Note 13. 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.

On September 14, 2016, the defined benefit pension plan was amended to be terminated and the amendment has been submitted to the Internal Revenue Service and the Pension Benefit Guarantee Corporation for approval. Under the amendment, benefit accruals ceased as of November 30, 2016. Although an application for termination approval is in process, the date of possible Internal Revenue Service approval is unknown and there can be no assurance of when the plan will be terminated. The funding status of the plan upon termination is not expected to be significantly different from the funded status disclosed in the table below. The benefit obligation is not expected to change at termination and the fair value of assets at termination is not expected to change significantly at termination as the assets are expected to remain in the cash and equivalents category through the termination date.

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, 2016 and 2015 (in thousands).


	2016			2015
Change in Benefit Obligation
Benefit obligation, beginning of year	$	8,107		$	7,729
Service cost		410			446
Interest cost		331			302
Actuarial loss (gain)		245			(271	)
Benefits paid		(695	)		(99	)
Gain due to curtailment		(2,621	)		—

Benefit obligation, end of year	$	5,777		$	8,107


Changes in Plan Assets
Fair value of plan assets, beginning of year	$	4,264		$	4,368
Actual return on plan assets		124			(5	)
Benefits paid		(695	)		(99	)

Fair value of assets, end of year	$	3,693		$	4,264

Funded Status, end of year	$	(2,084	)	$	(3,843	)


Amount Recognized in Other Liabilities	$	(2,084	)	$	(3,843	)


	2016			2015
Amounts Recognized in Accumulated Other Comprehensive Loss, net of tax
Net loss	$	—		$	2,115
Deferred income tax benefit		—			(719	)

Amount recognized	$	—		$	1,396


Weighted Average Assumptions Used to Determine Benefit Obligation
Discount rate used for disclosure
First five years		1.47	%		4.25	%
Five years to twenty years		3.34	%		4.25	%
After twenty years		4.30	%		4.25	%
Expected return on plan assets		7.50	%		7.50	%
Rate of compensation increase		3.00	%		3.00	%

Components of Net Periodic Benefit Cost
Service cost	$	410		$	446
Interest cost		331			302
Expected return on plan assets		(297	)		(314	)
Recognized net gain due to curtailment		(173	)		—
Recognized net actuarial loss		84			86

Net periodic benefit cost	$	355		$	520


Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (Loss)
Net gain	$	(2,115	)	$	(38	)

Total recognized in other comprehensive income (loss)	$	(2,115	)	$	(38	)


Total Recognized in Net Periodic Benefit Cost and Other Comprehensive Income (Loss)	$	(1,760	)	$	482


Weighted Average Assumptions Used to Determine Net Periodic Benefit Cost
Discount rate		4.25	%		4.00	%
Expected return on plan assets		7.50	%		7.50	%
Rate of compensation increase		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 2016 and 2015, by asset category were as follows:


	2016			2015

Asset Category
Mutual funds - fixed income		—			40	%
Mutual funds - equity		—			60	%
Cash and equivalents		100	%		—

Total		100	%		100	%

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, 2016 and 2015 (in thousands):


	Fair Value Measurements at December 31, 2016
	Total		Level 1		Level 2		Level 3

Cash and equivalents	$	3,693	$	3,693	$	—	$	—

Total	$	3,693	$	3,693	$	—	$	—


	Fair Value Measurements at December 31, 2015
	Total		Level 1		Level 2		Level 3

Fixed income funds	$	1,720	$	1,720	$	—	$	—
Equity funds		2,544		2,544		—		—

Total	$	4,264	$	4,264	$	—	$	—

The Company did not make a cash contribution during the years ended December 31, 2016 and 2015. The Company expects to make a contribution of $2.1 million upon termination. The accumulated benefit obligation for the defined benefit pension plan was $5.8 million and $5.6 million at December 31, 2016 and 2015, respectively.

Estimated future benefit payments, which reflect expected future service, as appropriate, were as follows at December 31, 2016 (in thousands):


2017	$	369
2018		5,408
2019		—
2020		—
2021		—
Years 2022-2026		—

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 based on years of service to participants 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. 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, 2016 and 2015, expense attributable to the Plan amounted to $482 thousand and $451 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. 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, 2016 and 2015. Shares of the Company held by the ESOP at December 31, 2016 and 2015 were 247,283 and 208,168, respectively.

On September 14, 2016, the ESOP was amended to freeze the plan to new participants and to cease all contributions, effective December 31, 2016. The amendment also directs matching contributions and certain other retirement contributions made by the Company to the 401(k) plan. The ESOP shall be maintained as a frozen plan and continue to be invested in Company stock and such other assets as permitted under the ESOP and Trust Agreement for the benefit of participants and their beneficiaries.