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.

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 (5.39% for 2022 and 5.56% for 2021) 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 July 1:

Total contributions made to the Pentegra DB Plan, as reported on Pentegra’s Form 5500, were $248.6 million and $253.2 million for the plan years ended June 30, 2021 and June 30, 2020, respectively. The Company’s contributions to the Pentegra DB Plan for the fiscal year ended December 31, 2022 are not more than 5% of the total contributions to the Pentegra DB Plan for the plan year ending June 30, 2021. The Company’s policy is to fund pension costs as accrued.

The Company has entered into post-employment agreements with certain key officers to provide supplemental retirement benefits. The Company recorded $177,000 and $175,000 of compensation expense for the years ended December 31, 2022, and 2021, respectively. At December 31, 2022, a $1.0 million liability was included in other liabilities on the Company’s consolidated balance sheet in support of the expected current and future benefit payments on these agreements. In addition, in January 2020, the Company purchased three annuity contracts, totaling $2.4 million, to satisfy the benefit obligation associated with certain supplemental executive retirement plan agreements.

The Company has a savings plan under Section 401(k) of the Internal Revenue Code, covering substantially all employees after 60 days of continuous employment. Under the plan, in 2022, employee contributions up to 6% were matched 50% by the Company. Such matching became 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 $365,000 and $319,000 to the plan for the years ended December 31, 2022, and 2021, respectively. Effective January 1, 2023, the Company made changes to its 401(k) plan to qualify as a Safe Harbor plan. Under the revised plan, employee contributions up to 5% will be matched 100% by the Company and said matching contributions will be immediately vested to the employee. Separately, in an effort to replace the ESOP benefits that matured in 2022, as outlined below, the Company introduced a profit-sharing plan beginning in 2023, wherein a contribution will be made to every employee’s retirement account in an amount ranging from 5% to 8% annually, based on the Company’s profitability.

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 which had a fixed interest rate of 4.88% matured on October 8, 2022.

Shares purchased by the ESOP with the loan proceeds were held in a suspense account and were allocated to ESOP participants on a pro rata basis as principal and interest payments were made by the ESOP to First Financial Northwest. The loan was secured by First Financial Northwest’s common stock purchased with the loan proceeds and was 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 $1.2 million and $1.6 million were made by the ESOP during 2022 and 2021 respectively.

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.

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. The 2016 Plan expires in 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.

As a result of the approval of the 2016 Plan, the First Financial Northwest, Inc. 2008 Equity Incentive Plan (“2008 Plan”) was frozen with no additional awards being made under the 2008 plan. Restricted stock awards and stock options that were granted under the 2008 Plan are fully vested and unexercised options remain exercisable, subject to the provision of the 2008 Plan and the respective award agreements. At December 31, 2022, there were 969,834 total shares available for future grant under the 2016 Plan, including 184,197 shares available to be granted as restricted stock.

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.

Total compensation expense for the 2016 Plan for the year ended December 31, 2022, was $770,000. The final compensation expense for the 2008 Plan and the total compensation for the 2016 Plan for the year ended December 31, 2020, was $708,000. The related income tax benefit was $162,000 and $149,000 for the years ended December 31, 2022, and 2021, respectively.

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. At December 31, 2022, options granted under the 2008 Plan to purchase 217,519 shares were outstanding and fully vested and exercisable. Stock options have a contractual period 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 “simplified” 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.


	Shares	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term in Years	Aggregate Intrinsic Value
Outstanding at January 1, 2022	272,000	$	10.63		$	1,507,300

Exercised	(54,481)	8.36			386,658

Outstanding at December 31, 2022	217,519	11.20		1.44	$	823,028
Expected to vest assuming a 3% forfeiture rate over the vesting term	217,519	11.20		1.44	823,028
Exercisable at December 31, 2022	217,519	11.20		1.44	823,028


Nonvested Shares	Shares	Weighted Average Grant Date Fair Value
Nonvested at December 31, 2021	44,426	13.78
Granted	47,542	16.35
Vested	(58,698)	14.07
Forfeited	(1,998)	16.93
Nonvested at December 31, 2022	31,272	16.93

Expected to vest assuming a 3% forfeiture rate over the vesting term	30,334	16.93

As of December 31, 2022, there was $84,000 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 two months. The total fair value of shares vested during the years ended December 31, 2022, and 2021 were $790,000 and $402,000, respectively.