President's Report

January 31, 2006

At the Bank

The Home Loan Bank starts 2006 as an SEC registrant, with a risk-based Capital Plan, and a strong management team focused on providing ready access to reasonably-priced advances and a fair return on our members' capital. Regarding the last point, I am delighted to report that our Board of Directors approved a dividend rate for the fourth quarter 2005 of 5.11% (annualized). The dollar amount of the dividend for the fourth quarter was approximately $46 million and distributed to our member financial institutions on January 31, 2006. The slight reduction in the dividend rate from the third quarter (5.25%) reflects, among other things, the lower level of investments, as discussed further below.

The average dividend rate for the four dividends paid out of 2005 net income was 5.02%. The total cash dividend paid in these four quarters was approximately $184 million, compared with approximately $85 million for 2004. Net income increased in 2005 and was approximately $230 million as compared to $161 million for 2004. The 43% improvement in earnings over the prior year was a result of better spreads on advances and investments along with increased earnings on our capital due to higher interest rates. The Bank continues to refine its policies and procedures related to forward-looking statements in financial disclosures, especially with regard to future dividend payments. I hope to be able to provide more guidance about the outlook for earnings and dividends in future reports.

The level of interest rates directly affects the FHLBanks through earnings on invested capital. As a cooperative, the FHLBanks operate at relatively low net spreads between the yields earned on their assets and the cost of liabilities compared to other financial institutions. Therefore, a relatively higher proportion of FHLBank income is generated from the investment of member-supplied capital at the average asset yield. This means that changes in asset yields tend to have a greater effect on FHLBank profitability than on the profitability of financial institutions in general..

The audit of our 2005 financials is underway, and the unaudited Statements of Condition and Operations for 2004 and 2005 are subject to change until the audit is completed. A form 10-K, including the audited financials, will be sent to you after it is filed with the SEC.

Retained earnings at year-end 2005 were $291 million as compared to $223 million at the end of 2004. Retained earnings after the January dividend payment will be approximately $245 million.

The Bank intends to establish a post-dividend target minimum level for its retained earnings of approximately $250 million, and we expect to achieve that level by mid-year 2006.

At the close of business on December 31, 2005, total assets for the Bank were just over $85 billion as compared to $88.4 billion at the end of 2004. Outstanding advances, i.e., secured loans to members, were $61.9 billion, representing 73% of assets. MPF member mortgage assets were $1.5 billion and represented 1.7% of assets.

Because of the current flatness of the yield curve and a dearth of AAA investments that meet the Home Loan Bank's strict investment parameters, the Bank allowed its MBS to total capital ratio during December 2005 to decline to 2.2 to 1, compared to 2.35 to 1 during the third quarter of 2005. (By FHFB regulation, the Bank is capped at a 3 to 1 ratio, and historically the Bank maintained an approximate 2.8 to 1 ratio.) The Bank anticipates that it will continue to manage the MBS portfolio at a lower ratio until market conditions produce a more appealing risk/reward profile for these investments. As of December 31, 2005, the Bank held $9.6 billion in securities compared to $12.6 billion at the end of 2004.

Under the Home Loan Bank's risk-based Capital Plan, which became effective on December 1, 2005, the Bank held $3.59 billion in capital stock and total capital of $3.89 billion, which exceeded the regulatory risk-based capital requirement of $626.5 million and the leveraged capital requirement
of $3.34 billion.

The Board of Directors ratified the funding of 63 affordable housing projects in the two 2005 Affordable Housing Program ("AHP") funding rounds. A total of $17.4 million was awarded to these projects, and as a result, 2,195 new affordable housing units will be created in New Jersey, New York, and Puerto Rico. These 63 successful public/private AHP partnerships will generate $337 million in total expenditures, producing jobs as well as housing.

Carl A. Florio Sworn In as New Director

At the January Board meeting, Carl A. Florio was sworn in as a newly elected member of the Board. Carl Florio is the Eastern Regional President of First Niagara Financial Group, Inc., since the completion of the merger between Hudson River Bank & Trust Company and First Niagara in January 2005. Previously, he served as the President and CEO of Hudson River Bank & Trust Co. from 1996 through the merger, and from 1993 to 1996, Mr. Florio served as Hudson’s Chief Financial Officer. His earlier work experience included several years as a partner in the accounting firm of Pattison, Koskey, Rath & Florio, where he audited commercial banks and savings institutions throughout the Hudson Valley. Mr. Florio has been active in many professional and community service organizations. We welcome Carl to the Board.

We also thank our two outgoing Directors -- G. Thomas Bowers, Director, First Niagara Bank, and Harold E. Doley, III, Principal, The Lugano Group, Inc. -- for their many contributions. Each added their considerable expertise and commitment to the management, growth, and direction of our Bank.

A Point of Interest

In 2005, there was a fair amount of trade press regarding the accounting treatment of mortgage pool, purchase, and sale transactions between financial institutions in Puerto Rico. From time to time, we have been asked if the Home Loan Bank has any exposure because of accounting uncertainties related to the purchase mortgage pools in Puerto Rico. The answer is no. Although these are transactions that the Bank is monitoring closely, the Bank's secured position is unaffected. The advances of our Puerto Rico members are not secured by any of the purchased mortgage loans in question. We have worked and continue to work closely with our members in Puerto Rico as they make progress in resolving the issues surrounding these transactions.

In closing, I would like to thank each customer and stockholder for helping to make 2005 a good year, and we look forward to serving you in 2006.


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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