reviews audit reports and findings.

|/s/ BARRY M. DONOHUE |  |  |  | /s/
        WILLIAM M. GILFILLAN
|-------------------- |  |  |  | --------------------------------
|Barry M. Donohue,    |  |  |  | William M. Gilfillan,           
|President &
CEO      |  |  |  | Executive Vice President & CFO  



May 13,
2005


13

---

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14

---





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To The Board of
Directors and Stockholders Atlantic Liberty Financial Corp.




We have audited
the accompanying consolidated statements of financial condition of Atlantic Liberty Financial Corp. (the Company) and Subsidiary as of
March 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders equity and cash flows for the years then
ended. The consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on
the 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 audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated 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 consolidated financial position of Atlantic Liberty Financial Corp. and Subsidiary as of March 31, 2005 and 2004,
and the consolidated results of their operations and cash flows for the years then ended, in conformity with accounting principles generally accepted
in the United States of America.

Pine Brook, New Jersey May 13, 2005

15

---

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16

---



ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF
FINANCIAL CONDITION






|                                                                                                                                                |  |  |  |                |  | March 31, |            
|----------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | -------------- |  | --------- | -----------
|
|Assets                                                                                                                                          |  |  |  |                |  |           |            
|Cash and
amounts due from depository institutions                                                                                               |  |  |  |                |  | $         | 1,260,911  
|Interest-bearing deposits                                                                                                                       |  |  |  |                |  |           | 5,103,144  
|Cash and
cash equivalents                                                                                                                       |  |  |  | 1 and
14       |  |           | 6,364,055  
|Securities
available for sale                                                                                                                   |  |  |  | 1, 2 and
14    |  |           | 2,939,984  
|Investment
securities held to maturity                                                                                                          |  |  |  | 1, 3 and
14    |  |           | 4,007,709  
|Mortgage-backed securities held to maturity                                                                                                     |  |  |  | 1, 4, 9 and
14 |  |           | 41,977,526 
|Loans
receivable                                                                                                                                |  |  |  | 1, 5, 9 and
14 |  |           | 120,147,619
|Premises and
equipment                                                                                                                          |  |  |  | 1 and
7        |  |           | 1,651,861  
|Federal Home
Loan Bank of New York stock                                                                                                        |  |  |  | 9              |  |           | 2,167,500  
|Interest
receivable                                                                                                                             |  |  |  | 1, 6 and
14    |  |           | 864,006    
|Deferred tax
asset                                                                                                                              |  |  |  | 1 and
11       |  |           | 381,257    
|Other
assets                                                                                                                                    |  |  |  | 10             |  |           | 3,472,471  
|Total
assets                                                                                                                                    |  |  |  |                |  | $         | 183,973,988
|                                                                                                                                               
|Liabilities and stockholders equity                                                                                                            |  |  |  |                |  |           |            
|                                                                                                                                               
|Liabilities                                                                                                                                     |  |  |  |                |  |           |            
|Deposits                                                                                                                                        |  |  |  | 8 and
14       |  | $         | 109,103,031
|Advances
from Federal Home Loan Bank of New York                                                                                                |  |  |  | 9 and
14       |  |           | 43,350,000 
|Borrowers
escrow for taxes and insurance                                                                                                        |  |  |  |                |  |           | 1,061,827  
|Other
liabilities                                                                                                                               |  |  |  | 10             |  |           | 2,632,373  
|Total
liabilities                                                                                                                               |  |  |  |                |  |           | 156,147,231
|                                                                                                                                               
|Commitments
and contingencies                                                                                                                   |  |  |  | 13 and
14      |  |           |           
|                                                                                                                                               
|Stockholders equity:                                                                                                                           |  |  |  | 10, 11 and
12  |  |           |            
|Preferred
stock; $0.10 par value; 500,000 shares authorized; none issued and outstanding                                                        |  |  |  |                |  |           |           
|Common
stock; $0.10 par value; 6,000,000 shares authorized; shares issued 1,710,984; shares outstanding  1,683,224 (2005) and 1,691,584
(2004) |  |  |  |                |  |           | 171,098    
|Additional
paid-in capital                                                                                                                      |  |  |  |                |  |           | 16,495,194 
|Retained
earnings-substantially restricted                                                                                                      |  |  |  |                |  |           | 12,708,507 
|Unearned
ESOP shares                                                                                                                            |  |  |  |                |  |           | (923,931   
|Accumulated
other comprehensive (loss) income                                                                                                   |  |  |  |                |  |           | (30,271    
|Treasury
stock, at cost; 27,760 shares (2005) and 19,400 shares (2004)                                                                          |  |  |  |                |  |           | (593,840   
|Total
stockholders equity                                                                                                                      |  |  |  |                |  |           | 27,826,757 
|Total
liabilities and stockholders equity                                                                                                      |  |  |  |                |  | $         | 183,973,988

See notes to consolidated financial statements.

17

---

ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF
INCOME






|                                                      |  |  |  |          |  | Year Ended March 31, |          
|----------------------------------------------------- |  |  |  | -------- |  | -------------------- | ---------
|
|Interest
income:                                      |  |  |  |          |  |                      |          
|Loans                                                 |  |  |  | 1 and
5  |  | $                    | 7,604,057
|Mortgage-backed securities held to maturity           |  |  |  | 1        |  |                      | 1,810,092
|Securities
available for sale                         |  |  |  | 1        |  |                      | 143,331  
|Investment
securities held to maturity                |  |  |  | 1        |  |                      | 139,483  
|Other
interest-earning assets                         |  |  |  |          |  |                      | 120,732  
|Total
interest income                                 |  |  |  |          |  |                      | 9,817,695
|Interest
expense:                                     |  |  |  |          |  |                      |          
|Deposits                                              |  |  |  | 8        |  |                      | 1,665,755
|Advances                                              |  |  |  |          |  |                      | 1,148,760
|Escrow                                                |  |  |  |          |  |                      | 14,869   
|Total
interest expense                                |  |  |  |          |  |                      | 2,829,384
|Net interest
income                                   |  |  |  |          |  |                      | 6,988,311
|Provision
for loan losses                             |  |  |  | 1 and
5  |  |                      | 125,000  
|Net interest
income after provision for loan losses   |  |  |  |          |  |                      | 6,863,311
|Non-interest
income:                                  |  |  |  |          |  |                      |          
|Fees and
service charges                              |  |  |  |          |  |                      | 426,924  
|Miscellaneous                                         |  |  |  |          |  |                      | 1,041,025
|Total
non-interest income                             |  |  |  |          |  |                      | 1,467,949
|Non-interest
expenses:                                |  |  |  |          |  |                      |          
|Salaries and
employee benefits                        |  |  |  | 1 and
10 |  |                      | 2,828,152
|Directors compensation                               |  |  |  | 10       |  |                      | 234,423  
|Occupancy
expenses, net                               |  |  |  | 1        |  |                      | 161,998  
|Equipment                                             |  |  |  | 1        |  |                      | 413,819  
|Advertising                                           |  |  |  |          |  |                      | 35,441   
|Federal
insurance premium                             |  |  |  |          |  |                      | 16,503   
|Legal
fees                                            |  |  |  |          |  |                      | 291,133  
|Miscellaneous                                         |  |  |  |          |  |                      | 819,616  
|Total
non-interest expenses                           |  |  |  |          |  |                      | 4,801,085
|Income
before income taxes                            |  |  |  |          |  |                      | 3,530,175
|Income
taxes                                          |  |  |  | 1 and
11 |  |                      | 1,496,273
|Net
income                                            |  |  |  |          |  | $                    | 2,033,902
|Net income
per common share:                          |  |  |  | 1        |  |                      |          
|Basic                                                 |  |  |  |          |  | $                    | 1.28     
|Diluted                                               |  |  |  |          |  | $                    | 1.27     
|Weighted
average number of common shares outstanding: |  |  |  | 1        |  |                      |          
|Basic                                                 |  |  |  |          |  |                      | 1,590,902
|Diluted                                               |  |  |  |          |  |                      | 1,605,979

See notes to consolidated financial statements.

18

---



ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS EQUITY

|                                                   |  |  |  | Common Stock |         | Additional Paid-In Capital |  | Retained Earnings  Substantially Restricted |            | Unearned ESOP Shares |  | Accumulated Other Comprehensive Income |            | Treasury Stock |  | Total
|-------------------------------------------------- |  |  |  | ------------ | ------- | -------------------------- |  | -------------------------------------------- | ---------- | -------------------- |  | -------------------------------------- | ---------- | -------------- |  | -----
|Balance 
March 31, 2003                           |  |  |  | $            | 171,098 |                            |  | $                                            | 16,141,335 |                      |  | $                                      | 9,975,842  |                |  | $    
|Net
income                                         |  |  |  |              |        |                            |  |                                              |           |                      |  |                                        | 1,383,299  |                |  |      
|Unrealized
gain on securities available for sale   |  |  |  |              |        |                            |  |                                              |           |                      |  |                                        |           |                |  |      
|Comprehensive
income                               |  |  |  |              |         |                            |  |                                              |            |                      |  |                                        |            |                |  |      
|Cash
dividends                                     |  |  |  |              |        |                            |  |                                              |           |                      |  |                                        | (244,328   | )              |  |      
|ESOP shares
committed to be released               |  |  |  |              |        |                            |  |                                              | 119,051    |                      |  |                                        |           |                |  |      
|Amortization
of unearned MRP shares                |  |  |  |              |        |                            |  |                                              | 105,512    |                      |  |                                        |           |                |  |      
|Treasury
stock, at cost                            |  |  |  |              |        |                            |  |                                              |           |                      |  |                                        |           |                |  |      
|Balance 
March 31, 2004                           |  |  |  |              | 171,098 |                            |  |                                              | 16,365,898 |                      |  |                                        | 11,114,813 |                |  |      
|Net
income                                         |  |  |  |              |        |                            |  |                                              |           |                      |  |                                        | 2,033,902  |                |  |      
|Unrealized
(loss) on securities available for sale |  |  |  |              |        |                            |  |                                              |           |                      |  |                                        |           |                |  |      
|Comprehensive
income                               |  |  |  |              |         |                            |  |                                              |            |                      |  |                                        |            |                |  |      
|Cash
dividends                                     |  |  |  |              |        |                            |  |                                              |           |                      |  |                                        | (428,057   | )              |  |      
|ESOP shares
committed to be released               |  |  |  |              |        |                            |  |                                              | 135,332    |                      |  |                                        |           |                |  |      
|Amortization
of unearned MRP shares                |  |  |  |              |        |                            |  |                                              | 316,535    |                      |  |                                        |           |                |  |      
|Acquisition of
MRP shares                          |  |  |  |              |        |                            |  |                                              | (316,628   | )                    |  |                                        | (12,151    | )              |  |      
|Sale of
treasury stock                             |  |  |  |              |        |                            |  |                                              | (5,943     | )                    |  |                                        |           |                |  |      
|Purchase of
treasury stock, at cost                |  |  |  |              |        |                            |  |                                              |           |                      |  |                                        |           |                |  |      
|Balance 
March 31, 2005                           |  |  |  | $            | 171,098 |                            |  | $                                            | 16,495,194 |                      |  | $                                      | 12,708,507 |                |  | $    

See notes to consolidated financial statements.

19

---



ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF
CASH FLOWS

|                                                                                  |  |  |  | Year Ended March 31, |            
|--------------------------------------------------------------------------------- |  |  |  | -------------------- | -----------
|
|Cash flows
from operating activities:                                             |  |  |  |                      |            
|Net
income                                                                        |  |  |  | $                    | 2,033,902  
|Adjustments
to reconcile net income to net cash provided by operating activities: |  |  |  |                      |            
|Depreciation
of premises and equipment                                            |  |  |  |                      | 178,200    
|Accretion of
deferred fees, premiums and discounts, net                           |  |  |  |                      | (19,602    
|Provision
for loan losses                                                         |  |  |  |                      | 125,000    
|(Increase)
in interest receivable                                                 |  |  |  |                      | (142,182   
|Deferred
income tax expense (benefit)                                             |  |  |  |                      | 11,194     
|Decrease
(increase) in other assets                                               |  |  |  |                      | 19,327     
|Increase
(decrease) in other liabilities                                          |  |  |  |                      | 866,552    
|Amortization
of cost of stock contributed to MRP                                  |  |  |  |                      | 316,535    
|ESOP shares
committed to be released                                              |  |  |  |                      | 272,212    
|Net cash
provided by operating activities                                         |  |  |  |                      | 3,661,138  
|Cash flows
from investing activities:                                             |  |  |  |                      |            
|Purchases
of:                                                                     |  |  |  |                      |            
|Securities
available for sale                                                     |  |  |  |                      | (2,000,000 
|Investment
securities held to maturity                                            |  |  |  |                      | (2,999,500 
|Mortgage-backed securities held to maturity                                       |  |  |  |                      | (20,042,961
|Loan
participations                                                               |  |  |  |                      | (11,545,421
|Proceeds
from calls, maturities and principal repayments on:                      |  |  |  |                      |            
|Securities
available for sale                                                     |  |  |  |                      | 2,395,827  
|Investment
securities held to maturity                                            |  |  |  |                      | 1,000,000  
|Mortgage-backed securities held to maturity                                       |  |  |  |                      | 8,705,159  
|Net decrease
(increase) in loans receivable                                       |  |  |  |                      | 4,418,544  
|Additions to
premises and equipment                                               |  |  |  |                      | (317,263   
|Purchase of
Federal Home Loan Bank of New York stock                              |  |  |  |                      | (1,187,500 
|Redemption
of Federal Home Loan Bank of New York stock                            |  |  |  |                      | 180,000    
|Net cash
(used in) investing activities                                           |  |  |  |                      | (21,393,115
|Cash flows
from financing activities:                                             |  |  |  |                      |            
|Net increase
in deposits                                                          |  |  |  |                      | 1,241,755  
|Advances
from Federal Home Loan Bank of New York                                  |  |  |  |                      | 26,750,000 
|Repayment of
advances from Federal Home Loan Bank of New York                     |  |  |  |                      | (6,600,000 
|Net increase
in borrowers escrow for taxes and insurance                          |  |  |  |                      | 116,919    
|Proceeds
from sale of treasury stock                                              |  |  |  |                      | 50,246     
|Cash
dividends                                                                    |  |  |  |                      | (428,057   
|Purchase of
treasury stock                                                        |  |  |  |                      | (594,709   
|Net cash
provided by financing activities                                         |  |  |  |                      | 20,536,154 
|Net increase
(decrease) in cash and cash equivalents                              |  |  |  |                      | 2,804,177  
|Cash and
cash equivalents  beginning                                             |  |  |  |                      | 3,559,878  
|Cash and
cash equivalents  ending                                                |  |  |  | $                    | 6,364,055  
|Supplemental
information:                                                         |  |  |  |                      |            
|Cash paid
during the period for:                                                  |  |  |  |                      |            
|Interest on
deposits and borrowings                                               |  |  |  | $                    | 2,780,362  
|Income
taxes                                                                      |  |  |  | $                    | 1,482,669  

See notes to consolidated financial statements.

20

---

ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS





|1. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- |  | ------------------------------------------

Nature of operations and basis of consolidated financial statement
presentation

The consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary Atlantic Liberty Savings, F.A. (the Bank). All significant intercompany accounts and transactions have been
eliminated in consolidation.

The Banks principal business consists of attracting retail deposits from the
general public in the areas surrounding its two locations in Brooklyn, New York and investing those deposits, together with funds generated from
operations and borrowings, primarily in one-to four-family residential mortgage loans, multi-family and commercial real estate loans, mortgage-backed
securities and various other investment securities. One- to four-family residential real estate in the Banks market areas is characterized by a
large number of attached and semi-detached houses, including a number of two-and three-family homes and cooperative apartments. Revenues are derived
principally from the interest on loans, securities, loan origination and servicing fees, and service charges and fees collected on deposit accounts.
The primary sources of funds are deposits and principal and interest payments on loans and securities.

The consolidated financial statements of the Company have been prepared in
conformity with accounting principles generally accepted in the United States of America (GAAP). In preparing the consolidated financial
statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the
consolidated statements of financial condition and revenues and expenses for the periods then ended. Actual results could differ significantly from
those estimates.

Material estimates that are particularly susceptible to significant change relate
to the determination of the allowance for loan losses, the assessment of prepayment risk associated with mortgage-backed securities and the amount of
deferred taxes which are more likely than not to be realized. Management believes that the allowance for loan losses is adequate, prepayment risks
associated with mortgage-backed securities are properly recognized and that all deferred taxes are more likely than not to be realized. While
management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes
in economic conditions in the Banks market area. Additionally, assessments of prepayment risks related to mortgage-backed securities are based
upon current market conditions, which are subject to frequent change. The assessment of the amount of deferred tax assets more likely than not to be
realized is based upon projected future taxable income, which is subject to continual revisions for updated information.

In addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Banks allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance
based on their judgments about information available to them at the time of their examination.

Cash and cash equivalents

Cash and cash equivalents include cash and amounts due from depository institutions
and interest-bearing deposits in other banks with original maturities of three months or less.

Securities

Investments in debt securities that the Bank has the positive intent and ability to
hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized holding
gains and losses included in earnings. Debt and equity securities not classified as trading securities nor as held-to-maturity securities are
classified as available for sale securities and reported at fair value, with unrealized holding gains or losses, net of deferred income taxes, if
applicable, reported in the accumulated other comprehensive income component of stockholders equity.

Premiums and discounts on all securities are amortized or accreted to income using
the level-yield method. Gain or loss on sales of securities is based on the specific identification method.

21

---

ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Contd.)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)

Loans receivable

Loans receivable is stated at unpaid principal balances less the allowance for loan
losses and net deferred loan fees. Interest is calculated by the use of the actuarial method.

Recognition of interest income is discontinued and existing accrued interest
receivable reversed on loans that are more than ninety days delinquent or where management, through its loan review process, feels such interest is
uncollectible. Income is subsequently recognized only to the extent that cash payments are received until, in managements judgment, the
borrowers ability to make periodic interest and principal payments is probable, in which case the loan is returned to an accrual
status.

Loan origination fees and certain direct loan origination costs are deferred and
accreted to income as an adjustment of yield over the contractual lives of the related loans by use of the interest method.

Allowance for loan losses

An allowance for loan losses is maintained at a level necessary to absorb loan
losses which are both probable and reasonably estimable. Management, in determining the allowance for loan losses, considers the losses inherent in its
loan portfolio and changes in the nature and volume of loan activities, along with the general economic and real estate market conditions. The Bank
utilizes a two tier approach: (1) identification of impaired loans and establishment of specific loss allowances on such loans; and (2) establishment
of general valuation allowances on the remainder of its loan portfolio.

The Bank maintains a loan review system which allows for a periodic review of its
loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status,
size of loans, types of collateral and financial condition of the borrowers. Specific loan loss allowances are established for identified losses based
on a review of such information. A loan evaluated for impairment is deemed to be impaired when, based on current information and events, it is probable
that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans identified as impaired are
evaluated independently. The Bank does not aggregate such loans for evaluation purposes. Loan impairment is measured based on the present value of
expected future cash flows discounted at the loans effective interest rate or, as a practical expedient, at the loans observable market
price or the fair value of the collateral if the loan is collateral dependent.

General loan loss allowances are based upon a combination of factors including, but
not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions and managements judgment.

The allowance is increased through provisions charged against current earnings and
recoveries of previously charged off loans. Loans which are determined to be uncollectible are charged against the allowance. Although management
believes that specific and general loan loss allowances are established to absorb losses which are probable and reasonably estimable, actual losses are
dependent upon future events and, as such, further additions to the level of specific and general loan loss allowances may be necessary. Payments
received on impaired loans are applied first to accrued interest receivable and then to principal.

Concentration of risk

The Banks lending activities are concentrated in loans secured by real estate
primarily located in the State of New York. As a result, credit risk is broadly dependent on the real estate market and general economic conditions in
the state.

22

---

ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Contd.)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)

Premises and equipment

Premises and equipment are comprised of land, at cost, and buildings and
improvements and furnishings and equipment, at cost, less accumulated depreciation. Depreciation charges are computed on the straight-line method over
the following estimated useful lives:

|Buildings and
improvements |  |  |  | 30
years    
|-------------------------- |  |  |  | ------------
|Furnishings and
equipment  |  |  |  | 3 to 5
years

Significant renewals and betterments are charged to the premises and equipment
account. Maintenance and repairs are charged to expense in the year incurred. Rental income is netted against occupancy expense in the consolidated
statements of income.

Income taxes

The Company and the Bank file consolidated federal income tax returns. Federal
income taxes are allocated to the Company and the Bank based upon the contribution of their respective income or loss to the consolidated return. The
Company and the Bank file separate state and city income tax returns. Federal, state and city income taxes have been provided on the basis of reported
income. The amounts reflected on the income tax returns differ from these provisions due principally to temporary differences in the reporting of
certain items for financial reporting and tax reporting purposes. Deferred income taxes are recorded to recognize such temporary differences. The
realization of deferred tax assets is assessed and a valuation allowance provided, when necessary, for that portion of the asset which more likely than
not will be realized.

Management believes, based upon current facts, that it is more likely than not that
there will be sufficient taxable income in future years to realize all deferred tax assets.

Interest rate risk

The Bank is principally engaged in the business of attracting deposits from the
general public and using these deposits, together with other funds, to make loans secured by real estate and, to a lesser extent, to purchase
investment and mortgage-backed securities. The potential for interest-rate risk exists as a result of the shorter duration of interest-sensitive
liabilities compared to the longer duration of interest-sensitive assets. In a rising rate environment, liabilities will reprice faster than assets,
thereby reducing net interest income. For this reason, management regularly monitors the maturity structure of interest sensitive assets and
liabilities in order to measure its level of interest-rate risk and to plan for future volatility.

Stock-based Compensation Plans

The Company, under a plan approved by its stockholders in 2003, has granted stock
options to employees and outside directors. See note 10 for additional information as to option grants. The Company accounts for options granted using
the intrinsic value method, in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. No compensation expense has been reflected in net income for the options granted as all such grants have an exercise price
equal to the market price of the underlying stock at the date of grant. The following table provides information as to net income and net income per
share as if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, as amended (SFAS No. 123), to all option grants:

23

---

ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Contd.)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)



|                                                                                                                                                                                                |  |  |  | Year Ended March 31, |          
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | -------------------- | ---------
|
|Net income as
reported                                                                                                                                                                          |  |  |  | $                    | 2,033,902
|Remove:  Total stock-based compensation expense, net of income taxes, included in reported net income                                                                                           |  |  |  |                      |         
|                                                                                                                                                                                               
|Include:  Total stock-based compensation expense, net of income taxes, that would have been included in the determination of net
income if the fair value method had been applied to all grants |  |  |  |                      | (120,424 
|Pro forma net
income                                                                                                                                                                            |  |  |  | $                    | 1,913,478
|Net income per
common share, as reported:                                                                                                                                                       |  |  |  |                      |          
|Basic                                                                                                                                                                                           |  |  |  | $                    | 1.28     
|Diluted                                                                                                                                                                                         |  |  |  | $                    | 1.27     
|Pro forma net
income per common share:                                                                                                                                                          |  |  |  |                      |          
|Basic                                                                                                                                                                                           |  |  |  | $                    | 1.20     
|Diluted                                                                                                                                                                                         |  |  |  | $                    | 1.19     

Net income per common share

Basic net income per common share is computed by dividing net income for the year
by the weighted average number of shares of common stock outstanding, adjusted for unearned shares of the ESOP. Diluted net income per common share is
computed by adjusting the weighted average number of shares of common stock outstanding to include the effect of outstanding stock options and
compensation grants, if dilutive, using the treasury stock method.

Reclassification

Certain amounts reported in prior year consolidated financial statements have been
reclassified to conform with the presentation adopted in the current year. These reclassifications have no effect on net income or stockholders
equity of the prior year.

Recent accounting pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement
No. 123R, Share-Based Payment. Statement No. 123R revised Statement No. 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees and its related implementation guidance. Statement No. 123R will
require compensation costs related to share-based payment transactions to be recognized in the financial statements (with limited exceptions). The
amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. Compensation costs will
be recognized over the period that an employee provides service in exchange for the award.

On April 14, 2005, the Securities and Exchange Commission (SEC) adopted
a new rule that amends the compliance dates for Financial Accounting Standards Boards Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment (SFAS No. 123R). Under the new rule, the Company is required to adopt SFAS No. 123R in the first
annual period beginning after December 15, 2005. The Company has not yet determined the method of adoption or the effect of adopting SFAS No. 123R, and
it has not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123.

In March 2004, the Financial Accounting Standards Board (FASB) reached
consensus on the guidance provided by Emerging Issues Task Force Issue 03-1 (EITF 03-1), The Meaning of Other-Than-Temporary Impairment and
its Application to Certain Investments. The guidance is applicable to debt and equity securities that are within the scope of FASB Statement of
Financial Accounting Standard (SFAS) No. 115, Accounting for Certain Investments

24

---

ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Contd.)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)

in Debt and Equity Securities and
certain other investments. EITF  03-1 specifies that an impairment would be considered
other-than-temporary unless (a) the investor has the ability and intent to hold an
investment for  a reasonable period of time sufficient for the recovery of the fair value
up to (or beyond) the cost of the investment and (b) evidence indicating the  cost of the
investment is recoverable within a reasonable period of time outweighs evidence to the
contrary. EITF 03-1 cost method investment and  disclosure provisions were effective for
reporting periods ending after June 15, 2004. The measurement and recognition provisions
relating to debt and  equity securities have been delayed until the FASB issues
additional guidance. During the year ended March 31, 2005, the Company adopted the cost
method investment and disclosure provisions of EITF 03-1. The adoption did not have a
material impact on the consolidated financial condition, results  of operations or cash
flows of the Company.

|2. |  | SECURITIES AVAILABLE FOR SALE
|-- |  | -----------------------------






|                                       |  |  |  | March 31, 2005 |          
|-------------------------------------- |  |  |  | -------------- | ---------
|
|
|U.S.
Government Agencies:              |  |  |  |                |          
|Due after five
years through ten years |  |  |  | $              | 2,000,000
|Corporate
Bonds:                       |  |  |  |                |          
|Due after ten
years                    |  |  |  |                | 300,000  
|Mortgage-backed securities:            |  |  |  |                |          
|Due after ten
years                    |  |  |  |                | 692,606  
|                                       |  |  |  | $              | 2,992,606

|                                       |  |  |  | March 31, 2004 |          
|-------------------------------------- |  |  |  | -------------- | ---------
|
|
|U.S.
Government (including agencies):  |  |  |  |                |          
|Due after five
years through ten years |  |  |  | $              | 2,000,000
|Corporate
bonds:                       |  |  |  |                |          
|Due after ten
years                    |  |  |  |                | 300,000  
|Mortgage-backed securities:            |  |  |  |                |          
|Due after ten
years                    |  |  |  |                | 1,096,829
|                                       |  |  |  | $              | 3,396,829

25

---

ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Contd.)

2.    SECURITIES AVAILABLE FOR SALE
(Continued)

The unrealized losses, categorized by the length of time of continuous loss
position, and the fair value of related securities available for sale are as follows:



|                                               |  |  |  | March 31, 2005 |          
|---------------------------------------------- |  |  |  | -------------- | ---------
|
|
|U.S.
Government (including agencies)           |  |  |  |                |          
|Due after
five years within ten years          |  |  |  | $              | 1,985,310
|Corporate
bonds due after ten years            |  |  |  |                |         
|Mortgage-backed securities due after ten years |  |  |  |                |         
|                                               |  |  |  | $              | 1,985,310



|                                               |  |  |  | March 31, 2004 |          
|---------------------------------------------- |  |  |  | -------------- | ---------
|
|
|Corporate
bonds due after ten years            |  |  |  | $              | 289,500  
|Mortgage-backed securities due after ten years |  |  |  |                | 1,088,357
|                                               |  |  |  | $              | 1,377,857

Management does not believe that any of the individual unrealized losses represent
an other-than-temporary impairment. The unrealized losses are on U.S. Government agency and Corporate bond securities that earn interest at a fixed
rate and are due to changes in market interest rates. The unrealized losses are on mortgage-backed securities that earn interest at an adjustable rate
and are the result of changes in market rates at a faster pace than the related securities. The Company and the Bank have the intent and ability to
hold the securities that comprise the above schedule for a time necessary to recover the amortized cost.

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

26

---

ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Contd.)

|3. |  | INVESTMENT SECURITIES HELD TO MATURITY
|-- |  | --------------------------------------






|                                      |  |  |  | March 31, 2005 |          
|------------------------------------- |  |  |  | -------------- | ---------
|
|
|U.S.
Government (including agencies)  |  |  |  |                |          
|Due after five
years within ten years |  |  |  | $              | 2,999,517
|Corporate
bonds:                      |  |  |  |                |          
|Due after one
year within five years  |  |  |  |                | 1,008,192
|                                      |  |  |  | $              | 4,007,709






|                                      |  |  |  | March 31, 2004 |          
|------------------------------------- |  |  |  | -------------- | ---------
|
|
|U.S.
Government (including agencies): |  |  |  |                |          
|Due after five
years within ten years |  |  |  |                | 1,000,000
|Corporate
bonds:                      |  |  |  |                |          
|Due after one
year within five years  |  |  |  |                | 1,016,272
|                                      |  |  |  | $              | 2,016,272

The unrealized losses, categorized by the length of time of continuous loss
position, and the fair value of related investment securities held to maturity are as follows:



|                                      |  |  |  | March 31, 2005 |          
|------------------------------------- |  |  |  | -------------- | ---------
|
|
|U.S.
Government (including agencies)  |  |  |  |                |          
|Due after
five years within ten years |  |  |  | $              | 2,979,990

Management does not believe that any of the individual unrealized losses represent
an other-than-temporary impairment. The unrealized losses are on U.S. Government agency securities that earn interest at a fixed rate and are due to
changes in market interest rates. The Bank has the intent and ability to hold the securities that comprise the above schedule for a time necessary to
recover the amortized cost.

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

27

---

ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Contd.)

|4. |  | MORTGAGE-BACKED SECURITIES HELD TO MATURITY
|-- |  | -------------------------------------------






|                                         |  |  |  | March 31, 2005 |           
|---------------------------------------- |  |  |  | -------------- | ----------
|
|
|Government
National Mortgage Association |  |  |  | $              | 1,908,963 
|Federal Home
Loan Mortgage Corporation   |  |  |  |                | 1,757,989 
|Federal
National Mortgage Association    |  |  |  |                | 38,270,215
|Collateralized
Mortgage Obligation       |  |  |  |                | 40,359    
|                                         |  |  |  | $              | 41,977,526






|                                         |  |  |  | March 31, 2004 |           
|---------------------------------------- |  |  |  | -------------- | ----------
|
|
|Government
National Mortgage Association |  |  |  | $              | 2,737,455 
|Federal Home
Loan Mortgage Corporation   |  |  |  |                | 2,782,763 
|Federal
National Mortgage Association    |  |  |  |                | 25,111,181
|Collateralized
Mortgage Obligation       |  |  |  |                | 59,471    
|                                         |  |  |  | $              | 30,690,870

Contractual maturity data for mortgage-backed securities held to maturity is as
follows (in thousands):

|                                       |  |  |  | March 31, |       
|-------------------------------------- |  |  |  | --------- | ------
|
|
|Due after one
year through five years  |  |  |  | $         | 2     
|Due after five
years through ten years |  |  |  |           | 36    
|Due after ten
years                    |  |  |  |           | 41,940
|                                       |  |  |  | $         | 41,978

The amortized costs and carrying values shown above are by contractual final
maturity. Actual maturities may differ from contractual final maturities due to scheduled monthly payments and due to the borrowers having the right to
prepay obligations.

28

---

ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Contd.)

4.    MORTGAGE-BACKED SECURITIES HELD TO MATURITY
(Continued)

The unrealized losses, categorized by the length of time of continuous loss
position, and the fair value of related mortgage-backed securities held to maturity are as follows:



|                                         |  |  |  | March 31, 2005 |           
|---------------------------------------- |  |  |  | -------------- | ----------
|
|
|Government
National Mortgage Association |  |  |  | $              |          
|Federal Home
Loan Mortgage Corporation   |  |  |  |                | 441,269   
|Federal
National Mortgage Corporation    |  |  |  |                | 26,120,391
|                                         |  |  |  | $              | 26,561,660



|                                         |  |  |  | March 31, 2004 |          
|---------------------------------------- |  |  |  | -------------- | ---------
|
|
|Government
National Mortgage Association |  |  |  | $              | 2,416,136
|Federal Home
Loan Mortgage Corporation   |  |  |  |                | 866,025  
|Federal
National Mortgage Corporation    |  |  |  |                | 2,131,522
|                                         |  |  |  | $              | 5,413,683

Management does not believe that any of the individual unrealized losses represent
an other-than-temporary impairment. The unrealized losses relate to fixed rate and adjustable rate securities. Such unrealized losses are the result of
changes in interest rates. The Bank has the intent and ability to hold the securities that comprise the above schedule for a time necessary to recover
the amortized cost.

There were no sales of mortgage-backed securities during the years ended March 31,
2005 and 2004.

29

---

ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Contd.)

|5. |  | LOANS RECEIVABLE
|-- |  | ----------------






|                            |  |  |  | March 31, |            
|--------------------------- |  |  |  | --------- | -----------
|
|Real estate
mortgage:       |  |  |  |           |            
|One-to-four
family          |  |  |  | $         | 59,717,722 
|Multi-family                |  |  |  |           | 22,031,546 
|Commercial and
land         |  |  |  |           | 32,667,448 
|                            |  |  |  |           | 114,416,716
|Construction
participations |  |  |  |           | 10,732,500 
|Consumer:                   |  |  |  |           |            
|Home equity
loans           |  |  |  |           | 1,011,692  
|Unsecured                   |  |  |  |           | 34,249     
|                            |  |  |  |           | 1,045,941  
|Total
loans                 |  |  |  |           | 126,195,157
|Less:                       |  |  |  |           |            
|Loans in
process            |  |  |  |           | 5,096,064  
|Allowance for
loan losses   |  |  |  |           | 736,925    
|Net deferred
loan fees      |  |  |  |           | 214,549    
|                            |  |  |  |           | 6,047,538  
|                            |  |  |  | $         | 120,147,619

At March 31, 2005 and 2004, loans for which the accrual of interest had been
discontinued totaled approximately $88,000 and $96,000, respectively. During the years ended March 31, 2005 and 2004, the Bank recognized interest
income of approximately $1,000 and $2,000, respectively, on these loans. Interest income that would have been recorded, had the loans been performing
in accordance with their original terms, amounted to approximately $3,800 and $5,000 for the years ended March 31, 2005 and 2004,
respectively.

The Bank has granted loans to certain of its officers and directors and to their
associates. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than normal risk of collectibility. The activity in such loans is as
follows:



|                    |  |  |  | Year Ended March 31, |      
|------------------- |  |  |  | -------------------- | -----
|
|
|Balance 
beginning |  |  |  | $                    | 1,549
|New
loans           |  |  |  |                      | 750  
|Repayments          |  |  |  |                      | (750 
|Balance 
ending    |  |  |  | $                    | 1,549

The following is an analysis of the allowance for loan losses:



|                                 |  |  |  | Year Ended March 31, |        
|-------------------------------- |  |  |  | -------------------- | -------
|
|Balance 
beginning              |  |  |  | $                    | 581,882
|Provisions
charged to operations |  |  |  |                      | 125,000
|Loan
recoveries                  |  |  |  |                      | 30,043 
|Balance 
ending                 |  |  |  | $                    | 736,925

There were no impaired loans at March 31, 2005 and 2004.

30

---

ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Contd.)

|6. |  | INTEREST RECEIVABLE
|-- |  | -------------------






|                                                                                    |  |  |  | March 31, |        
|----------------------------------------------------------------------------------- |  |  |  | --------- | -------
|
|Loans, net of
allowance for uncollected interest of $8,031 (2005) and $5,079 (2004) |  |  |  | $         | 586,362
|Mortgage-backed securities held to maturity                                         |  |  |  |           | 152,774
|Investment
securities held to maturity                                              |  |  |  |           | 78,580 
|Securities
available for sale                                                       |  |  |  |           | 46,290 
|                                                                                    |  |  |  | $         | 864,006

|7. |  | PREMISES AND EQUIPMENT
|-- |  | ----------------------






|                              |  |  |  | March 31, |          
|----------------------------- |  |  |  | --------- | ---------
|
|Land                          |  |  |  | $         | 400,000  
|Buildings and
improvements    |  |  |  |           | 2,510,083
|Furnishings
and equipment     |  |  |  |           | 599,617  
|                              |  |  |  |           | 3,509,700
|Less
accumulated depreciation |  |  |  |           | 1,857,839
|                              |  |  |  | $         | 1,651,861

|8. |  | DEPOSITS
|-- |  | --------






|                        |  |  |  | March 31, |     
|----------------------- |  |  |  | --------- | ----
|
|
|Demand
accounts:        |  |  |  |           |     
|Non-interest
bearing    |  |  |  |           | 0.00
|Interest
bearing        |  |  |  |           | 0.37
|Regular
savings         |  |  |  |           | 0.75
|Money
Market            |  |  |  |           | 1.36
|Certificates
of deposit |  |  |  |           | 2.30
|Total
deposits          |  |  |  |           | 1.58

A summary of certificates of deposit by maturity follows (in thousands):



|                         |  |  |  | March 31, |       
|------------------------ |  |  |  | --------- | ------
|
|One year or
less         |  |  |  | $         | 28,920
|After one to
two years   |  |  |  |           | 11,549
|After two to
three years |  |  |  |           | 4,530 
|After three
years        |  |  |  |           | 7,860 
|                         |  |  |  | $         | 52,859

At March 31, 2005 and 2004, time deposits with denominations of $100,000 or more
amounted to approximately $11,933,000 and $12,000,000, respectively. Deposits in excess of $100,000 are not federally insured.

31

---

ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Contd.)

8.    DEPOSITS (Continued)

Interest expense on deposits consists of the following:



|                           |  |  |  | Year Ended March 31, |          
|-------------------------- |  |  |  | -------------------- | ---------
|
|Demand
deposits            |  |  |  | $                    | 73,516   
|Savings and
money market   |  |  |  |                      | 403,518  
|Certificates
of deposit    |  |  |  |                      | 1,195,797
|                           |  |  |  |                      | 1,672,831
|Early
withdrawal penalties |  |  |  |                      | (7,076   
|                           |  |  |  | $                    | 1,665,755

|9. |  | ADVANCES FROM FEDERAL HOME LOAN BANK OF NEW YORK
(FHLB)
|-- |  | ---------------------------------------------------------






|     |  |  |  | March 31, |           
|---- |  |  |  | --------- | ----------
|
|
|2005 |  |  |  | $         |          
|2006 |  |  |  |           | 16,300,000
|2007 |  |  |  |           | 12,050,000
|2008 |  |  |  |           | 13,000,000
|2009 |  |  |  |           | 2,000,000 
|     |  |  |  | $         | 43,350,000

At March 31, 2005, the advances are secured by a specific pledge of mortgage-backed
securities with carrying values and fair values respectively of approximately $15,881,000 and $15,569,000, FHLB stock in the amount of $2,167,500 and a
blanket assignment of qualifying mortgage loans.

At March 31, 2004, the advances are secured by FHLB stock in the amount of
$1,160,000 and a blanket assignment of qualifying mortgage loans.

|10. |  | BENEFIT PLANS
|--- |  | -------------

Pension Plan

The Bank has a non-contributory pension plan covering all eligible employees. The
plan is a defined benefit plan which provides benefits based on a participants years of service and compensation. The Banks funding policy
is to contribute annually the maximum amount that can be deducted for federal income tax purposes.

Plan assets are invested in six diversified investment funds of the RSI Retirement
Trust (the Trust), a no loan series open-ended mutual fund. The investment funds include four equity mutual funds and two bond mutual
funds, each with its own investment objectives, investment strategies and risks, as detailed in the Trusts prospectus. The Trust has been given
discretion by the Plan Sponsor to determine the appropriate strategic asset allocation versus plan liabilities, as governed by the Trusts
Statement of Investment Objectives and Guidelines (the Guidelines).

The long-term investment objective is to be invested 65% in equity securities
(equity mutual funds) and 35% in debt securities (bond mutual funds). If the plan is underfunded under the Guidelines, the bond fund portion will be
temporarily increased to 50% in order to lessen asset value volatility. When the plan is no longer underfunded, the bond fund portion will be decreased
back to 35%. Asset rebalancing is performed at least annually, with interim adjustments made when the investment mix varies more than 5% from the
target (i.e., a 10% target range).

32

---

ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Contd.)

10.    BENEFIT PLANS (Continued)

The investment goal is to achieve investment results that will contribute to the
proper funding of the pension plan by exceeding the rate of inflation over the long-term. In addition, investment managers for the Trust are expected
to provide above average performance when compared to their peer managers. Performance volatility is also monitored. Risk/volatility is further managed
by the distinct investment objectives of ach of the Trust funds and the diversification within each fund.

The plans weighted-average asset allocations by asset category are as
follows:



|                                    |  |  |  | Plan Assets at January 1, |    
|----------------------------------- |  |  |  | ------------------------- | ---
|
|Equity
securities (Mutual Funds)    |  |  |  |                           | 71 
|Debt
securities (Bond Mutual Funds) |  |  |  |                           | 29 
|Total                               |  |  |  |                           | 100

The long-term rate-of-return-on-assets assumption was set based on historical
returns earned by equities and fixed income securities, adjusted to reflect expectations of future returns as applied to the plans target
allocation of asset classes. Equities and fixed income securities were assumed to earn real rates of return in the ranges of 5%9% and 2%6%,
respectively. The long-term inflation rate was estimated to be 3%. When these overall return expectations are applied to the plans target
allocation, the expected rate of return is determined to be 9.0% which is roughly the midpoint of the range of expected return.

For the fiscal year ending March 31, 2006, the Bank expects to contribute
approximately $159,000 to the Plan.

Benefit payments, which reflect expected future service, as appropriate, are
expected to be paid as follows:



|Year Ended March 31, |  |  |  | Amount
|-------------------- |  |  |  | ------
|2006                 |  |  |  | $     
|2007                 |  |  |  |       
|2008                 |  |  |  |       
|2009                 |  |  |  |       
|2010                 |  |  |  |       
|2011 
2015          |  |  |  |       

33

---

ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Contd.)

10.    BENEFIT PLANS (Continued)

The following table sets forth the plans funded status:



|                                 |  |  |  | March 31, |          
|-------------------------------- |  |  |  | --------- | ---------
|
|Change in
Benefit Obligation     |  |  |  |           |          
|Benefit
obligation  beginning   |  |  |  | $         | 1,473,454
|Service
cost                     |  |  |  |           | 138,348  
|Interest
cost                    |  |  |  |           | 93,932   
|Actuarial
loss                   |  |  |  |           | 170,671  
|Settlements
and plan amendments  |  |  |  |           |         
|Benefit
obligation  ending      |  |  |  | $         | 1,876,405
|Change in
Plan Assets            |  |  |  |           |          
|Fair value of
assets  beginning |  |  |  | $         | 1,433,800
|Actual gain on
plan assets       |  |  |  |           | 134,067  
|Employer
contributions           |  |  |  |           | 110,306  
|Settlements
and plan amendments  |  |  |  |           |         
|Fair value of
assets  ending    |  |  |  | $         | 1,678,173



|                                         |  |  |  | March 31, |           
|---------------------------------------- |  |  |  | --------- | ----------
|
|Reconciliation of Funded Status          |  |  |  |           |           
|Accumulated
benefit obligation           |  |  |  | $         | (1,462,152
|Projected
benefit obligation             |  |  |  | $         | (1,876,405
|Fair value of
assets                     |  |  |  |           | 1,678,173 
|Funded
status                            |  |  |  |           | (198,232  
|Unrecognized
loss                        |  |  |  |           | 591,845   
|Unrecognized
past service liability      |  |  |  |           | 79,356    
|Prepaid
expense included in other assets |  |  |  | $         | 472,969   
|Valuation
assumptions:                   |  |  |  |           |           
|Discount
rate                            |  |  |  |           | 6.125     
|Salary
increase rate                     |  |  |  |           | 3.250     

34

---

ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Contd.)

10.    BENEFIT PLANS (Continued)



|                                                                 |  |  |  | Year Ended March 31, |         
|---------------------------------------------------------------- |  |  |  | -------------------- | --------
|
|Net
Periodic Pension Expense                                     |  |  |  |                      |         
|Service
cost                                                     |  |  |  | $                    | 138,348 
|Interest
cost                                                    |  |  |  |                      | 93,932  
|Expected
return on assets                                        |  |  |  |                      | (131,772
|Amortization
of:                                                 |  |  |  |                      |         
|Unrecognized
past service liability                              |  |  |  |                      | 13,088  
|Unrecognized
transition (asset)                                  |  |  |  |                      |        
|Unrecognized
loss                                                |  |  |  |                      | 30,580  
|Total pension
expense included in salaries and employee benefits |  |  |  | $                    | 144,176 
|Valuation
Assumptions                                            |  |  |  |                      |         
|Discount
rate                                                    |  |  |  |                      | 6.375   
|Long term
rate                                                   |  |  |  |                      | 9.000   
|Salary
increase rate                                             |  |  |  |                      | 3.500   

Savings and Investment Plan

The Bank sponsors a savings and investment plan, pursuant to Section 401(k) of the
Internal Revenue Code, for all eligible employees. Employees may elect to save up to 10% of their compensation of which the Bank will match 100% of
employees contribution up to 6% of eligible compensation. The plan expense, which is included in salaries and employee benefits, amounted to
approximately $62,000 and $63,000 for the years ended March 31, 2005 and 2004, respectively.

Officers supplemental pension plan

Effective October 17, 1995, the Bank adopted a non-qualified supplemental pension
plan to provide a supplemental pension benefit to the Banks deceased former Chief Executive Officer (the Officer). The plan provides
for payments to be made in the amount of $20,000 per year, adjusted by the consumer price index, for fifteen years commencing with the Officer
attaining age sixty-five and commencing upon retirement or date of death. Such benefit is paid to the Officers designated beneficiaries.
Effective April 1, 1996, the Bank began making payments to the beneficiaries and has accrued $85,000 and $98,000 as of March 31, 2005 and 2004,
respectively, towards this liability. Expense recorded for this plan totalled approximately $7,000 during both the years ended March 31, 2005 and
2004.

Directors Retirement Plan

The Bank has a non-tax qualified Directors Retirement Plan that provides
outside directors who retire after five years of service on the Board with a monthly retirement benefit of fifty percent of the directors final
years fees for 60 months. For each year of service after five years an additional 10% of directors fees are earned, up to a maximum of 100%
of fees after ten years service. In the event of a change in control resulting in a separation of service prior to completing five years, benefits are
determined as though five years are completed and begin the first month following the separation of service. In the event of the directors death
or disability prior to retirement, the director or his surviving spouse will be entitled to a benefit under the plan if the director had otherwise
satisfied the age and service requirements prior to death or disability. In the event of a directors death while receiving benefits but before
all benefits have been paid to the director, the directors surviving spouse will receive the remaining benefit payments due. The Banks
accrued liability and expense under the plan at and for the year ended March 31, 2005 is approximately $69,000.

35

---

ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Contd.)

10.    BENEFIT PLANS (Continued)

Employees Stock Ownership Plan (ESOP)

Effective upon the consummation of the Banks reorganization to a stock form,
an ESOP was established for all eligible employees who had completed a twelve-month period of employment with the Bank and at least 1,000 hours of
service and had attained the age of 21. The ESOP used $1,368,790 in proceeds from a term loan obtained from the Company to purchase 136,879 shares of
the Companys common stock in the open market. The term loan principal is payable over ten equal annual installments through September 30, 2012.
Interest on the term loan is at the prime rate. Each year, the Bank intends to make discretionary contributions to the ESOP which will be equal to
principal and interest payments required on the term loan.

Shares purchased with the loan proceeds were initially pledged as collateral for
the term loan and are held in a suspense account for future allocation among participants. Contributions to the ESOP and shares released from the
suspense account will be allocated among the participants on the basis of compensation, as described by the ESOP Plan, in the year of
allocation.

The ESOP is accounted for in accordance with Statement of Position 93-6
Accounting for Employee Stock Ownership Plans, which was issued by the American Institute of Certified Public Accountants in November 1993.
Accordingly, the ESOP shares pledged as collateral are reported as unearned ESOP shares in the consolidated statements of financial condition. As
shares are committed to be released from collateral, compensation expense equal to the current market value of the shares is recorded, and the shares
become outstanding for basic net income per common share computations. ESOP compensation expense was approximately $272,000 and $256,000 for the years
ended March 31, 2005 and 2004.

The ESOP shares are summarized as follows:



|                                |  |  |  | March 31, |          
|------------------------------- |  |  |  | --------- | ---------
|
|Allocated
shares                |  |  |  |           | 40,612   
|Shares
committed to be released |  |  |  |           | 3,422    
|Unreleased
shares               |  |  |  |           | 92,393   
|Total ESOP
shares               |  |  |  |           | 136,427  
|Fair value of
unreleased shares |  |  |  | $         | 2,129,659

2004 Incentive Stock Benefit Plan (the Stock Benefit
Plan)

In December, 2003, the Companys stockholders approved, and the Company
implemented, the Stock Benefit Plan. Under the Stock Benefit Plan, employees of the Company and its subsidiary may be awarded shares of Company common
stock (the Stock Awards) and issued options to purchase shares of Company common stock (the Stock Options) covering up to
256,648 shares in the aggregate.

Stock Awards

Stock Awards under the Stock Benefit Plan are granted in the form of Company common
stock, which are held by a Plan trustee, and vest over a period of five years (20% annually from the date of grant). The Stock Awards become fully
vested upon the death or disability of the holder. On December 8, 2003, the Company awarded 85,550 shares of its common stock. During the year ended
March 31, 2005 and 2004, approximately $316,500 and $105,500, respectively, in expense related to the Stock Awards was recorded. The amount of expense
recorded for the Stock Awards is based upon the number of shares awarded, the market price of the Companys common stock at the grant date ($18.50
per share) and the period over which the Stock Awards are earned (60 months).

Stock Options

Stock Options granted under the Stock Benefit Plan may be either options that
qualify as incentive stock options as defined in Section 422 of the Internal Revenue Code of 1986, as amended, or non-statutory options. Options
granted will vest and will be exercisable on a cumulative basis in equal installments at the rate of 20% per year

36

---

ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Contd.)

10.    BENEFIT PLANS (Continued)

commencing on December 8, 2003. All options granted will be exercisable in the
event the optionee terminates his employment due to death or disability. The options expire ten years from the date of grant.

On December 8, 2003, options to purchase 171,098 shares of Company common stock
were granted, which include non-incentive stock options to directors and incentive stock options to officers and employees. A summary of stock option
activity follows:



|                |  |  |  | Vested |        | Non-Vested |  | Total |         | ExercisePrice
|--------------- |  |  |  | ------ | ------ | ---------- |  | ----- | ------- | -------------
|April 1,
2003   |  |  |  |        |       |            |  |       |        |              
|Options
granted |  |  |  |        |       |            |  |       | 171,098 |              
|Vesting         |  |  |  |        | 34,220 |            |  |       | (34,220 | )            
|March 31,
2004  |  |  |  |        | 34,220 |            |  |       | 136,878 |              
|Exercised       |  |  |  |        | (2,716 | )          |  |       |        |              
|Vesting         |  |  |  |        | 34,220 |            |  |       | (34,220 | )            
|March 31,
2005  |  |  |  |        | 65,724 |            |  |       | 102,658 |              

The following summarizes non-incentive and incentive options included
above.



|               |  |  |  | Non-Incentive |        | Incentive |  | Total |         | ExercisePrice
|-------------- |  |  |  | ------------- | ------ | --------- |  | ----- | ------- | -------------
|Vested         |  |  |  |               | 9,240  |           |  |       | 24,980  |              
|Non-vested     |  |  |  |               | 36,956 |           |  |       | 99,922  |              
|March 31,
2004 |  |  |  |               | 46,196 |           |  |       | 124,902 |              



|               |  |  |  | Non-Incentive |        | Incentive |  | Total |         | ExercisePrice
|-------------- |  |  |  | ------------- | ------ | --------- |  | ----- | ------- | -------------
|Vested         |  |  |  |               | 18,480 |           |  |       | 47,244  |              
|Non-vested     |  |  |  |               | 27,716 |           |  |       | 74,942  |              
|March 31,
2005 |  |  |  |               | 46,196 |           |  |       | 122,186 |              

The Company, as permitted by SFAS No. 123, recognizes compensation cost for stock
options granted based on the intrinsic value method instead of the fair value based method. The weighted-average grant-date fair value of the stock
options granted during 2005, which have an exercise price equal to the market price of the Companys common stock at the grant date, is estimated
using the Black-Scholes option-pricing model. Such fair value and the assumptions used for estimating fair value are as follows:

|Weighted
        average grant-date fair value per share | $
        6.40   
|-------------------------------------------------------- | -----------------
|Expected
        common stock dividend yield             | 1.08%            
|Expected
        volatility                              | 29.74%           
|Expected
        option life                             | 7.0
        years
|Risk-free
        interest rate                          | 3.81%            

|11. |  | INCOME TAXES
|--- |  | ------------

The Bank qualifies as a savings institution under the provisions of the Internal
Revenue Code and therefore, must calculate its tax bad debt deduction using either the experience method or the specific charge off method. Retained
earnings at March 31, 2005, includes approximately $1.3 million of pre-1988 (base year) bad debt allowance for which federal income taxes have not been
provided. In addition, deferred New York State and New York City taxes have not been provided on bad debt allowances in the amount of $2.3 million and
$2.4 million, respectively. If

37

---

ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Contd.)

11.    INCOME TAXES (Continued)

such amounts are used for purposes other than to absorb bad debts, including
distributions in liquidation, their will be subject to income taxes at the then current rates.

The components of income tax expense are summarized as follows:



|                                       |  |  |  | Year Ended March 31, |          
|-------------------------------------- |  |  |  | -------------------- | ---------
|
|Current income
tax expense:            |  |  |  |                      |          
|Federal                                |  |  |  | $                    | 1,030,121
|State and
city                         |  |  |  |                      | 454,958  
|                                       |  |  |  |                      | 1,485,079
|Deferred
income tax expense (benefit): |  |  |  |                      |          
|Federal                                |  |  |  |                      | 7,805    
|State and
city                         |  |  |  |                      | 3,389    
|                                       |  |  |  |                      | 11,194   
|                                       |  |  |  | $                    | 1,496,273

The components of the net deferred income tax asset are as follows:



|                                                 |  |  |  | March 31, |         
|------------------------------------------------ |  |  |  | --------- | --------
|
|Deferred
income tax assets:                      |  |  |  |           |         
|Deferred
compensation                            |  |  |  | $         | 219,683 
|Allowance for
loan losses                        |  |  |  |           | 319,067 
|Supplemental
pensions                            |  |  |  |           | 66,792  
|Accrued
bonus                                    |  |  |  |           | 12,989  
|Other
items                                      |  |  |  |           | 8,283   
|Unrealized
loss on securities available for sale |  |  |  |           | 22,351  
|                                                 |  |  |  |           | 649,165 
|Deferred
income tax liabilities:                 |  |  |  |           |         
|Prepaid
pension                                  |  |  |  |           | (204,782
|Depreciation                                     |  |  |  |           | (63,126 
|                                                 |  |  |  |           | (267,908
|Net deferred
income tax asset                    |  |  |  | $         | 381,257 

The following table presents a reconciliation between the reported income tax
expense and the income tax expense which would be computed by applying the normal federal income tax rate of 34% to income before income
taxes:



|                                                                     |  |  |  | Year Ended March 31, |          
|-------------------------------------------------------------------- |  |  |  | -------------------- | ---------
|
|Federal income
tax expense                                           |  |  |  | $                    | 1,200,260
|Increases in
taxes resulting from:                                   |  |  |  |                      |          
|New York state
and city income tax, net of federal income tax effect |  |  |  |                      | 302,509  
|Other items,
net                                                     |  |  |  |                      | (6,496   
|Effective
income tax expense                                         |  |  |  | $                    | 1,496,273
|Effective
income tax rate                                            |  |  |  |                      | 42.39    

38

---

ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Contd.)

|12. |  | STOCKHOLDERS EQUITY AND REGULATORY
CAPITAL
|--- |  | -------------------------------------------

For the purpose of granting to eligible account holders a priority in the event of
future liquidation, the Bank, at the time of conversion, established a special account in an amount equal to its total retained earnings of $8.8
million at March 31, 2002. In the event of a future liquidation of the converted Bank (and only in such event), an eligible account holder who
continues to maintain his deposit account shall be entitled to receive a distribution from the special account. The total amount of the special account
is decreased (but never increased) in an amount proportionately corresponding to decrease in the deposit account balances of eligible account holders
as of each subsequent year end. After conversion, no dividends may be paid to stockholders if such dividends would reduce the retained earnings of the
converted Bank below the amount required by the special account.

The Bank is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the Banks financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Banks
assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Banks capital amounts and
classification are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require
the Bank to maintain minimum amounts and ratios of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and
of Tier 1 capital to adjusted total assets (as defined). The following tables present a reconciliation of capital per GAAP and regulatory capital and
information as to the Banks capital levels at the dates presented:



|                                         |  |  |  | March 31, |       
|---------------------------------------- |  |  |  | --------- | ------
|
|
|GAAP capital
(core and tangible capital) |  |  |  | $         | 21,040
|Add: general
valuation allowance         |  |  |  |           | 737   
|Less:
investment in real estate          |  |  |  |           | (78   
|Total
regulatory capital                 |  |  |  | $         | 21,699

|                                                 |  |  |  | As of March 31, 2005 |       
|------------------------------------------------ |  |  |  | -------------------- | ------
|
|
|
|Total
Capital (to risk-weighted assets)          |  |  |  | $                    | 21,699
|Tier 1
Capital (to risk-weighted assets)         |  |  |  | $                    | 21,040
|Core (Tier 1)
Capital (to adjusted total assets) |  |  |  | $                    | 21,040
|Tangible
Capital (to adjusted total assets)      |  |  |  | $                    | 21,040

39

---

ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Contd.)

12.    STOCKHOLDERS EQUITY AND REGULATORY CAPITAL
(Continued)



|                                                 |  |  |  | As of March 31, 2004 |       
|------------------------------------------------ |  |  |  | -------------------- | ------
|
|
|
|Total
Capital (to risk-weighted assets)          |  |  |  | $                    | 19,279
|Tier 1
Capital (to risk-weighted assets)         |  |  |  | $                    | 18,775
|Core (Tier 1)
Capital (to adjusted total assets) |  |  |  | $                    | 18,775
|Tangible
Capital (to adjusted total assets)      |  |  |  | $                    | 18,775

As of December 31, 2004, the most recent notification from the Office of Thrift
Supervision, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. There are no conditions existing
or events which have occurred since notification that management believes have changed the Banks category.

During the years ended March 31, 2004 and 2005, the Company repurchased 19,400 and
28,181 shares, respectively, of its own common stock at a total cost of $384,099 and $594,710, respectively, under a stock repurchase program approved
by the Companys Board of Directors.

|13. |  | COMMITMENTS AND CONTINGENCIES
|--- |  | -----------------------------

The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These commitments include commitments to originate loans. These financial
instruments primarily include commitments to extend credit and involve, to varying degrees, elements of credit and interest rate risk in excess of
amounts recognized in the consolidated statements of financial condition.

The Banks exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Bank
uses the same credit policies in making commitments as it does for on-balance-sheet instruments.

Commitments to originate loans are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and
may require payment of a fee. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Bank evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank, upon extension of credit is based on managements credit evaluation of the counterparty. Collateral held varies but
primarily includes residential real estate and income-producing commercial properties.

Commitments to purchase securities are contacts for delayed delivery of securities
in which seller agrees to make delivery at a specified future date of a specified instrument, at a specified price or yield. Risks arise from possible
inability of counterparties to meet the terms of their contracts and from movement in securities values and interest rates.

The Bank had the following commitments outstanding:



|                               |  |  |  | March 31, |          
|------------------------------ |  |  |  | --------- | ---------
|
|To originate
or purchase loans |  |  |  | $         | 8,006,000

40

---

ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Contd.)

13.    COMMITMENTS AND CONTINGENCIES
(Continued)

At March 31, 2005, of the $8,006,000 in outstanding commitments to originate loans,
$1,230,000 were for fixed rate loans with rates ranging from 5.50% to 7.25%, $4,176,000 were for adjustable rate loans with initial rates ranging from
4.75% to 6.75%, and $2,600,000 was for an adjustable rate construction participation loan at prime +2.00%.

The Bank also has, in the normal course of business, commitments for services and
supplies. Management does not anticipate losses on any of these transactions.

The Company and the Bank are parties to various litigation which arises primarily
in the ordinary course of business. In the opinion of management, the ultimate disposition of such litigation should not have a material effect on the
consolidated financial position or results of operations of the Company.

|14. |  | ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
|--- |  | ---------------------------------------------

The fair value of a financial instrument is defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties, other than a forced or liquidation sale. Significant estimations were
used by management for the purposes of this disclosure. Estimated fair values have been determined using the best available data and estimation
methodology suitable for each category of financial instruments. Fair value estimates, methods and assumptions are set forth below.

Cash and cash equivalents and interest receivable

The carrying amounts for cash and cash equivalents and interest receivable
approximate fair value because they mature in three months or less.

Securities

The fair value of securities, both available for sale and held to maturity, are
based on quoted market or dealer prices, if available. If quoted market or dealer prices are not available, fair value is estimated using quoted market
prices for similar securities.

Loans receivable

Fair value is estimated by discounting future cash flows, using the current rates
at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, of such loans.

Deposits

The fair value of demand and savings deposit accounts is equal to the amount
payable on demand at the reporting date. The fair value of certificates of deposit is estimated by discounting future cash flow using rates currently
offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding
provided by deposit liabilities compared to the cost of borrowing funds in the market.

Advances from Federal Home Loan Bank of New York

The fair value is estimated using rates currently offered for liabilities of
similar remaining maturities, or when available, quoted market prices.

41

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ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Contd.)

14.    ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)

Commitments

The fair value of loan commitments is estimated using fees currently charged to
enter into similar agreements taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For
fixed rate loan commitments, fair value also considers the difference between current levels of interest and the committed rates.

|                                            |  |  |  | March 31, |        
|------------------------------------------- |  |  |  | --------- | -------
|
|
|
|Financial
assets                            |  |  |  |           |        
|Cash and cash
equivalents                   |  |  |  | $         | 6,364  
|Securities
available for sale               |  |  |  |           | 2,940  
|Investment
securities held to maturity      |  |  |  |           | 4,008  
|Mortgage-backed securities held to maturity |  |  |  |           | 41,978 
|Loans
receivable                            |  |  |  |           | 120,148
|Interest
receivable                         |  |  |  |           | 864    
|                                           
|Financial
liabilities                       |  |  |  |           |        
|Deposits                                    |  |  |  |           | 109,103
|Advances                                    |  |  |  |           | 43,350 
|                                           
|Commitments                                 |  |  |  |           |        
|To originate
or purchase loans              |  |  |  |           |       

The fair value estimates are made at a discrete point in time based on relevant
market information and information about the financial instruments. Because no market exists for a significant portion of the financial instruments,
fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

In addition, fair value estimates are based on existing on-and-off balance sheet
financial instruments, without attempting to estimate the value of anticipated future business, and exclude the value of assets and liabilities that
are not considered financial instruments. Other significant assets that are not considered financial assets and liabilities include premises and
equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of the estimates.

Finally, reasonable comparability between financial institutions may not be likely
due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for
many of the financial instruments. This lack of uniform valuation methodologies introduces a greater degree of subjectivity to these estimated fair
values.

42

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ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Contd.)

|15. |  | PARENT ONLY FINANCIAL INFORMATION
|--- |  | ---------------------------------

The following are condensed financial statements for Atlantic Liberty Financial
Corp. (Parent company only).

STATEMENTS OF CONDITION






|                                           |  |  |  | March 31, |           
|------------------------------------------ |  |  |  | --------- | ----------
|
|Assets:                                    |  |  |  |           |           
|Cash and due
from banks                    |  |  |  | $         | 2,817,160 
|Securities
available for sale              |  |  |  |           | 2,939,984 
|ESOP loan
receivable                       |  |  |  |           | 958,153   
|Investment in
subsidiary                   |  |  |  |           | 21,039,715
|Interest
receivable                        |  |  |  |           | 46,290    
|Other
assets                               |  |  |  |           | 53,757    
|Total
assets                               |  |  |  | $         | 27,855,059
|Liabilities                                |  |  |  |           | 28,302    
|Stockholders equity                       |  |  |  |           | 27,826,757
|Total
liabilities and stockholders equity |  |  |  | $         | 27,855,059

STATEMENTS OF INCOME






|                                                                                   |  |  |  | Year Ended March 31, |          
|---------------------------------------------------------------------------------- |  |  |  | -------------------- | ---------
|
|Interest
income                                                                    |  |  |  | $                    | 192,936  
|Total
income                                                                       |  |  |  |                      | 192,936  
|Legal
expense                                                                      |  |  |  |                      | 21,500   
|Other
expenses                                                                     |  |  |  |                      | 104,430  
|Total
non-interest expenses                                                        |  |  |  |                      | 125,930  
|Income (loss)
before income tax and equity in undistributed earnings of subsidiary |  |  |  |                      | 67,006   
|Income
tax                                                                         |  |  |  |                      | 38,218   
|Income (loss)
before equity in undistributed earnings of subsidiary                |  |  |  |                      | 28,788   
|Equity in
undistributed earnings of subsidiary                                     |  |  |  |                      | 2,005,114
|Net
income                                                                         |  |  |  | $                    | 2,033,902

43

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ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Contd.)

15.    PARENT ONLY FINANCIAL INFORMATION
(Continued)

STATEMENTS OF CASH FLOWS






|                                                                              |  |  |  | Year Ended March 31, |           
|----------------------------------------------------------------------------- |  |  |  | -------------------- | ----------
|
|Cash flows
from operating activities:                                         |  |  |  |                      |           
|Net
income                                                                    |  |  |  | $                    | 2,033,902 
|Adjustments to
reconcile net income to net cash used in operating activities: |  |  |  |                      |           
|Net
amortization of premium                                                   |  |  |  |                      | 8,396     
|(Increase) in
interest receivable                                             |  |  |  |                      | (11,332   
|(Increase) in
other assets                                                    |  |  |  |                      | (4,536    
|Increase in
other liabilities                                                 |  |  |  |                      | 18,038    
|Distribution
of treasury stock to MRP                                         |  |  |  |                      | 328,779   
|Equity in
undistributed earnings of subsidiary                                |  |  |  |                      | (2,005,114
|Net cash used
in operating activities                                         |  |  |  |                      | 368,133   
|Cash flows
from investing activities:                                         |  |  |  |                      |           
|Purchase of
securities available for sale                                     |  |  |  |                      | (2,000,000
|Proceeds from
repayments of securities available for sale                     |  |  |  |                      | 2,395,827 
|Decrease in
loans receivable                                                  |  |  |  |                      | 136,879   
|Net cash
provided by (used in) investing activities                           |  |  |  |                      | 532,706   
|Cash flows
from financing activities:                                         |  |  |  |                      |           
|Cash
dividends                                                                |  |  |  |                      | (428,057  
|Purchase of
treasury stock                                                    |  |  |  |                      | (594,709  
|Sale of
treasury stock                                                        |  |  |  |                      | 50,246    
|Net cash (used
in) financing activities                                       |  |  |  |                      | (972,520  
|Net (decrease)
in cash and cash equivalents                                   |  |  |  |                      | (71,681   
|Cash and cash
equivalents  beginning                                         |  |  |  |                      | 2,888,841 
|Cash and cash
equivalents  ending                                            |  |  |  | $                    | 2,817,160 

44

---

ATLANTIC LIBERTY FINANCIAL CORP. AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Contd.)

|16. |  | QUARTERLY FINANCIAL DATA (UNAUDITED)
|--- |  | ------------------------------------






|                                                       |  |  |  | Quarter Ended |          
|------------------------------------------------------ |  |  |  | ------------- | ---------
|
|
|Total interest
income                                  |  |  |  | $             | 2,379    
|Total interest
expense                                 |  |  |  |               | 666      
|Net interest
income                                    |  |  |  |               | 1,713    
|Provision for
loan losses                              |  |  |  |               |         
|Non-interest
income                                    |  |  |  |               | 154      
|Non-interest
expenses                                  |  |  |  |               | 1,173    
|Income
taxes                                           |  |  |  |               | 289      
|Net
income                                             |  |  |  | $             | 405      
|Net income per
common share                           |  |  |  |               |          
|Basic                                                  |  |  |  | $             | 0.26     
|Diluted                                                |  |  |  | $             | 0.26     
|Weighted
average number of common shares outstanding  |  |  |  |               |          
|Basic                                                  |  |  |  |               | 1,584,289
|Diluted                                                |  |  |  |               | 1,584,289






|                                                       |  |  |  | Quarter Ended |          
|------------------------------------------------------ |  |  |  | ------------- | ---------
|
|
|Total interest
income                                  |  |  |  | $             | 1,986    
|Total interest
expense                                 |  |  |  |               | 480      
|Net interest
income                                    |  |  |  |               | 1,506    
|Provision for
loan losses                              |  |  |  |               |         
|Non-interest
income                                    |  |  |  |               | 105      
|Non-interest
expenses                                  |  |  |  |               | 948      
|Income
taxes                                           |  |  |  |               | 294      
|Net
income                                             |  |  |  | $             | 369      
|Net income per
common share                           |  |  |  |               |          
|Basic                                                  |  |  |  | $             | 0.23     
|Diluted                                                |  |  |  | $             | 0.23     
|Weighted
average number of common shares outstanding  |  |  |  |               |          
|Basic                                                  |  |  |  |               | 1,591,369
|Diluted                                                |  |  |  |               | 1,591,369

45

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ATLANTIC LIBERTY FINANCIAL CORP.

and

ATLANTIC LIBERTY SAVINGS, F.A.



DIRECTORS AND EXECUTIVE OFFICERS


Directors

|Barry M.
Donohue                       |  |  |  | Thomas M. DeMartino                   
|-------------------------------------- |  |  |  | --------------------------------------
|President and
Chief Executive Officer, |  |  |  | Owner of T.M. DeMartino Consulting    
|Atlantic
Liberty Financial Corp. and   |  |  |  | Services, a business and government   
|Atlantic
Liberty Savings, F.A.         |  |  |  | services consultant                   
|                                      
|Richard T.
Arkwright                   |  |  |  | Honorable Guy J. Mangano              
|Chairman of
the Board,                 |  |  |  | Presiding Justice, Appellate Division,
|Atlantic
Liberty Financial Corp. and   |  |  |  | Second Department, NY State           
|Atlantic
Liberty Savings, F.A.         |  |  |  | Appellate Court, retired              
|Chairman and
Chief Investment          |  |  |  |                                       
|Officer,
Analytic Asset Management     |  |  |  | George M. Spanakos                    
|                                       |  |  |  | Attorney at Law                       
|                                       |  |  |  | President, St. George Realty          
|                                      
|Executive Officers                     |  |  |  |                                       
|                                      
|Barry M.
Donohue                       |  |  |  | William M. Gilfillan                  
|President and
Chief Executive Officer  |  |  |  | Executive Vice President and          
|                                       |  |  |  | Chief Financial Officer               

46

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SHAREHOLDER INFORMATION

|Annual
Meeting                          |  |  |  | Independent Auditors                
|--------------------------------------- |  |  |  | ------------------------------------
|The Annual
Meeting of Shareholders      |  |  |  | Beard Miller Company LLP            
|will be held
at 186 Montague Street     |  |  |  | 55
US Highway 46 East               
|Brooklyn, NY
11201 on August 17, 2005   |  |  |  | Pine Brook, NJ 07058                
|at 3:30 p.m.
local time.                |  |  |  |                                     
|                                       
|Stock
Listing                           |  |  |  | Transfer Agent and Registrar        
|Nasdaq                                  |  |  |  | Registrar & Transfer                
|National
Market under the symbol ALFC |  |  |  | 10
Commerce Drive                   
|                                        |  |  |  | Cranford, NJ 07016                  
|                                        |  |  |  | (800) 368-5948                      
|Local
Counsel                           |  |  |  |                                     
|Cullen Dykman
Bleakly Platt, LLP        |  |  |  | Contact our transfer agent          
|177 Montague
Street                     |  |  |  | directly for assistance             
|Brooklyn, NY
11201                      |  |  |  | in
changing your address,           
|                                        |  |  |  | elimination of duplicate            
|                                        |  |  |  | mailings, transferring stock, or    
|                                        |  |  |  | replacing lost, stolen or           
|                                        |  |  |  | destroyed stock certificates.       
|                                       
|Special
Counsel                         |  |  |  | Annual Report on Form 10-KSB        
|Luse Gorman
Pomerenk & Schick, P.C.     |  |  |  | A
copy of the Companys Form        
|5335 Wisconsin
Avenue, NW               |  |  |  | 10-KSB for the fiscal year ended    
|Washington, DC
20015                    |  |  |  | March 31, 2005, as filed with the   
|                                        |  |  |  | Securities and Exchange Commission  
|                                        |  |  |  | is
available without charge to      
|                                        |  |  |  | shareholders by written request to  
|                                        |  |  |  | the company. It may also be accessed
|                                        |  |  |  | on
our website at:                  
|                                        |  |  |  | www.atlanticlibertysavings.com      

47

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[This Page Intentionally Left Blank]

48

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Price Range of Common Stock

|Fiscal 2003                     |  |  |  | High |       | Low |  | Dividends
|------------------------------- |  |  |  | ---- | ----- | --- |  | ---------
|Quarter
ended December 31, 2002 |  |  |  | $    | 14.09 |     |  | $        
|Quarter
ended March 31, 2003    |  |  |  |      | 16.05 |     |  |          

|Fiscal 2004                      |  |  |  | High |       | Low |  | Dividends
|-------------------------------- |  |  |  | ---- | ----- | --- |  | ---------
|Quarter
ended June 30, 2003      |  |  |  |      | 19.60 |     |  |          
|Quarter
ended September 30, 2003 |  |  |  |      | 20.40 |     |  |          
|Quarter
ended December 31, 2003  |  |  |  |      | 20.47 |     |  |          
|Quarter
ended March 31, 2004     |  |  |  |      | 20.34 |     |  |          

|Fiscal 2005                      |  |  |  | High |       | Low |  | Dividends
|-------------------------------- |  |  |  | ---- | ----- | --- |  | ---------
|Quarter
ended June 30, 2004      |  |  |  |      | 19.34 |     |  |          
|Quarter
ended September 30, 2004 |  |  |  |      | 19.62 |     |  |          
|Quarter
ended December 31, 2004  |  |  |  |      | 24.00 |     |  |          
|Quarter
ended March 31, 2005     |  |  |  |      | 25.22 |     |  |          



The stock price information set forth in the table
above was provided by the National Association of Securities Dealers Inc. automated quotable system (Nasdaq). Atlantic Liberty Financial Corp.s
common stock is traded on the Nasdaq National Market under the symbol ALFC. The common stock began trading on October 23, 2002. On June 10,
2005 there were 1,682,147 shares of Atlantic Liberty Financial Corporation common stock outstanding (including unallocated ESOP shares) and there were
286 holders of record.


49

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