Note 12.

Benefit Plans

Pension Plan

The Bank has a noncontributory, defined benefit pension plan for all full-time employees over 21 years of age with at least one year of credited service, and hired prior to May 1, 2011. Effective May 1, 2011, the plan was frozen to new participants. Only individuals employed on or before April 30, 2011 were eligible to become participants in the plan upon satisfaction of the eligibility requirements. Benefits are generally based upon years of service and average compensation for the five highest-paid consecutive years of service. The Bank’s funding practice has been to make at least the minimum required annual contribution permitted by the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code of 1986, as amended.

The following tables provide a reconciliation of the changes in the plan benefit obligation and the fair value of assets for the periods ended December 31, 2014, 2013 and 2012 (in thousands).


	2014			2013			2012
Change in Benefit Obligation
Benefit obligation, beginning of year	$	5,501		$	7,244		$	5,995
Service cost		347			470			427
Interest cost		269			279			269
Actuarial (gain) loss		1,769			(1,327	)		725
Benefits paid		(157	)		(961	)		(172	)
Gain due to settlement		—			(204	)		—

Benefit obligation, end of year	$	7,729		$	5,501		$	7,244


Changes in Plan Assets
Fair value of plan assets, beginning of year	$	4,329		$	4,046		$	3,454
Actual return on plan assets		196			744			458
Employer contributions		—			500			306
Benefits paid		(157	)		(961	)		(172	)

Fair value of assets, end of year	$	4,368		$	4,329		$	4,046

Funded Status, end of year	$	(3,361	)	$	(1,172	)	$	(3,198	)


Amount Recognized in Other Liabilities	$	(3,361	)	$	(1,172	)	$	(3,198	)


Amounts Recognized in Accumulated Other Comprehensive Loss, net of tax
Net loss	$	2,153		$	265		$	2,629
Prior service cost		—			—			—
Deferred income tax benefit		(732	)		(90	)		—

Amount recognized	$	1,421		$	175		$	2,629


Weighted Average Assumptions Used to Determine Benefit Obligation
Discount rate used for disclosure		4.00	%		5.00	%		4.00	%
Expected return on plan assets		7.50	%		8.00	%		8.00	%
Rate of compensation increase		3.00	%		3.00	%		3.00	%


	2014			2013			2012
Components of Net Periodic Benefit Cost
Service cost	$	347		$	470		$	427
Interest cost		269			279			269
Expected return on plan assets		(315	)		(303	)		(275	)
Amortization of prior service cost		—			—			2
Recognized net loss due to settlement		—			284			—
Recognized net actuarial loss		—			109			86

Net periodic benefit cost	$	301		$	839		$	509


Other Changes in Plan Assets and Benefit Obligations Recognized in Accumulated Other Comprehensive (Income) Loss
Net (gain) loss	$	1,888		$	(2,364	)	$	456
Amortization of prior service cost		—			—			(2	)

Total recognized in accumulated other comprehensive income (loss)	$	1,888		$	(2,364	)	$	454


Total Recognized in Net Periodic Benefit Cost and Accumulated Other Comprehensive Income (Loss)	$	2,189		$	(1,525	)	$	963


Weighted Average Assumptions Used to Determine Net Periodic Benefit Cost
Discount rate		5.00	%		4.00	%		4.50	%
Expected return on plan assets		7.50	%		8.00	%		8.00	%
Rate of compensation increase		3.00	%		3.00	%		3.00	%

The plan sponsor selects the expected long-term rate of return on assets assumption in consultation with their investment advisors and actuary. This rate is intended to reflect the average rate of earnings expected to be earned on the funds invested or to be invested to provide plan benefits. Historical performance is reviewed, especially with respect to real rates of return (net of inflation), for the major asset classes held or anticipated to be held by the trust, and for the trust itself. Undue weight is not given to recent experience, which may not continue over the measurement period, with higher significance placed on current forecasts of future long-term economic conditions.

Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Further, solely for this purpose, the plan is assumed to continue in force and not terminate during the period during which assets are invested. However, consideration is given to the potential impact of current and future investment policy, cash flow into and out of the trust, and expenses (both investment and non-investment) typically paid from plan assets (to the extent such expenses are not explicitly estimated within periodic cost).

The process used to select the discount rate assumption takes into account the benefit cash flow and the segmented yields on high-quality corporate bonds that would be available to provide for the payment of the benefit cash flow. A single effective discount rate, rounded to the nearest .25%, is then established that produces an equivalent discounted present value.

The pension plan’s weighted-average asset allocations at the end of the plan year for 2014 and 2013, by asset category were as follows:


	2014			2013
Asset Category
Mutual funds – fixed income		39	%		39	%
Mutual funds – equity		61	%		61	%

Total		100	%		100	%

The trust fund is sufficiently diversified to maintain a reasonable level of risk without imprudently sacrificing return, with a targeted asset allocation of 40% fixed income and 60% equities. The Investment Manager selects investment fund managers with demonstrated experience and expertise, and funds with demonstrated historical performance for the implementation of the plan’s investment strategy. The investment manager will consider both actively and passively managed investment strategies and will allocate funds across the asset classes to develop an efficient investment structure.

It is the responsibility of the trustee to administer the investments of the trust within reasonable costs, being careful to avoid sacrificing quality. These costs include, but are not limited to, management and custodial fees, consulting fees, transaction costs and other administrative costs chargeable to the trust.

Following is a description of the valuation methodologies used for assets measured at fair value.

Fixed income and equity funds: Valued at the net asset value of shares held at year-end.

The pension financial instruments measured and reported at fair value are classified and disclosed in one of the following categories:

•

Level 1 Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

•

Level 2 Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

•

Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following tables set forth by level, within the fair value hierarchy, the Company’s pension plan assets at fair value as of December 31, 2014, 2013 and 2012 (in thousands):


	Fair Value Measurements at December 31, 2014
	Total		Level 1		Level 2		Level 3

Fixed income funds	$	1,711	$	1,711	$	—	$	—
Equity funds		2,657		2,657		—		—

Total	$	4,368	$	4,368	$	—	$	—


	Fair Value Measurements at December 31, 2013
	Total		Level 1		Level 2		Level 3

Fixed income funds	$	1,697	$	1,697	$	—	$	—
Equity funds		2,632		2,632		—		—

Total	$	4,329	$	4,329	$	—	$	—


	Fair Value Measurements at December 31, 2012
	Total		Level 1		Level 2		Level 3

Fixed income funds	$	1,023	$	1,023	$	—	$	—
Equity funds		3,023		3,023		—		—

Total	$	4,046	$	4,046	$	—	$	—

The Company did not make a cash contribution during the year ended December 31, 2014, and expects to make no contribution during the year ended December 31, 2015. The Company made cash contributions of $500 thousand and $306 thousand during the years ended December 31, 2013 and 2012, respectively. The accumulated benefit obligation for the defined benefit pension plan was $5.3 million, $3.8 million and $5.1 million at December 31, 2014, 2013 and 2012, respectively.

Estimated future benefit payments, which reflect expected future service, as appropriate, were as follows at December 31, 2014 (in thousands):


2015	$	361
2016		312
2017		301
2018		24
2019		26
Years 2020-2024		2,569

401(k) Plan

The Company maintains a 401(k) plan for all eligible employees. Participating employees may elect to contribute up to the maximum percentage allowed by the Internal Revenue Service, as defined in the plan. The Company makes matching contributions, on a dollar-for dollar basis, for the first one percent of an employee’s compensation contributed to the Plan and fifty cents for each dollar of the employee’s contribution between two percent and six percent. The Company also makes an additional contribution for eligible employees hired on or after May 1, 2011. This contribution is allocated based on years of service to participants who were hired on or after May 1, 2011 who have completed at least one thousand hours of service during the year and who are employed on the last day of the Plan Year. The amount that the Company matches is contributed for the benefit of the respective employee to the employee stock ownership plan (ESOP). All employees who are age nineteen or older are eligible. Employee contributions vest immediately. Employer matching contributions vest after two plan service years with the Company. The Company has the discretion to make a profit sharing contribution to the plan each year based on overall performance, profitability, and other economic factors. For the years ended December 31, 2014, 2013 and 2012, expense attributable to the Plan amounted to $306 thousand, $249 thousand and $219 thousand, respectively.

Employee Stock Ownership Plan

On January 1, 2000, the Company established an employee stock ownership plan. The ESOP provides an opportunity for the Company to award shares of First National Corporation stock to employees at its discretion. Employees are eligible to participate in the ESOP effective immediately upon beginning service with the Company. Participants become 100% vested after two years of credited service. In addition to the 401(k) matching contributions made by the Company to the ESOP, the Board of Directors may make discretionary contributions, within certain limitations prescribed by federal tax regulations. There was no compensation expense for the ESOP for the years ended December 31, 2014, 2013 and 2012. Shares of the Company held by the ESOP at December 31, 2014, 2013 and 2012, were 173,823, 169,882 and 134,609, respectively.

Split Dollar Life Insurance Plan

On January 6, 1999, the Bank adopted a Director Split Dollar Life Insurance Plan. This Plan provided life insurance coverage to insurable outside directors of the Bank. The Bank owns the policies and is entitled to all values and proceeds. The Plan provided retirement benefits and the payment of benefits at the death of the insured director. The amount of benefits was determined by the performance of the policies over the director’s life.

Accounting guidance requires a company to recognize an obligation over the director’s service period based upon the substantive agreement with the director such as the promise to maintain a life insurance policy or provide a death benefit postretirement. The related effect on net income recognized during the year ended December 31, 2012 was a benefit of $21 thousand. In May 2013, the Bank terminated its Split Dollar Life Insurance Plan that provided life insurance coverage to insurable directors and recorded a gain of $543 thousand from the termination of the postretirement benefit liability.