Exhibit 10.3.1

 

Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.

 

FEDERAL HOME LOAN BANK OF BOSTON

2006 EXECUTIVE INCENTIVE PLAN

February 2006

 

PURPOSE

 

The Federal Home Loan Bank of Boston (Bank) has established an Executive
Incentive Plan (EIP) to:

 

•                  promote achievement of the Bank’s financial plan and
strategic objectives as spelled out in the 2006 Strategic Business Plan;

•                  provide total annual compensation (i.e., salary plus
incentive) that is competitive with other financial institutions in the
employment markets in which the Bank competes, including other Federal Home Loan
Banks; and

•                  facilitate the retention and commitment of corporate
officers.

 

BANK’S OBJECTIVES FOR 2006

 

The focus of the Bank’s 2006 Strategic Business Plan is summarized in two words:
profitable growth. The Bank is targeting steady growth in business with members
in terms of both advances and mortgages. While the Bank’s focus will be
profitable growth, we will continue to enhance the Bank’s operational
infrastructure, and we will maintain and reinforce the Bank’s commitment to
conservative and prudent risk management and compliance.

 

Also for 2006, the Bank has identified three all-encompassing long-term
strategic goals that demonstrate our commitment to the Bank’s mission, vision,
the needs of its stakeholders, and the well-being of the New England region:

 

1.               to foster a member-centric organization;

2.               to maintain trust and confidence among stakeholders; and

3.               to harness the power of technology to maintain maximum
efficiency and productivity.

 

The goals in the 2006 incentive plan are designed to reinforce the focus of the
Bank’s 2006 Strategic Business Plan.

 

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

 

The incentive goals are summarized in the following table with more detail
following:

 

 

 

Weight

 

 

 

 

 

 

 

Goal

 

Pres.

 

1

 

2

 

Threshold

 

Target

 

Excess

 

Pre-tax ROE (Adjusted for Net Prepayment Fees) Spread to LIBOR

 

15

%

20

%

25

%

300 basis points

 

400 basis points

 

500 basis points

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage Growth in Average Member Advances (net of CDA and NEF) and MPF
Balances 2006 Over 2005 With National, Growth-Oriented, and Insurance Company
Accounts*

 

10

%

10

%

10

%

10 percent

 

15 percent

 

20 percent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage Growth in Average Member Advances (net of CDA and NEF) and MPF
Balances 2006 Over 2005 With Community Bank and Credit Union Accounts

 

10

%

10

%

10

%

3 percent

 

5 percent

 

8 percent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage Growth in Targeted Mission-Related Advances Programs (CDA and NEF)
2006 Over 2005

 

10

%

10

%

10

%

5 percent

 

10 percent

 

15 percent

 

 

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

* Excluding Bank of America advances.

 

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

 

 

 

Weight

 

 

 

 

 

 

 

Goal

 

Pres.

 

1

 

2

 

Threshold

 

Target

 

Excess

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Examination Results

 

15

%

15

%

15

%

N.A.

 

“Fair” rating in 2006 exam report

 

“Satisfactory” rating in 2006 exam report

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operational Component

 

10

%

15

%

20

%

As defined

 

As defined

 

As defined

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discretionary Component

 

30

%

20

%

10

%

As documented by supervisor

 

As documented by supervisor

 

As documented by supervisor

 

 

Profitability Goal

 

2006 Goal:

 

Pre-tax ROE (Adjusted for Net Prepayment Fees) Spread to LIBOR

Weight:

 

President: 15 percent; Tier 1: 20 percent; Tier 2: 25 percent

Threshold:

 

300 basis points

Target:

 

400 basis points

Excess:

 

500 basis points

 

The metric will be the spread by which the Bank’s pre-tax (i.e., pre-REFCorp and
pre-AHP) ROE (adjusted for net prepayment fees) exceeds the daily average of the
bond-equivalent yield of three-month LIBOR. The projection for this metric in
the 2006 Strategic Business Plan’s base case is 399 basis points.

 

The difference between “ROE” and “ROE Adjusted for Net Prepayment Fees” is that
the latter defers the net effect of prepayment fee income from advances or
investments and associated debt retirement and hedge unwind expenses over the
expected remaining lives of the assets that were prepaid. The exclusion of
prepayment fee income and associated debt retirement and swap unwind expense
from the core ROE metric removes the potential for “windfall” compensation in
the event of heavy prepayment fee income and removes a conflict with the
objective of prudent asset-liability management by excluding the otherwise
punitive cost of debt retirement and swap unwind expense.

 

The metric is not distorted by the general level of interest rates (which
affects both dollar earnings and prepayment speeds on advances), and it is
independent of the Bank’s asset size. It also eliminates a tax bias associated
with REFCorp and AHP. It does, however, implicitly factor in operating
efficiencies, since projected core ROE will be impaired to the extent the Bank’s
budget is exceeded.

 

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

 

Growth Goals

 

2006 GOAL:

 

GROWTH IN MEMBER ADVANCES AND MPF WITH NATIONAL, GROWTH-ORIENTED, AND INSURANCE
COMPANY ACCOUNTS*

Weight:

 

President: 10 percent; Tier 1: 10 percent; Tier 2: 10 percent

Threshold:

 

10 percent

TARGET:

 

15 PERCENT

Excess:

 

20 percent

 

 

 

2006 GOAL:

 

GROWTH IN MEMBER ADVANCES AND MPF WITH COMMUNITY BANK AND CREDIT UNION ACCOUNTS

Weight:

 

President: 10 percent; Tier 1: 10 percent; Tier 2: 10 percent

Threshold:

 

3 percent

Target:

 

5 percent

Excess:

 

8 percent

 

 

 

2006 GOAL:

 

GROWTH IN TARGETED MISSION-RELATED ADVANCES PROGRAMS

Weight:

 

President: 10 percent; Tier 1: 10 percent; Tier 2: 10 percent

THRESHOLD:

 

5 PERCENT

TARGET:

 

10 PERCENT

Excess:

 

15 percent

 

In the 2006 Strategic Business Plan, average member advances and Mortgage
Partnership Finance (MPF) loans are projected to increase substantially between
2005 and 2006. To achieve the projected level of growth, management is
developing a strategy in 2006 that seeks to develop value propositions for five
distinct segments of the membership:

 

1.               National accounts,

2.               Growth-oriented institutions,

3.               Community banks,

4.               Credit unions, and

5.               Insurance companies.

 

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

* Excluding Bank of America advances.

 

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

 

For purposes of the 2006 EIP, those five segments have been aggregated into two
groups with similar characteristics. A growth target based on advances and MPF
has been established for each group.(i)  The table below shows the starting and
target ending balances for these two groups:

 

$Billions

 

2005 Average Advances
(Net of CDA and NEF)
and MPF Base

 

Target Growth

 

Projected 2006 Average
Advances (Net of CDA
and NEF) and MPF

 

National, Growth-Oriented, and Insurance Company Accounts*

 

$

30.1 billion

 

15 percent

 

$

34.6 billion

 

 

 

 

 

 

 

 

 

Community Bank and Credit Union Accounts

 

$

7.6 billion

 

5 percent

 

$

8.0 billion

 

 

The Bank currently holds a 63 percent market share of the wholesale funding used
by national accounts, excluding Bank of America, and a 83 percent market share
of wholesale funding used by growth oriented institutions. The Bank will
aggressively seek to expand its marketshare in 2006 through pricing, product
development and streamlining internal policies and procedures. In addition, the
Bank is expanding its efforts to reach the insurance industry with products that
address their business needs. These institutions do not access the traditional
wholesale funding market used by banks. Bank of America balances are
incorporated into the Bank’s 2006 Strategic Business Plan, but have been removed
from the EIP to focus incentives on opportunities for growth of the Bank’s
average advances levels. Bank of America contributed significantly to this
growth in 2005.

 

In contrast, the Bank enjoys a nearly 100 percent market share of wholesale
funding used by community institutions and credit unions. Growth in advances
from this segment will be dependent on the Bank’s ability to help members expand
their own market share pursuant to their own business plans. The Bank will also
compete for funding increasingly being diversified into brokered CD and
repurchase agreements.

 

Management expects continued steady growth in the MPF program during the year,
in spite of a continuing slowdown in the housing market and growth in mortgage
products that are not eligible for sale into MPF. Growth will be generated
through existing participating financial institutions (PFIs) and recruitment of
new PFIs. The Bank’s largest PFI is expected to remain the largest seller.

 

The focus of the mission-related metric will be to expand member lending
activities in the communities they serve through the Bank’s Community
Development Advances (CDA) and New England Fund (NEF) advances.(ii)

 

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

* Excluding Bank of America advances.

 

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

 

The actual average CDA and NEF advances balance for 2005 was $1.40 billion. A
ten percent increase would grow average mission-related advances to $1.54
billion. This increase would be driven by relatively small advances
disbursements. The average CDA disbursement for housing-related purposes is
projected to average $4.4 million and economic development $4.0 million in 2006.

 

Bank staff will actively use the outreach and education tools available to
achieve the goal, including the successful Community Development Consult
program, funding strategies, training programs, and publication of examples of
successful initiatives.

 

Exam Goal

 

2006 GOAL:

 

EXAMINATION RESULT

Weights:

 

President: 15 percent; Tier 1: 15 percent; Tier 2: 15 percent

Threshold:

 

None

Target:

 

“Fair” rating in 2006 exam report

Excess:

 

“Satisfactory” rating in 2006 exam report

 

In 2006 exam report, the Federal Housing Finance Board (Finance Board) will rate
the Bank “satisfactory,” “fair,” “marginal,” or “unsatisfactory.”  A payment on
this goal will be made at target if the Bank’s rating is “fair.”  A
“satisfactory” rating will result in an excess payout on this goal.

 

Operational Component

 

Weights:

 

President: 10 percent; Tier 1: 15 percent; Tier 2: 20 percent

Threshold:

 

As defined below

Target:

 

As defined below

Excess:

 

As defined below

 

Payments awarded under the Operational Component to the EIP participants will be
based on the Bank’s achievements on the following key Bank-wide initiatives,
which support the Bank’s all-encompassing three strategic goals:

 

To foster a member-centric organization

 

Implement a new member segmentation strategy and develop value propositions for
each segment –

•                  Threshold: Define segment criteria; develop segment data
base; form cross-functional teams; schedule and conduct member interviews; and
complete insurance company research and initiative value proposition
development.

•                  Target: Complete value propositions for four segments
(national accounts, growth institutions, credit unions and insurance companies);
present business cases to executive steering committee; and begin implementation
of approved value propositions.

 

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

 

•                  Excess: Implement targeted communication strategies for a
minimum of three segments; and integrate marketing research and marketing
communications functions by using research data to drive communication
strategies.

 

Enhance collateral policies –

•                  Threshold: Research on optimum collateral haircuts for the
Bank is completed by management by year-end 2006. Submit recommendation to
remove the Bank’s prioritization requirement to FHFB for review. If approved by
the FHFB, communicate to members that the Bank’s prioritization requirement has
been rescinded.

•                  Target:  Management’s recommendations regarding optimum
collateral haircuts are completed and presented to our board. Revise the
Products Policy as necessary, and communicate any changes to the Policy to our
members.

•                  Excess:  Bank generates $500 million new advances business as
a result of enhanced collateral policies.

 

MAINTAIN TRUST AND CONFIDENCE AMONG STAKEHOLDERS

 

Ensure Sarbanes-Oxley compliance –

•                  Threshold: Complete all Sarbanes-Oxley Section 404 initial
documentation and begin management testing. Comply with Sarbanes Section 302
certifications requirements.

•                  Target: Complete all Sarbanes-Oxley Section 404 initial
documentation, begin management testing, update documentation, and remediate
internal control gaps identified through management testing. Comply with
Sarbanes Section 302 certifications requirements.

•                  Excess: Complete all Sarbanes-Oxley Section 404 initial
documentation, complete management testing, update documentation, and remediate
internal control gaps identified. Comply with Sarbanes Section 302
certifications requirements.

 

Complete study of compensation philosophy –

•                  Threshold: N.A.

•                  Target: Proposal and costs presented to the Personnel
Committee no later than the March 2006 meeting; recommendations for changes and
implementation presented to Personnel Committee no later than the August 2006
meeting.

•                  Excess:  Implementation plan finalized based on agreed-to
recommendations and complete implementation of those changes between August and
December 2006.

 

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

 

To harness the power of technology to maintain maximum efficiency and
productivity

 

Summit(1)  –

•                  Threshold: Complete software upgrade, develop plans for
derivatives phase and requirements for MBS phase by June 30, 2006.

•                  Target: Upgrade complete, derivatives phase implemented, and
MBS project plan complete by November 30, 2006.

•                  Excess: Upgrade complete, derivatives phase implemented, and
MBS phase in testing by December 31, 2006.

 

DISCRETIONARY COMPONENT

 

Weights:

 

President: 30 percent; Tier 1: 20 percent; Tier 2: 10 percent

Threshold:

 

As defined by manager/supervisor

Target:

 

As defined by manager/supervisor

Excess:

 

As defined by manager/supervisor

 

This is a subjective goal that a manager/supervisor can award based on a
participant’s leadership, work ethic, attitude, or other such similar intangible
attribute that contributes to the Bank’s success. Managers/supervisors need to
provide reasonable documentation that states the basis for whatever award is
recommended under the discretionary component.

 

INCENTIVE POTENTIAL

 

Eligible employees will be assigned an incentive award potential expressed as a
percentage of the incumbent’s base salary in effect at year-end 2006 as follows:

 

 

 

Incentive as a Percent of Salary

 

 

 

Threshold

 

Target

 

Excess

 

 

 

 

 

 

 

 

 

President

 

25.00

%

35.00

%

50.00

%

 

 

 

 

 

 

 

 

Tier I

 

18.75

%

25.00

%

37.50

%

 

 

 

 

 

 

 

 

Tier II

 

15.00

%

20.00

%

30.00

%

 

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

(1) The Summit Project Plan for subsequent phases is currently under review, and
will be completed by March 31. The timing of deliverable phases may be changed
as a result of this review. In this event, management will report any project
plan changes to the board of directors at the April 2006 meeting, and will
request conforming amendments to this objective of the Executive Incentive Plan.

 

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

 

2006 Participation

 

The following individuals are participants in the EIP for 2006:(iii)

 

President

 

Tier I

 

Tier II

Michael A. Jessee

 

Edward Dumas

 

[***]

 

 

M. Susan Elliott

 

 

 

 

John T. Eller

 

 

 

 

William Hamilton

 

 

 

 

Ellen McLaughlin

 

 

 

 

Frank Nitkiewicz

 

 

 

 

Bill Oakley

 

 

 

 

Michael L. Wilson

 

 

 

EIP Administration

 

The EIP is administered by the Personnel Committee of the Board of Directors
(Committee), which shall have full power and binding authority to construe,
interpret, and administer the EIP, and to adjust it during or at the end of the
calendar year covered by the EIP for extraordinary circumstances. Extraordinary
circumstances may include changes in business strategy, termination or
commencement of business lines, impact of severe economic fluctuations,
significant growth or consolidation of the membership base, or significant
regulatory or other changes impacting the Bank or Bank System.

 

The Committee reserves the right at any time to amend, suspend or terminate the
EIP in whole or in part, for any reason, and without the consent of any EIP
participant.

 

The Bank’s President and Chief Executive Officer will determine participation in
the EIP with the concurrence of the Committee.

 

EIP awards shall not be considered earned or payable, in whole or in part, to
any participant for any reason until they are finally determined by the Bank’s
President and Chief Executive Officer with the concurrence of the Committee
following the end of the plan year. Moreover, unless otherwise specifically
determined by the President and Chief Executive Officer with the concurrence of
the Committee, a participant will be entitled to payment of an award only if the
participant is employed on the date of payment of the award. However, any
individual hired or promoted into an eligible position during the plan year who
is granted an award shall have any such incentive award prorated based on months
of EIP participation, providing he/she has served a minimum of six months in
that role and otherwise satisfies the EIP’s requirements.

 

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

 

Except as set forth in the following paragraph, any EIP participant who
terminates employment for any reason, whether voluntarily or involuntarily,
before the end of the plan year, defined as the period January 1, 2006 through
December 31, 2006, shall not be entitled to any award, except as otherwise
determined by the Bank’s President and Chief Executive Officer, with the
concurrence of the Committee, at their sole discretion.

 

EIP participants who terminate employment with the Bank by reason of death or
disability prior to the conclusion of the plan year will receive a pro rata
payment of any incentive award determined by the Bank’s President and Chief
Executive Officer, with the concurrence of the Committee, based on the months of
completed service as an EIP participant during the year. Beneficiaries of such
payments will be the same as identified in the Bank’s group insurance plan.

 

The Bank may make such provisions, as it deems appropriate, for withholding
payroll taxes in connection with payment of EIP awards.

 

The Bank also has several other incentive programs for staff at the Bank
designed to motivate employees to become more innovative and productive. The
Bank’s President is responsible for the administration of each of these programs
and has the authority to construe, implement, and administer programs, as
appropriate.

 

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

(i) Average Advances and MPF Balances are defined as the average daily balance
of advances (net of CDA and NEF) plus the average monthend balance of MPF. Under
MPF, opportunities for participations with other MPF Banks will count toward the
goal. If a member merges into a non-member, the merged entity’s balances will be
excluded from the calculation for 2006 and the average balance for 2005. If, for
example, a community bank member is merged into a national account member, all
of the merged member’s balances for 2005 and to the 2006 merger date will be
included in the national account member group. The 2005 year-end average numbers
exclude Bank of America and all institutions that were merged or acquired
through January 2, 2006. The 2005 MPF assets include all participations.

(ii) This goal is measured using the following advance product types: 822, 873,
877, 878, 879, 903, 904, and 914.

(iii) All corporate officers are listed as EIP participants with one exception:
[***], [***]. [***] is a participant in the Bank’s Sales Incentive Plan and is
eligible for an incentive award equivalent to a Tier II participant in the EIP.

 

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