First Financial Northwest, Inc. - 10-K filing on 2017-03-10

Benefit Plans

12 Months Ended

Dec. 31, 2016

Compensation and Retirement Disclosure [Abstract]

Multi-employer Pension Plans

The Company participates in the Pentegra Defined Benefit Plan for Financial Institutions (“The Pentegra DB Plan”), a tax-qualified defined-benefit pension plan that covers substantially all employees after one year of continuous employment. Pension benefits vest over a period of five years of credited service. The Pentegra DB Plan’s Employer Identification Number is 13-5645888 and the Plan Number is 333. The Pentegra DB Plan operates as a multi-employer plan for accounting purposes and as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. There are no collective bargaining agreements in place that require contributions to the Pentegra DB Plan.

The Pentegra DB Plan is a single plan under Internal Revenue Code Section 413(c) and, as a result, all of the assets stand behind all of the liabilities. Accordingly, under the Pentegra DB Plan, contributions made by a participating employer may be used to provide benefits to participants of other participating employers.

As of March 31, 2013, the Pentegra DB Plan was frozen, eliminating all future benefit accruals for employees. Each employee’s accrued benefit was determined as of March 31, 2013.

The funding target is the present value of all benefits that have accrued as of the first day of the current plan year (July 1). Because interest rates used to calculate the present value of all benefits (6.09% for 2016 and 6.28% for 2015) is significantly higher than current market rates, the funding target does not represent the Company’s actual liability upon withdrawal from participation in the Pentegra DB Plan, which is significantly larger than the funding target. The table below presents the funded status (market value of plan assets divided by funding target) of the plan as of July1:



	2016		2015
Source	Valuation Report		Valuation Report
First Financial Northwest’s Plan⁽¹⁾	103.7	%	102.8	%

_________________

⁽¹⁾ Market value of plan assets reflects any contributions received through June 30, 2016, or 2015, respectively.

Total contributions made to the Pentegra DB Plan, as reported on Form 5500, equal $163.1 million and $190.8 million for the plan years ended June 30, 2015 and June 30, 2014 respectively. The Company’s contributions to the Pentegra DB Plan are not more than 5% of the total contributions to the Pentegra DB Plan. The Company’s policy is to fund pension costs as accrued.

Total contributions during the years ended December 31, 2016, 2015, and 2014 were:



2016			2015			2014
Date Paid	Amount		Date Paid	Amount		Date Paid	Amount

10/7/2016	$	40,129	11/25/2015	$	540,000	9/25/2014	$	8,735
11/23/2016	499,871					11/28/2014	539,932
Total	$	540,000	Total	$	540,000	Total	$	548,667

Supplemental Executive Retirement Plan

The Company has post-employment agreements with certain key officers to provide supplemental retirement benefits. The Company recorded $36,000, $101,000 and $170,000 of deferred compensation expense for the years ended December 31, 2016, 2015, and 2014, respectively.

401(k) Plan

The Company has a savings plan under Section 401(k) of the Internal Revenue Code, covering substantially all employees after 90 days of continuous employment. Under the plan, employee contributions up to 6% will be matched 50% by the Company. Such matching becomes vested over a period of five years of credited service. Employees may make investments in various stock, money market, or fixed income plans. The Company contributed $201,000, $192,000 and $161,000 to the plan for the years ended December 31, 2016, 2015, and 2014, respectively.

Employee Stock Ownership Plan

The Company provides an ESOP for the benefit of substantially all employees. The ESOP borrowed $16.9 million from First Financial Northwest and used those funds to acquire 1,692,800 shares of First Financial Northwest’s stock at the time of the initial public offering at a price of $10.00 per share. The loan matures on October 8, 2022 and has a fixed interest rate of 4.88%.

Shares purchased by the ESOP with the loan proceeds are held in a suspense account and are allocated to ESOP participants on a pro rata basis as principal and interest payments are made by the ESOP to First Financial Northwest. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Company’s discretionary contributions to the ESOP and earnings on the ESOP assets. Annual principal and interest payments of $1.6 million were made by the ESOP during 2016, 2015, and 2014.

As shares are committed to be released from collateral, the Company reports compensation expense equal to the daily average market prices of the shares and the shares become outstanding for EPS computations. The compensation expense is accrued throughout the year.

A summary of key transactions for the ESOP for the periods indicated follows:



	Year Ended December 31,
	2016		2015		2014
	(In thousands)
ESOP contribution expense	$	1,605	$	1,400	$	1,216
Dividends on unallocated ESOP shares used to reduce ESOP contribution	183		210		197

Shares held by the ESOP at December 31, 2016 and 2015, are as follows:



	December 31,
	2016		2015
	(Dollars in thousands, except share data)
Allocated shares	1,043,893		931,040
Unallocated shares	648,907		761,760
Total ESOP shares	1,692,800		1,692,800
Fair value of unallocated shares	$	12,809	$	10,634

Stock-Based Compensation

In June 2016, First Financial Northwest’s shareholders approved the First Financial Northwest, Inc. 2016 Equity Incentive Plan (“2016 Plan”). This plan provides for the granting of incentive stock options (“ISO”), non-qualified stock options (“NQSO”), restricted stock and restricted stock units until June 2026. The 2016 Plan established 1,400,000 shares available to grant with a maximum of 400,000 of these shares available to grant as restricted stock awards. Each share issued as a restricted stock award counts as two shares towards the total shares available to be awarded.

Under the 2016 Plan, the vesting date for each option award or restricted stock award is determined by an award committee and specified in the award agreement. In the case of restricted stock awards granted in lieu of cash payments of directors’ fees, the grant date is used as the vesting date.

As a result of the approval of the 2016 Plan, the First Financial Northwest, Inc. 2008 Equity Incentive Plan (“2008 Plan”) was frozen and no additional awards will be made. As of June 30, 2016, there were 611,756 available stock options and 74,478 available restricted stock awards that are no longer available to be awarded under the 2008 Plan. Restricted stock awards and stock options that were granted under the 2008 Plan will continue to vest and be available for exercise, subject to the 2008 Plan provisions. At December 31, 2016, there were 1,371,896 total shares available for grant under the 2016 Plan, including 385,948 shares available to be granted as restricted stock.

Total compensation expense for the both the 2008 Plan and 2016 Plan for the years ended December 31, 2016, 2015, and 2014 was $622,000, $440,000, and $384,000, respectively. The related income tax benefit was $218,000, $154,000 and $134,000 for the years ended December 31, 2016, 2015, and 2014, respectively.

Stock Options

Under the 2008 Plan, stock option awards were granted with an exercise price equal to the market price of First Financial Northwest's common stock at the grant date. These option awards have a vesting period of five years, with 20% vesting on the anniversary date of each grant date, and a contractual life of ten years. Any unexercised stock options will expire ten years after the grant date, or sooner in the event of the award recipient’s death, disability or termination of service with the Company.

Under the 2016 Plan, the exercise price and vesting period for stock options are determined by the award committee and specified in the award agreement, however, the exercise price shall not be less than the fair market value of a share as of the grant date. Any unexercised stock option will expire 10 years after the award date or sooner in the event of the award recipient’s death, disability, retirement, or termination of service.

A cashless exercise of vested stock options may occur by the option holder surrendering the number of options valued at the current stock price at the time of exercise to cover the total cost to exercise. The surrendered options are canceled and are unavailable for reissue.

The fair value of each option award is estimated on the grant date using a Black-Scholes model that uses the assumptions noted in the table below. The dividend yield is based on the current quarterly dividend in effect at the time of the grant. Historical employment data is used to estimate the forfeiture rate. The historical volatility of the Company’s stock price over a specified period of time is used for the expected volatility assumption. First Financial Northwest bases the risk-free interest rate on the U.S. Treasury Constant Maturity Indices in effect on the date of the grant. First Financial Northwest elected to use the “Share-Based Payments” method permitted by the U.S. Securities and Exchange Commission to calculate the expected term. This method uses the vesting term of an option along with the contractual term, setting the expected life at the midpoint.

The fair value of options granted was determined using the following weighted-average assumptions as of the grant date for the periods indicated. There were no stock options granted in 2016.



	Year Ended December 31,
	2016	2015			2014
Annual dividend yield	N/A	1.77		%	1.86		%
Expected volatility	N/A	35.30			37.27
Risk-free interest rate	N/A	2.23			2.44
Expected term	N/A	10.0 years			10.0 years
Weighted-average grant date fair value per option granted	N/A	$	4.74		$	4.13

A summary of the Company’s stock option plan awards activity for the year ended December 31, 2016 follows:



	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term in Years	Aggregate Intrinsic Value
Outstanding at December 31, 2015	884,260		$	10.11
Granted	—		—
Exercised	(260,440	)	9.78
Forfeited or expired	(20,000	)	12.05
Outstanding at December 31, 2016	603,820		10.19		4.84	$	5,766,947
Expected to vest assuming a 3% forfeiture rate over the vesting term	598,750		10.18		4.82	5,723,540
Exercisable at December 31, 2016	434,820		9.80		3.80	4,320,027

As of December 31, 2016, there was $590,000 of total unrecognized compensation cost related to nonvested stock options granted under the 2008 Plan. The cost is expected to be recognized over the remaining weighted-average vesting period of 2.8 years. There were no stock options granted during the year ended December 31, 2016 under either the 2008 Plan or 2016 Plan.

Restricted Stock Awards

The 2008 Plan authorized the grant of restricted stock awards to directors, advisory directors, officers and employees. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at the grant date. The restricted stock awards’ fair value is equal to the stock price on the grant date. Shares awarded as restricted stock vest ratably over a five-year period beginning at the grant date with 20% vesting on the anniversary date of each grant date.

The 2016 Plan authorizes the grant of restricted stock awards subject to vesting periods or terms as defined by the award committee and specified in the award agreement. Restricted stock awards granted in lieu of cash payments for directors’ fees are subject to immediate vesting on the grant date unless the award agreement provides otherwise.

A summary of changes in nonvested restricted stock awards for the year ended December 31, 2016, follows:



Nonvested Shares	Shares		Weighted-Average Grant Date Fair Value
Nonvested at December 31, 2015	47,800		$	8.95
Granted	14,052		12.81
Vested	(35,452	)	10.34
Nonvested at December 31, 2016	26,400		9.13

Expected to vest assuming a 3% forfeiture rate over the vesting term	25,608

As of December 31, 2016 there was $177,000 of total unrecognized compensation costs related to nonvested shares granted as restricted stock awards. The cost is expected to be recognized over the remaining weighted-average vesting period of 1.1 years. The total fair value of shares vested during the years ended December 31, 2016, and 2015 were $367,000 and $212,000, respectively.