President's Report

October 31, 2003

At the Bank

A Challenging Time

The challenges experienced these past months have perhaps been unprecedented in the history of the Home Loan Bank. As we reported on September 22, the dividend normally paid at the end of October for the third quarter will not be paid to stockholders. We chose this action because the losses we took in addressing credit risk in the Bank's investment portfolio exceeded third-quarter earnings and caused a reduction of the Bank's retained earnings. Payment of a dividend would have depleted retained earnings further. Preservation of retained earnings is important. Among other things, retained earnings help protect the $100-per-share par value of capital stock owned by our members. The dividend action enabled the Bank to finish the quarter with close to $100 million in retained earnings, providing a substantial foundation for rebuilding retained earnings as quickly as possible.

The Dividend and Retained Earnings

Our Board of Directors is acutely aware of the importance of rebuilding retained earnings while resuming payment of a stable dividend regularly. The Board has directed Bank management to work aggressively to develop a policy the Board can adopt to accomplish this.

Our objective is to determine an appropriate risk-based retained earnings target and to prepare a policy for Board consideration that will build retained earnings to the target level over time. In this regard, the Federal Housing Finance Board ("FHFB"), the Washington regulator for the Home Loan Bank System, has expressed a view that the dividends for each of the Home Loan Banks should be paid from residual earnings after a set-aside is made to build an appropriate level of retained earnings. The FHFB has directed the 12 Home Loan Banks to establish formal retained earnings policies by no later than March 31, 2004. Given our need to build retained earnings and the loss of investment income from the nearly $2 billion in MBS investments we sold in September, we expect that future dividends paid by the Home Loan Bank will be at a lower level relative to prevailing market interest rates than the dividends of the recent past.

Our goal is to balance the growth rate of retained earnings and the dividend rate so that your paid-in capital is well protected from the risk of loss while you continue to earn a reasonable return on your investment in Home Loan Bank stock.

Reduced Compensation

You should know that the effect on net income and dividends from our recent actions has negatively affected the compensation of the officers and other employees of the Bank. At its October meeting, the Board of Directors approved management's recommendation to terminate the incentive compensation plan for 2003. Compensation for most employees of the Home Loan Bank had a significant "at risk" incentive component tied directly to the Bank's financial performance.

A Question from a Member

A member of the Home Loan Bank asked about the possibility of the Home Loan Bank stock being classified as an impaired asset because it paid no dividend. While any determination of impairment would need to be made independently by each stockholder, definitive guidance exists for the carrying value of FHLB stock in the AICPA Guide for Banks and Savings Institutions. In Chapter 19 of the Guide, Illustrative Consolidated Financial Statements, Note 20 regarding the Fair Value of Financial Instruments states: "Fair values for securities, excluding Federal Home Loan Bank stock, are based on quoted market prices. The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank."

We appreciate the concern underlying this inquiry, and we are working swiftly to meet this issue head on. We are communicating not only with our regulators, but also with the regulators of our members so they have a full understanding and are aware of the steps we are taking to protect the value of member capital and to resume a stable dividend. The retained earnings policy our Board is working to adopt will produce a stable dividend.

In Closing

We are extraordinarily proud of being a solid and important partner to our community lenders in New Jersey, New York, Puerto Rico, and the U.S. Virgin Islands. We have made and will continue to make sure that our operations support your businesses and our overall mission.

This is a time of challenge and change. We pledge to continue to navigate these changes -- whether in the credit markets, in our operations, or in regulatory reform. I appreciate your continued support as we work together to deliver value to all our members. Thank you.


Alfred A. DelliBovi
President & CEO

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Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This report may contain forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements are based upon our current expectations and speak only as of the date hereof. These statements may use forward-looking terms, such as “projected,” “expects,” “may,” or their negatives or other variations of these terms. The Bank cautions that, by their nature, forward-looking statements involve risk or uncertainty and that actual results could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. These forward-looking statements involve risks and uncertainties including, but not limited to, regulatory and accounting rule adjustments or requirements, changes in interest rates, changes in projected business volumes, changes in prepayment speeds on mortgage assets, the cost of our funding, changes in our membership profile, the withdrawal of one or more large members, competitive pressures, shifts in demand for our products, and general economic conditions. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

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