Note 10 - Benefit Plans

12 Months Ended

Dec. 31, 2021

Notes to Financial Statements

Compensation and Employee Benefit Plans [Text Block]

Note 10 - Benefit Plans

Multi-employer Pension Plan

The Bank participated in the Pentegra Defined Benefit Plan for Financial Institutions (the Pentegra DB Plan), a tax-qualified defined-benefit pension plan that covered substantially all employees after one year of continuous employment. Pension benefits vested 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 12004. 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 ("ERISA") and the Internal Revenue Code. There are no collective bargaining agreements in place that require contributions to the Pentegra DB Plan. The Pentegra Defined Benefit Plan was frozen and no new benefits were allowed as of February 1, 2010.

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.

The table below presents the funded status (market value of plan assets divided by funding target) of the plan as of July 1:

	2020
Source	Valuation Report
Our plan		109.7	%

There was no change to the funded status of the plan as of December 31, 2020. First Fed’s contributions to the Pentegra DB Plan were not more than 5% of the total contributions to the Pentegra DB Plan. First Fed’s policy was to fund pension costs as accrued.

Total contributions during the periods shown were:

Year Ended
December 31, 2020
Date Paid	Amount
(In thousands)
12/24/2020	$	364

Change from Multi-employer to Single-employer Pension Plan

Effective March 23, 2021, the Company withdrew from the Pentegra Defined Benefit Plan for Financial Institutions ("Pentegra DB Plan") and established the First Federal Defined Benefit Plan ("Bank DB Plan"), a single-employer plan. On March 23, 2021, all assets and liabilities were transferred from the Pentegra DB Plan to the newly established Bank DB Plan.

The Bank DB Plan is a defined benefit pension plan covering current and former employees. Benefits available under the plan are frozen. The plan provides defined benefits based on years of service and final average salary prior to the freeze. The Company uses December 31 as the measurement date for this plan. The initial measurement period will be March 23, 2021 – December 31, 2021.

The fair value of plan assets and projected benefit obligation on the March 23, 2021, Bank DB Plan adoption date were $14,705,000 and $14,197,000, respectively. A $2,717,599 cash contribution was made to the Pentegra DB Plan in March 2021 prior to the transition. A prior service cost of $1.6 million, net of tax, was included in accumulated other comprehensive loss on the Company's balance sheet at December 31, 2021. The prior service cost is expected to be amortized over 15 years.

	December 31, 2021
	(Dollars in thousands)
Fair value, January 1	$	14,705
Actual return on plan assets		1,618
Company contributions		—
Settlements and curtailments		—
Benefits paid		(502	)
Federal subsidy on benefits paid		—
Fair value, December 31		15,821
Change in projected benefit obligation
Projected benefit obligation, January 1		14,197
Service cost		—
Interest cost		304
Plan amendments		—
Settlements and curtailments		—
Actuarial loss		1,329
Benefits paid		(502	)
Federal subsidy on benefits paid		—
Projected benefit obligation, December 31		15,328
Amounts recognized on Consolidated Balance Sheet
Other assets		493
Accumulated other comprehensive income		(1,852	)
Net amount recognized, December 31		2,345
Funded status, December 31
Accumulated benefit obligation		15,328
Overfunded (underfunded) status of ABO		493
Provision for future salaries		—
Projected benefit obligation		15,328
Weighted-average assumptions, December 31
Discount rate		2.65	%
Rate of compensation increase		N/A
Interest-crediting rate		0.00	%

The Company does not expect to make a contribution to the Bank DB Plan in 2022. It is the policy of the Company to fund no less than the minimum funding amount required by ERISA.

	For the Year Ended
	December 31, 2021
	(Dollars in thousands)
Components of Net Period Benefit Cost (Income)
Interest cost	$	304
Expected return on plan assets		(538	)
Amortization of prior service cost (credit)		(26	)
Other		—
Net periodic benefit cost (income)		(260	)
Other changes recognized in other comprehensive income
Net (gain) loss	$	249
Amortization of prior service (cost) credit		26
Other		—
Net periodic benefit cost (income)		275
Weighted-average assumptions used to determine net cost
Discount rate		2.65	%
Expected return on plan assets		5.75	%
Rate of compensation increase		N/A

The expected long-term return on plan assets assumption was developed as a weighted average rate based on the target asset allocation of the plan and the Long-Term Capital Market Assumptions for the corresponding fiscal year end. Gains and losses are recognized in accordance with the standard amortization provisions of the applicable accounting guidance. The Company's net periodic benefit income recognized for the Bank DB Plan is sensitive to the discount rate and expected return on plan assets.

From initial funding in the first quarter of 2021 through December 31, 2021, the Bank DB Plan assets have been invested primarily in fixed income and large U.S. equity funds, with additional investments in international equity, real estate, and small/mid-range U.S. equity funds. The target allocations for 2022 by asset category are presented in the table below.

Asset Category
Fixed Income	80% - 100%
U.S. Equities	10% - 30%
Non-U.S. Equities	0% - 20%
Real Assets	0% - 10%

Benefit payments projected to be made from the Bank DB Plan are as follows:

	December 31, 2021
	(Dollars in thousands)
Estimated future benefit payments
2022	$	2,390
2023		900
2024		1,010
2025		870
2026		700
Years 2027 - 2031		3,980
Thereafter		5,478
Projected benefit obligation	$	15,328

Fair value measurements, including descriptions of Level 1, 2, and 3 of the fair value hierarchy and the valuation methods employed by the Company are provided in Note 14 - Fair Value Measurements. Plan investment assets measured at fair value by level and in total are as follows:

	December 31, 2021
	Quoted Prices in Active Markets for Identical Assets or Liabilities		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
	(In thousands)
Large U.S. Equity	$	4,848	$	—	$	—	$	4,848
Small/Mid U.S. Equity		781		—		—		781
International Equity		1,389		—		—		1,389
Fixed Income		7,769		—		—		7,769
Other		1,034		—		—		1,034
	$	15,821	$	—	$	—	$	15,821

Nonqualified Deferred Compensation Plan

First Fed also sponsors a nonqualified Deferred Compensation Plan for members of the Board of Directors and eligible officer-level employees. This plan, approved by the Board on February 1, 2012, allows eligible participants to defer and invest a portion of their earnings in a selection of investment options identified in the plan at no expense to First Fed. All deferrals are remitted to Principal, the Plan Administrator, and held in a trust. The aggregate balance held in trust at December 31, 2021, was $1.3 million.

The Company also has agreements with certain key officers that provide for potential payments upon retirement, disability, termination, change in control and death.

401(k) Plan

First Fed maintains a single-employer 401(k) plan. Employees may contribute up to 100% of their pre-tax compensation to the 401(k) plan, subject to regulatory limits. First Fed provides matching funds of 50% limited to the first 6% of salary contributed. First Fed's contributions were $569,000 and $380,000 during the years ended December 31, 2021 and December 31, 2020, respectively.

Employee Stock Ownership Plan

In connection with the mutual to stock conversion, the Company established an ESOP for eligible employees of the Company and the Bank. Employees of the Company who have been credited with at least 1,000 hours of service during a 12-month period are eligible to participate in the ESOP.

Pursuant to the Plan, the ESOP purchased in the open market 8% of the common stock originally issued in the mutual to stock conversion. As of December 31, 2021, 1,048,029 shares, or 100% of the total, have been purchased in the open market at an average price of $12.45 per share with funds borrowed from First Northwest. The Bank will make contributions to the ESOP in amounts necessary to amortize the ESOP loan payable to First Northwest over a period of 20 years, bearing estimated interest at 2.46%.

Shares purchased by the ESOP with the loan proceeds are held in a suspense account and allocated to ESOP participants on a pro rata basis as principal and interest payments are made by the ESOP to the Company. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Bank's discretionary contributions to the ESOP and earnings on the ESOP assets. Annual principal and interest payments of $835,000 were made by the ESOP during the years ended December 31, 2021 and 2020.

As shares are committed to be released from collateral, the Company reports compensation expense equal to the average daily market prices of the shares and the shares become outstanding for EPS computations. The compensation expense is accrued monthly throughout the year. Dividends on allocated and unallocated ESOP shares will be recorded as a reduction of debt and accrued interest.

Compensation expense related to the ESOP for the years ended December 31, 2021 and 2020, was $675,000 and $475,000, respectively.

Shares issued to the ESOP as of the dates indicated are as follows:

	December 31, 2021		December 31, 2020
	(Dollars in thousands)
Allocated shares		333,396		280,507
Committed-to-be-released shares		26,442		26,442
Unallocated shares		688,191		741,080
Total ESOP shares issued		1,048,029		1,048,029
Fair value of unallocated shares	$	13,901	$	11,561

Stock-based Compensation

On November 16, 2015, the Company's shareholders approved the First Northwest Bancorp 2015 Equity Incentive Plan (the "2015 EIP"), which provided for the grant of incentive stock options, non-qualified stock options, restricted stock and restricted stock units to eligible participants. The cost of awards under the 2015 EIP generally is based on the fair value of the awards on their grant date. Shares of common stock issued under the EIP may be authorized but unissued shares or repurchased shares. During the year ended June 30, 2017, the Company purchased and retired 523,014 shares of common stock to be used for future stock awards.

In May 2020, the Company's shareholders approved the First Northwest Bancorp 2020 Equity Incentive Plan ("2020 EIP"), which provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock shares or restricted stock units, and performance share awards to eligible participants through May 2030. The cost of awards under the 2020 EIP generally is based on the fair value of the awards on their grant date. The maximum number of shares that may be utilized for awards under the 2020 EIP is 520,000. At December 31, 2021, there were 344,537 total shares available for grant under the 2020 EIP, all of which are available to be granted as restricted shares. Following adoption of the 2020 EIP, no additional awards may be made under the 2015 EIP. At December 31, 2021, 103,520 restricted shares are outstanding under the 2015 EIP that are expected to vest subject to the 2015 EIP plan provisions.

During the years ended December 31, 2021 and 2020, restricted awards for 102,033 and 161,224 shares were awarded, respectively, and no stock options were granted. Restricted shares vest ratably over periods of up to five years from the date of grant provided the eligible participant remains in service to the Company. The Company recognizes compensation expense for the restricted awards based on the fair value of the shares at the grant date amortized over the stated period.

For the years ended December 31, 2021 and 2020, total compensation expense for the 2015 and 2020 EIPs was $1.8 million and $1.3 million, respectively.

Included in the above compensation expense for the years ended December 31, 2021 and 2020, was directors' compensation of $368,000 and $358,000, respectively.

The following tables provide a summary of changes in non-vested restricted awards for the periods shown:

	For the Year Ended
	December 31, 2021
	Shares			Weighted-Average Grant Date Fair Value
Non-vested at January 1, 2021		292,892		$	13.96
Granted		102,033			18.49
Vested		(101,751	)		13.63
Canceled (1)		(19,548	)		13.63
Forfeited		(37,194	)		13.30
Non-vested at December 31, 2021		236,432			16.19

(1) A surrender of vested stock awards by a participant surrendering the number of shares valued at the current stock price at the vesting date to cover the participant's tax obligation of the vested shares. The surrendered shares are canceled and are unavailable for reissue.

As of December 31, 2021, there was $3.0 million of total unrecognized compensation cost related to non-vested restricted shares. The cost is expected to be recognized over the remaining weighted-average vesting period of approximately 2.26 years.