Exhibit 10.3


 


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


2005 EXECUTIVE INCENTIVE PLAN


March 2005


 


Purpose


 


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


 


•                  promote achievement of the Bank’s financial and
non-financial objectives as spelled out in the 2005
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.


 


Overall
Business Purpose


 


The Bank’s
overall business purpose, as described in the Bank’s 2005 Strategic Business Plan, has been and continues to be
to provide reliable value to its shareholding members.  In all economic climates, the Bank provides
its members with:


 


•                  a reliable source of competitively priced liquidity in
the form of advances and asset-purchase programs, as well as other products and
services; and


•                  a dividend yield above short-term market rate indices.


 


The Bank
has an affirmative obligation to safeguard the investments of its shareholders
and creditors.  As such, the Bank has a
robust approach towards risk management, the crux of which is a conservative
operating philosophy.  The Bank strives
to minimize its market, credit, and liquidity risks, and it carefully monitors
and manages all of its risk exposures, including its exposure to business and
operational risk.


 


Incentive
Goals and Targets


 


The goals
in the 2005 EIP are compatible with the financial and non-financial objectives
in the 2005 Strategic Business Plan and
the Bank’s overall business purpose. 
There will be four financial goals (one focused on profitability, the
other three on balance sheet growth), two non-financial goals (one concerning
improved examination results and a second to cover non-financial, operational
objectives), and one discretionary goal. 
The goals, with the weights by tiers, are summarized in the following
table with detail next:


 





















 


	
   

  	
   

  	
  Weight

  	
   

  	
  Threshold

  	
   

  	
  Target

  	
   

  	
  Excess

  	
   

  
	
  Goal

  	
   

  	
  Pres.

  	
   

  	
  1

  	
   

  	
  2

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

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

  	
   

  	
  15

  	
  %

  	
  20

  	
  %

  	
  25

  	
  %

  	
  300 basis points

  	
   

  	
  360 basis points

  	
   

  	
  480 basis points

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Percentage
  Growth in Average CDA and NEF Advances 2005 Over 2004

  	
   

  	
  10

  	
  %

  	
  10

  	
  %

  	
  10

  	
  %

  	
  5 percent

  	
   

  	
  10 percent

  	
   

  	
  15 percent

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Percentage
  Growth in Average Advances and MPF Balances 2005 Over 2004 Members<$5B

  	
   

  	
  10

  	
  %

  	
  10

  	
  %

  	
  10

  	
  %

  	
  10 percent

  	
   

  	
  12 percent

  	
   

  	
  15 percent

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Percentage
  Growth in Average Advances and MPF Balances 2005 Over 2004 Members>$5B

  	
   

  	
  10

  	
  %

  	
  10

  	
  %

  	
  10

  	
  %

  	
  Maintain 2004 average

  	
   

  	
  5 percent

  	
   

  	
  10 percent

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Improved
  Examination Results

  	
   

  	
  15

  	
  %

  	
  15

  	
  %

  	
  15

  	
  %

  	
  N.A.

  	
   

  	
  “Fair” rating in 2005
  exam report

  	
   

  	
  “Satisfactory” rating
  in 2005 exam report

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Operational
  Component

  	
   

  	
  10

  	
  %

  	
  15

  	
  %

  	
  20

  	
  %

  	
  Based on
  accomplishments as defined

  	
   

  	
  Based on
  accomplishments as defined

  	
   

  	
  Based on
  accomplishments as defined

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Discretionary
  Component

  	
   

  	
  30

  	
  %

  	
  20

  	
  %

  	
  10

  	
  %

  	
  As documented by
  supervisor

  	
   

  	
  As documented by
  supervisor

  	
   

  	
  As documented by
  supervisor

  	
   

  



 


2





















 


Financial Goals in the 2005 EIP


 


	
  2005 Goal:

  	
   

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

  
	
  Weights:

  	
   

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

  
	
  Threshold:

  	
   

  	
  300 basis points

  
	
  Target:

  	
   

  	
  360 basis points

  
	
  Excess:

  	
   

  	
  480 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 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 eliminates a tax
bias associated with REFCorp and AHP.


 


The
incentive target of 360 basis points is the same as the projection for adjusted
pre-tax ROE spread to LIBOR in the “base case” of the 2005 Strategic Business Plan.  The identical goal with a target of 350 basis
points was included in the 2004 EIP.


 


	
  2005 Goal:

  	
   

  	
  Growth in CDA and NEF
  Advances

  
	
  Weights:

  	
   

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

  
	
  Threshold:

  	
   

  	
  5 percent growth

  
	
  Target:

  	
   

  	
  10 percent growth

  
	
  Excess:

  	
   

  	
  15 percent growth

  



 


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.(1)


 


The average CDA and NEF
advances balance for 2004 was $1.17 billion. 
A ten percent increase would grow average mission-related advances to
$1.29 billion. This increase would be driven by 


 










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


 


3





















 


relatively small advances
disbursements.  The average CDA
disbursement for housing-related purposes is projected to average $3.9 million
and economic development $1.5 million in 2005.


 


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.


 


This would be a new goal
for 2005.  It would replace the 2004 goal
called “Commuity Development Outreach Initatives,” which was not focused on
balance sheet growth per se.


 


	
  2005 Goal:

  	
   

  	
  Members with Assets
  <$5 Billion - Growth in Advances and MPF

  
	
  Weights:

  	
   

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

  
	
  Threshold:

  	
   

  	
  10 percent growth

  
	
  Target:

  	
   

  	
  12 percent growth

  
	
  Excess:

  	
   

  	
  15 percent growth

  
	
   

  	
   

  	
   

  
	
  2005 Goal:

  	
   

  	
  Members with Assets
  >$5 Billion - Growth in Advances and MPF

  
	
  Weights:

  	
   

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

  
	
  Threshold:

  	
   

  	
  Maintenance of 2004 average

  
	
  Target:

  	
   

  	
  5 percent growth

  
	
  Excess:

  	
   

  	
  10 percent growth

  



 


The “base case” projection
in the 2005 Strategic Business Plan
is that average advances and Mortgage Partnership Finance (MPF) loans will be
basically unchanged between 2004 and 2005 — an average of $29.83 billion in
2004 compared with a projected average of $29.69 billion in 2005.  Advances projections are based on member
surveys and one-on-one discussions with certain of the Bank’s larger
customers.  Significant MPF growth is
heavily dependent on a single member that has been unwilling to purchase the
capital stock necessary to support the loans on the Bank’s balance sheet.  The projections do not factor in further
industry consolidation or the recuitment of one or more members of significant
size.


 


Notwithstanding the
projections for 2005, it is important that management be incented to grow the
Bank’s core businesses of advances and MPF. 
In 2005 the Bank will focus on the needs of community bank members as
well as the larger, regional and money-center institutions.  Separate goals have been established for the
two membership groups.(2)


 










(2) Average Advances and MPF Balances is 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.  To measure these goals, the
following Boston Bank members will be a part of the greater than $5 billion
asset group: all Citizens Bank affiliates that are subsidiaries of the Royal
Bank of Scotland Group; all Bank of America owned affiliates; and all captive
reinsurance companies.  For members other
than Fleet, which is expected to merge into Bank of America-Charlotte in June
2005 and transfer its advances to a new affiliated member, if a member merges
into a non-member, the merged entity’s balances will be excluded from the
calculation for 2005 and the average balance for 2004.  If a member merges into a member with assets
greater than $5 billion, all of the merged member’s balances for 2004 and to
the 2005 merger date will be included in the greater than $5 billion asset
group.


 


4





















 


The Bank has the greatest
ability to influence advances borrowings and mortgage sales among members with
assets under $5 billion.  Bank staff work
with member management teams and boards of directors to provide a variety of
education programs along with financial management tools and models to assist
in evaluating options for balance sheet and funding cost management.  We have established a target of increasing
average combined gross balances of advances (net of CDA and NEF advances), MPF,
and other similar lending activities for this segment of the membership by 12
percent between 2004 and 2005.  This
segment is comprised of 452 members as of December 31, 2004, with average
2004 advances balances of $14.0 billion and MPF balances with the Bank of
approximately $1.0 billion.


 


Management also will work
with the large members to obtain a greater share of their wholesale funding and
mortage loan sales in the secondary market. 
Thus, a target goal of a 5 percent increase in average advances (net of
CDA and NEF advances) and MPF to members with assets greater than $5 billion
has been established.  Fifteen members
with the inclusion of Balboa, Melville Reinsurance, and Fleet/Bank of America
comprise this segment of members.  They
held $9.6 billion in advances and had MPF balances of $3.1 billion at year-end
2003.  The advances volume had dropped by
$2 billion at October 31, 2004, and MPF balances stood at $3.4
billion.  More recently, the Bank has
been able to re-build short-term funding balances to put this segment’s
advances at $12.8 billion on December 31, 2004.  MPF business remained lower than anticipated
at $3.1 billion.  The goal has been
established keeping in mind that the advances business from these members is
almost entirely rate sensitive, short-term in nature, less profitable and
particularly subject to business decisions over which the Bank has no control.
The MPF volume is subject to a servicing released option and constraints
associated with the capital requirement.


 


The combination of these two asset building goals is
similar to a goal in the 2004 incentive plan, the only differences being that
the 2004 goal was inclusive of CDA and NEF advances and was stated in terms of
dollar growth year-end over year-end rather than percentage growth in average
balances.  Having a separate goal for
growing CDA and NEF advances puts a special focus on targeted housing programs,
which is consistent with the Bank’s mission statement.  There is no substantive difference between a
dollar-growth goal and a percentage-growth goal, and the switch from a
point-in-time to an average-balance basis will incent the development of
sustained business with the members.


 


Non-financial Goals in the 2005 EIP


 


	
  2005 Goal:

  	
   

  	
  Improved Examination
  Results

  
	
  Weights:

  	
   

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

  
	
  Threshold:

  	
   

  	
  None

  
	
  Target:

  	
   

  	
  “Fair” rating in 2004 exam report

  
	
  Excess:

  	
   

  	
  “Satisfactory” rating in 2004 exam report

  



 


In 2005 exam reports, the Federal Housing Finance
Board plans to include a rating of “satisfactory,” “fair,” “marginal,” or “unsatisfactory.”  A payment on this goal will be made at 


 


5





















 


target if the Bank’s rating is “fair.”  A “satisfactory” rating will result in an
excess payout on this goal.


 


This goal did not exist in the 2004 incentive plan


 


	
  2005 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 will
be based on an evaluation of an EIP participant’s role in achieving relevant
non-financial objectives through individual efforts or leadership at the
department or team level.  Non-financial,
operational objectives include:


 


•                  Complete preparations for compliance
with Sarbanes-Oxley Sections 302 and 404;


•                  Initiate registration with the
Securities and Exchange Commission (SEC);


•                  Implement operating improvements to
fully respond to the 2004 examination findings, including a revised retained
earnings plan;


•                  Begin efforts to implement the conversion
to the Mortgage Purchase Program (MPP) upon resolution of the 2004 examination
findings;


•                  Complete the Summit application
conversion phases, specifically Phase 1 (investments and non-swapped debt) by May 2005,
Phase 2 (derivatives) by September 2005, and Phase 3 (MBS) by first
quarter 2006;


•                  Initiate a records retention and
management program;


•                  Amend the Bank’s Capital Plan to
support asset growth;


•                  Assess operational impact of changes
to FHLB Direct and Profile;Otherwise complete initiatives in the technology,
marketing, community lending, communications, or human resources plans.


 


Managers will write goals and objectives for each EIP
participant to use as a basis of this evaluation.  Managers will select a payout percentage for
this individual component from a range of threshold to the maximum payout
percentage.   If the award is not
substantially achieved, a payment of zero for this component can also be
awarded.   Managers will select a payout
percentage for each employee based upon the following performance levels:


 


	
  Percentage Awarded

  	
   

  	
  Performance Level

  
	
  Zero

  	
   

  	
  The individual was unable to substantially
  accomplish the goals, or did not accomplish them in a manner expected for the
  position.

  
	
  Threshold Percentage

  	
   

  	
  Individual partially achieved the results expected
  for the year, however certain items were not completed or they were not
  accomplished in the manner expected for the position.

  



 


6





















 


	
  Target Percentage

  	
   

  	
  Goals for the year were completed and accomplished
  in a manner expected for the position.

  
	
  Excess Percentage

  	
   

  	
  Individual not only accomplished the results that
  were expected, but his/her achievements greatly exceeded expectations.

  



 


The EIP will allow managers to also select payouts
between threshold and target or between target and excess to show the degree to
which the EIP participant accomplished these results.


 


	
  2005 Goal:

  	
   

  	
  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 yearend 2005 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

  	
  %

  






 


7





















 


2005
Participation


 


The
following individuals are participants in the EIP for 2005:(3)


 




	
  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, provided that no such amendment shall adversely affect the rights
for EIP participants with respect to amounts earned prior to such amendments.


 


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


 


Any
individual hired or promoted into an eligible position during the year shall
have any earned 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.


 


EIP
participants who terminate employment with the Bank by reason of death or
disability prior to the conclusion of the year will receive a pro rata payment
of any incentive award earned, based 


 










(3) 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. 


 


8





















 


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.


 


Any EIP
participant who terminates employment before the end of the plan year forfeits
any earned award.  Any EIP participant
whose service with the Bank is terminated for cause will receive no payment.  If any EIP participant has had poor performance
during the year, any potential payment may be subject to reduction or
elimination.


 


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.


 


9