Benefit Plans

Pension Plan

The Bank had 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 were generally based upon years of service and average compensation for the five highest-paid consecutive years of service. The Bank’s funding practice was 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. Under the amendment, benefit accruals ceased as of November 30, 2016. The Internal Revenue Service approved the termination on October 16, 2017 and the Company distributed all plan assets on March 8, 2018. The funding status of the plan on March 8, 2018 was not significantly different from the funded status disclosed in the table below. The benefit obligation and the fair value of assets did not change significantly prior to the distribution of plan assets. Pension plan assets remained in cash and equivalents through the distribution 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, 2017 and 2016 (in thousands).



	2017			2016
Change in Benefit Obligation
Benefit obligation, beginning of year	$	5,777		$	8,107
Service cost	—			410
Interest cost	82			331
Actuarial (gain) loss	(145		)	245
Benefits paid	(431		)	(695		)
Gain due to curtailment	—			(2,621		)
Benefit obligation, end of year	$	5,283		$	5,777
Changes in Plan Assets
Fair value of plan assets, beginning of year	$	3,693		$	4,264
Actual return on plan assets	16			124
Employer contributions	1,800			—
Benefits paid	(431		)	(695		)
Fair value of assets, end of year	$	5,078		$	3,693
Funded Status, end of year	$	(205	)	$	(2,084	)
Amount Recognized in Other Liabilities	$	(205	)	$	(2,084	)



Amounts Recognized in Accumulated Other Comprehensive Loss, net of tax
Net gain	$	(126	)	$	—
Deferred income tax expense	27			—
Amount recognized	$	(99	)	$	—



Weighted Average Assumptions Used to Determine Benefit Obligation
Discount rate used for disclosure
First five years	1.96	%	1.47	%
Five years to twenty years	3.58	%	3.34	%
After twenty years	4.35	%	4.30	%
Expected return on plan assets	1.00	%	7.50	%
Rate of compensation increase	N/A		3.00	%



Components of Net Periodic Benefit Cost
Service cost	$	—		$	410
Interest cost	82			331
Expected return on plan assets	(35		)	(297		)
Recognized net gain due to curtailment	—			(173		)
Recognized net actuarial loss	—			84
Net periodic benefit cost	$	47		$	355



Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (Loss)
Net gain	$	(126	)	$	(2,115	)
Total recognized in other comprehensive income (loss)	$	(126	)	$	(2,115	)
Total Recognized in Net Periodic Benefit Cost and Other Comprehensive Income (Loss)	$	(79	)	$	(1,760	)



	2017		2016
Weighted Average Assumptions Used to Determine Net Periodic Benefit Cost
Discount rate	1.47	%	4.25	%
Expected return on plan assets	1.00	%	7.50	%
Rate of compensation increase	N/A		3.00	%

The plan sponsor selected the expected rate of return on assets assumption in consultation with their investment advisors and actuary. This rate was intended to reflect the average rate of earnings expected to be earned on the funds invested or to be invested to provide plan benefits.

Because assets were held in a qualified trust, anticipated returns were not reduced for taxes. Further, solely for this purpose, the plan was assumed to continue in force and not terminate during the period during which assets were invested. However, consideration was 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 took into account the benefit cash flow and the segmented yields on high-quality corporate bonds that were available to provide for the payment of the benefit cash flow. A single effective discount rate was then established that produced an equivalent discounted present value.

The pension plan’s weighted-average asset allocations at the end of the plan year for 2017 and 2016, by asset category were as follows:



	2017		2016
Asset Category
Cash and equivalents	100	%	100	%
Total	100	%	100	%

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

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


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


•	Level 2 Inputs to the valuation methodology included quoted prices for similar assets and liabilities in active markets, and inputs that were 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 were 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, 2017 and 2016 (in thousands):



	Fair Value Measurements at December 31, 2017
	Total		Level 1		Level 2		Level 3
Cash and equivalents	$	5,078	$	5,078	$	—	$	—
Total	$	5,078	$	5,078	$	—	$	—



	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	$	—	$	—

The Company made a cash contribution of $1.8 million during the year ended December 31, 2017. The Company did not make a cash contribution during the year ended December 31, 2016. The Company made an additional contribution of $205 thousand upon the final distribution of plan assets on March 8, 2018. The accumulated benefit obligation for the defined benefit pension plan was $5.3 million and $5.8 million at December 31, 2017 and 2016, respectively.

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, 2017 and 2016, expense attributable to the Plan amounted to $740 thousand and $482 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, 2017 and 2016. Shares of the Company held by the ESOP at December 31, 2017 and 2016 were 230,846 and 247,283, 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.