NOTE 12 – EMPLOYEE BENEFIT PLANS

Employee Savings Plans

We sponsor a tax-qualified 401(k) retirement plan covering substantially all employees. This plan assists employees in meeting their savings and retirement planning goals through employee salary deferrals and discretionary employer matching contributions. Our contributions to the plan amounted to $977,000 in fiscal 2017, $666,000 in fiscal 2016, and $605,000 in fiscal 2015.

Executive Benefits

Pension, SRIP and SERP Overview

We maintain a supplemental retirement income plan (“SRIP”) for certain former and current executives of Hooker Furniture Corporation. Additionally, we assumed Home Meridian’s pension plan and other retirement plan liabilities upon completion of the Acquisition on February 1, 2016. Home Meridian’s legacy pension plan obligations relate to Pulaski Furniture Corporation, one of two entities combined to form HMI. These legacy pension plan obligations include:

§	the Pulaski Furniture Corporation Supplemental Executive Retirement Plan (“SERP”) for certain former executives; and

§	the Pulaski Furniture Corporation Pension Plan (“Pension Plan”) for former Pulaski Furniture Corporation employees.

The SRIP, SERP and Pension plans are all “frozen” and we do not expect to add additional employees to any of these plans in the future.

SRIP and SERP

The SRIP provides monthly payments to participants or their designated beneficiaries based on a participant’s “final average monthly earnings” and “specified percentage” participation level as defined in the plan, subject to a vesting schedule that may vary for each participant. The benefit is payable for a 15-year period following the participant’s termination of employment due to retirement, disability or death. In addition, the monthly retirement benefit for each participant, regardless of age, becomes fully vested and the present value of that benefit is paid to each participant in a lump sum upon a change in control of the Company as defined in the plan. The SRIP is unfunded and all benefits are payable solely from our general assets. The plan liability is based on the aggregate actuarial present value of the vested benefits to which participating employees are currently entitled, but based on the employees’ expected dates of separation or retirement. No employees have been added to the plan since 2008 and we do not expect to add additional employees in the future, due to changes in our compensation philosophy, which emphasizes more performance-based compensation measures in total management compensation.

The SERP provides monthly payments to eight retirees or their designated beneficiaries based on a defined benefit formula as defined in the plan. The benefit is payable for the life of the retiree with the following forms available as a reduced monthly benefit: Ten-year Certain and Life; 50% or 100% Joint and Survivor Annuity. The SERP is unfunded and all benefits are payable solely from our general assets. The plan liability is based on the aggregate actuarial present value of the benefits to which retired employees are currently entitled. No employees have been added to the plan since 2006 and we do not expect to add additional employees in the future.

Summarized SRIP and SERP information as of each fiscal year-end (the measurement date) is as follows:

	SRIP (Supplemental Retirement Income Plan)						SERP (Supplemental Executive Retirement Plan)
	Fifty-Two			Fifty-Two			Fifty-Two
	Weeks Ended			Weeks Ended			Weeks Ended
	January 29,			January 31,			January 29,
	2017			2016			2017
Change in benefit obligation:
Beginning projected benefit obligation	$	8,153		$	8,385		$	2,413
Service cost		375			406
Interest cost		341			289			89
Benefits paid		(354	)		(354	)		(204	)
Actuarial loss (gain)		330			(573	)		4
Ending projected benefit obligation (funded status)	$	8,845		$	8,153		$	2,302

Accumulated benefit obligation	$	8,344		$	7,446		$	2,302

Discount rate used to value the ending benefit obligations:		4.00	%		4.25	%		3.77	%

Amount recognized in the consolidated balance sheets:
Current liabilities (Accrued salaries, wages and benefits line)	$	473		$	354		$	221
Non-current liabilities (Deferred compensation line*)		8,372			7,799			2,081
Total	$	8,845		$	8,153		$	2,302

	Fifty-Two			Fifty-Two			Fifty-Two			Fifty-Two
	Weeks Ended			Weeks Ended			Weeks Ended			Weeks Ended
	January 29,			January 31,			February 1,			January 29,
	2017			2016			2015			2017
Net periodic benefit cost
Service cost	$	375		$	406		$	102		$	-
Interest cost		341			289			339			89
Net (gain) loss		(72	)		178			(51	)		-
Net periodic benefit cost	$	644		$	873		$	390		$	89


Other changes recognized in accumulated other comprehensive income
Net loss (gain) arising during period		330			(574	)		636			4
Gain (Loss)		72			(178	)		51			-
Total recognized in other comprehensive loss (income)		402			(752	)		687			4

Total recognized in net periodic benefit cost and accumulated other comprehensive income	$	1,046		$	121		$	1,077		$	93

Assumptions used to determine net periodic benefit cost:
Discount rate⁽¹⁾		4.25	%		3.5	%		4.5	%		3.88	%
Increase in future compensation levels		4.00	%		4.0	%		4.0	%		N/A

Estimated Future Benefit Payments:
Fiscal 2018	$	473	221
Fiscal 2019		551	209
Fiscal 2020		834	203
Fiscal 2021		834	195
Fiscal 2022		834	187
Next 5 years		4,347	795

(1)	The discount rate used for the SRIP is the Moody’s Composite Bond rate rounded to the nearest 0.25%. The discount rate used for the SERP Plan is hypothetical AA-rated corporate bond spot-rate explained in greater detail below.

For the SRIP plan, the gain recognized in other comprehensive income was due to an increased discount rate from 3.5% at January 31, 2016 to 4.25% at January 29, 2017. It also reflects the retirements of several participants. The discount rate utilized in each period was the Annualized Moody’s Composite Bond Rate rounded to the nearest 0.25%.

For the SERP, the discount rate assumption used to measure the postretirement benefit obligations is set by reference to a certain hypothetical AA-rated corporate bond spot-rate yield curve constructed by our actuary, Aon Hewitt (“Aon”). This yield curve was constructed from the underlying bond price and yield data collected as of the Plan’s measurement date and is represented by a series of annualized, individual discount rates with durations ranging from six months to seventy-five years. Aon then applies the yield curve to the actuarially projected cash flow patterns to derive the appropriate discount rate.

Increasing the SRIP discount rate by 1% would decrease the projected benefit obligation at January 29, 2017 by approximately $625,000. Similarly, decreasing the discount rate by 1% would increase the projected benefit obligation at January 29, 2017 by $701,000. Increasing the SERP discount rate by 1% would decrease the projected benefit obligation at January 29, 2017 by approximately $161,000. Similarly, decreasing the discount rate by 1% would increase the projected benefit obligation at January 29, 2017 by $185,000.

At January 29, 2017, the actuarial losses related to the SRIP amounted to $185,000, net of tax of $68,000. At January 31, 2016, the actuarial gains related to the SRIP amounted to $139,000, net of tax of $79,000. The estimated prior service (cost) credit and actuarial loss that will be amortized from accumulated other comprehensive income into net periodic benefit cost over fiscal 2018 are $0 and $62,000, respectively.

At January 29, 2017, the actuarial losses related to the SERP were immaterial. Consequently, the estimated prior service (cost) credit and actuarial loss that will be amortized from accumulated other comprehensive income into net periodic benefit cost over fiscal 2018 are also immaterial.

The Pension Plan

Pension plan assets include a range of mutual fund asset classes and are measured at fair value using Level 1 inputs, which are quoted prices in active markets.

Our Pension Plan investment policy includes various guidelines and procedures designed to ensure assets are invested in a manner necessary to meet expected future benefits earned by participants. The investment guidelines consider a broad range of economic conditions. Central to the policy are target allocation ranges by asset class. The objectives of the target allocations are to maintain investment portfolios that diversify risk through prudent asset allocation parameters, achieve asset returns that meet or exceed the plan’s actuarial assumptions, and achieve asset returns that are competitive with like institutions employing similar investment strategies.

We and our third-party advisors periodically review the pension plan for investment matters. The same advisor assists in specific investment review and selection.

Our overall investment strategy is to achieve a mix of approximately 75% of investments for long-term growth and 25% for near-term benefit payments with a diversification of asset types and fund strategies. The allocations for plan assets at January 29, 2017 were 77.5% equity and 22.5% corporate bonds and U.S. Treasury Securities.

Mutual funds primarily include investments in a range of asset classes, including: domestic and international equities (both large and small cap), fixed income securities such as corporate bonds, mortgage-backed securities, real estate investments and U.S. Treasuries.

The following are the major categories of plan assets measured at fair value on January 29, 2017, all using quoted prices in active markets for identical assets (Level 1), in thousands of dollars:

Money Market Funds	$	324
Mutual Funds:
Growth Funds	$	2,807
International Funds		2,089
Bond Funds		3,121
Value Funds		1,390
Small Blend Funds		1,377
Emerging Market Funds		1,399
Real Estate Funds		1,374
Total Plan Assets	$	13,881

The Pension Plan discount rate assumption used to measure the postretirement benefit obligations is set by reference to a certain hypothetical AA-rated corporate bond spot-rate yield curve constructed by Aon. This yield curve was constructed from the underlying bond price and yield data collected as of the Plan’s measurement date and is represented by a series of annualized, individual discount rates with durations ranging from six months to seventy-five years. Aon then applies the yield curve to the actuarially projected cash flow patterns to derive the appropriate discount rate.

The vested benefit obligation for the Pension Plan is the actuarial present value of the vested benefits to which the employee is currently entitled, but based on the employee’s expected date of separation or retirement.

Increasing the Pension Plan discount rate by 1% would decrease the projected benefit obligation at January 29, 2017 by approximately $1.7 million. Similarly, decreasing the discount rate by 1% would increase the projected benefit obligation at January 29, 2017 by $2.0 million.

The expected long-term rate of return on Pension Plan assets (“EROA”) is 7.0% as of the Plan’s most recent valuation date of January 31, 2017. We select the EROA to use based on input from Aon, our Pension Plan Investment Consultant and Actuary. Aon provides us with a statistical analysis of future expected returns based on the current investment policy target asset mix and Aon’s capital market assumptions. We then select the return from Aon’s reasonable range recommendation.

We contributed $1.2 million to reduce the underfunded balance of the Pension Plan during the fiscal 2017 third quarter. We also contributed $811,000 in required contributions to the Pension Plan in fiscal 2017. Expected minimum Pension Plan contributions in fiscal 2018 are $776,000.

Summarized Pension Plan information as of January 29, 2017 (the measurement date) is as follows:

Pulaski Furniture Pension Plan
	Fifty-Two
	Weeks Ended
	January 29,
	2017
Change in benefit obligation:
Beginning projected benefit obligation	$	17,829
Service cost		-
Interest cost		751
Benefits paid		(1,099	)
Actuarial (gain) loss		(101	)
Ending projected benefit obligation	$	17,380

Change in Plan Assets:
Beginning fair value of plan assets	$	11,585
Actual return on plan assets		1,666
Employer contributions		2,011
Actual expenses paid		(282	)
Actual benefits paid	$	(1,099	)
Ending fair value of plan assets	$	13,881

Funded Status of the Plan	$	(3,499	)

Discount rate used to value the ending benefit obligations:		4.14	%

Amount recognized in the consolidated balance sheets:
Current liabilities	$	-
Non-current liabilities		(3,499	)
Total	$	(3,499	)

	Fifty-Two
	Weeks Ended
	January 29,
	2017
Net periodic benefit cost
Expected administrative expenses	$	280
Interest cost		751
Net loss (gain)		(808	)
Net periodic benefit cost	$	223


Other changes recognized in accumulated other comprehensive income
Net (gain) loss arising during period		(957	)
Total recognized in other comprehensive (income) loss		(957	)

Total recognized in net periodic benefit cost and accumulated other comprehensive income	$	(734	)

Assumptions used to determine net periodic benefit cost:
Discount rate (Moody’s Composite Bond Rate)		4.36	%
Increase in future compensation levels		N/A

Estimated Future Benefit Payments:
Fiscal 2018	$	1,179
Fiscal 2019		1,155
Fiscal 2020		1,144
Fiscal 2021		1,130
Fiscal 2022		1,109
Fiscal 2023 through Fiscal 2027		5,463

Life Insurance

We also provide a life insurance program for certain executives. The life insurance program provides death benefit protection for these executives during employment up to age 65. Coverage under the program declines when a participating executive attains age 60 and automatically terminates when the executive attains age 65 or terminates employment with us for any reason, other than death, whichever occurs first. The life insurance policies funding this program are owned by the Company with a specified portion of the death benefits payable under those policies endorsed to the insured executives’ designated beneficiaries.

Performance Grants

The Compensation Committee of our Board of Directors annually awards performance grants to certain senior executives under the Company’s Stock Incentive Plan. Payments under these awards are based on our achieving specified performance targets during a designated performance period. Generally, each executive must remain continuously employed with the Company through the end of the performance period. Typically, performance grants can be paid in cash, shares of the Company’s common stock, or both, at the discretion of the Compensation Committee at the time payment is made.

Outstanding performance grants are classified as liabilities since the (i) settlement amount for each grant is not known until after the applicable performance period is completed and (ii) settlement of the grants may be made in common stock, cash or a combination of both. The estimated cost of each grant is recorded as compensation expense over its performance period when it becomes probable that the applicable performance targets will be achieved. The expected cost of the performance grants is revalued each reporting period. As assumptions change regarding the expected achievement of performance targets, a cumulative adjustment is recorded and future compensation expense will increase or decrease based on the currently projected performance levels. If we determine that it is not probable that the minimum performance thresholds for outstanding performance grants will be met, no further compensation cost will be recognized and any previously recognized compensation cost will be reversed.

During fiscal 2013, the Compensation Committee awarded performance grants for the 2014 fiscal year. The 2014 awards had a three-year performance period that ended on January 15, 2016. The performance criteria for these awards were met and were paid in April 2016. During fiscal 2015, fiscal 2016 and fiscal 2017, the Compensation Committee awarded performance grants for the 2015, 2016 and 2017 fiscal years that have three-year performance periods ending on January 29, 2017, January 28, 2018 and February 3, 2019. The following amounts were accrued in our consolidated balance sheets as of the fiscal period-end dates indicated:

	January 29,		January 31,
	2017		2016
Performance grants
Fiscal 2014 grant (Current liabilities, Accrued wages, salaries and benefits)	$	-	$	619
Fiscal 2015 grant (Current liabilities, Accrued wages, salaries and benefits)		644		429
Fiscal 2016 grant (Non-current liabilities, Deferred compensation)		215		129
Fiscal 2017 grant (Non-current liabilities, Deferred compensation)		93		-
Total performance grants accrued	$	952	$	1,177