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.