Employee Benefit Plans

First United Corporation sponsors a noncontributory defined benefit pension plan (the “Pension Plan”) covering substantially all full-time employees who qualify as to age and length of service. The benefits are based on years of service and the employees’ compensation during the last five years of employment.

Effective April 30, 2010, the Pension Plan was amended, resulting in a “soft freeze”, the effect of which prohibits new entrants into the plan and ceases crediting of additional years of service, after that date. Effective January 1, 2013, the plan was amended to unfreeze the plan for those employees for whom the sum of (i) their ages, at their closest birthday, plus (ii) years of service for vesting purposes equals 80 or greater. The “soft freeze” continues to apply to all other plan participants. Pension benefits for these participants will be managed through discretionary contributions to the 401(k) Profit Sharing Plan (the “401(k) Plan”). We anticipate the plan changes to have a minimal impact to the financial statements.

During 2001, the Bank established an unfunded supplemental executive retirement plan (the “SERP”) to provide senior management personnel with supplemental retirement benefits in excess of limits imposed on qualified plans by federal tax law. Concurrent with the establishment of the SERP, the Bank acquired BOLI policies on the senior management personnel and officers of the Bank. The benefits resulting from the favorable tax treatment accorded the earnings on the BOLI policies are intended to provide a source of funds for the future payment of the SERP benefits as well as other employee benefit costs.

The benefit obligation activity for both the Pension Plan and SERP was calculated using an actuarial measurement date of January 1. Plan assets and the benefit obligations were calculated using an actuarial measurement date of December 31.

The following tables summarize benefit obligation and funded status, plan asset activity, components of net pension cost, and weighted average assumptions for the Pension Plan and the SERP plans:



		Pension				SERP
(In thousands)		2013		2012		2013		2012
Change in Benefit Obligation
Obligation at the beginning of the year	$	30,340	$	26,540	$	4,990	$	4,814
Service cost		227		0		113		114
Interest cost		1,243		1,380		250		245
Change in discount rate assumption		(3,564)		3,933		0		0
Actuarial (gains)/losses		1,286		(437)		(167)		(100)
Benefits paid		(1,203)		(1,076)		(102)		(83)
Obligation at the end of the year		28,329		30,340		5,084		4,990
Change in Plan Assets
Fair value at the beginning of the year		31,154		29,037		0		0
Actual return on plan assets		4,897		3,193		0		0
Employer contribution		0		0		102		83
Benefits paid		(1,203)		(1,076)		(102)		(83)
Fair value at the end of the year		34,848		31,154		0		0
Funded Status	$	6,519	$	814	$	(5,084)	$	(4,990)



		Pension				SERP
(in thousands)		2013		2012		2013		2012
Components of Net Pension Cost
Service cost	$	227	$	0	$	113	$	114
Interest cost		1,243		1,380		250		245
Expected return on assets		(2,373)		(2,211)		0		0
Amortization of transition asset		(39)		(39)		0		0
Amortization of recognized loss		532		379		3		15
Amortization of prior service cost		12		12		20		123
Net pension (income)/expense in employee benefits	$	(398)	$	(479)	$	386	$	497

Weighted Average Assumptions used to
determine benefit obligations:
Discount rate for benefit obligations		4.75%		4.00%		5.25%		5.25%
Discount rate for net pension cost		4.00%		5.00%		0		0
Expected long-term return on assets		7.75%		7.75%		0		0
Rate of compensation increase		3.00%		3.00%		3.00%		3.00%

The accumulated benefit obligation for the Pension Plan was $27.2 million and $30.8 million at December 31, 2013 and 2012, respectively. The accumulated benefit obligation for the SERP was $4.3 million and $4.5 million at December 31, 2013 and 2012, respectively.

The investment assets of a defined benefit plan are managed with the goal of providing for retiree distributions while also supporting long-term plan obligations with a moderate level of portfolio risk. In order to address the variability over time of both risk and return, the plan investment strategy entails a dynamic approach to asset allocation, providing for normalized targets for major asset classes, with the ability to tactically adjust within the following specified ranges around those targets.



Asset Class	Normalized Target	Range
Cash	5%	0% - 20%
Fixed Income	40%	30% - 50%
Equities	55%	45% - 65%

Decisions regarding tactical adjustments within the above noted ranges for asset classes are based on a top down review of factors expected to have material impact on the risk and reward dynamics of the portfolio as a whole. Such factors include, but are not limited to, the following:

Anticipated domestic and international economic growth as a whole;

The position of the economy within its longer term economic cycle; and

The expected impact of economic vitality, cycle positioning, financial market risks, industry/demographic trends and political forces on the various market sectors and investment styles.

With respect to individual company securities, additional company specific matters are considered, which could include management track record and guidance, future earnings expectations, current relative price expectations and the impact of identified risks on expected performance, among others. A core equity position of large cap stocks will be maintained, with more aggressive or volatile sectors meaningfully represented in the asset mix in pursuit of higher returns.

Strategic and specific investment decisions are guided by an in-house investment committee as well as a number of outside institutional resources that provide economic, industry and company data and analytics. It is management’s intent to give the Plan’s investment managers flexibility with respect to investment decisions and their timing within the overall guidelines. However, certain investments require specific review and approval by management. Management is also informed of anticipated changes in nonproprietary investment managers, significant modifications of any previously approved investment, or the anticipated use of derivatives to execute investment strategies.

Portfolio risk is managed in large part by a focus on diversification across multiple levels as well as an emphasis on financial strength. For example, current investment policies restrict initial investments in debt securities to be rated investment grade at the time of purchase. Also, with the exception of the highest rated securities (e.g. - U.S. Treasury or government-backed agency securities), no more than 10% of the portfolio may be invested in a single entity’s securities. As a result of the previously noted approaches to controlling portfolio risk, any concentrations of risk would be associated with general systemic risks faced by industry sectors or the portfolio as a whole.

Assets in the Pension Plan are valued by the Corporation’s accounting system provider who utilizes a third party pricing service. Valuation data is based on actual market data for stocks and mutual funds (Level 1) and matrix pricing for bonds (Level 2). Cash and cash equivalents are also considered Level 1 within the fair value hierarchy.

As of December 31, 2013 and 2012, the value of Pension Plan investments was as follows:



December 31, 2013					Fair Value Hierarchy
(Dollars in thousands)		Assets at Fair Value	% of Portfolio		Level 1		Level 2
Cash and cash equivalents	$	464	1.3%	$	464	$	0
Fixed income securities:
U.S. Government and Agencies		143	0.4%		0		143
Taxable municipal bonds and notes		1,792	5.2%		0		1,792
Corporate bonds and notes		7,664	22.0%		0		7,664
Preferred stock		562	1.6%		0		562
Fixed income mutual funds		3,171	9.1%		3,171		0
Total fixed income		13,332	38.3%		3,171		10,161
Equities:
Large Cap		15,634	44.9%		15,634		0
Mid Cap		2,489	7.1%		2,489		0
Small Cap		1,373	3.9%		1,373		0
International		1,556	4.5%		1,556		0
Total equities		21,052	60.4%		21,052		0
Total market value	$	34,848	100.0%	$	24,687	$	10,161



December 31, 2012					Fair Value Hierarchy
(Dollars in thousands)		Assets at Fair Value	% of Portfolio		Level 1		Level 2
Cash and cash equivalents	$	3,377	10.8%	$	3,377	$	0
Fixed income securities:
U.S. Government and Agencies		138	0.4%		0		138
Taxable municipal bonds and notes		1,882	6.0%		0		1,882
Corporate bonds and notes		7,990	25.7%		0		7,990
Preferred stock		736	2.4%		0		736
Fixed income mutual funds		2,826	9.1%		2,826		0
Total fixed income		13,572	43.6%		2,826		10,746
Equities:
Large Cap		11,132	35.7%		11,132		0
Mid Cap		1,543	5.0%		1,543		0
Small Cap		840	2.7%		840		0
International		690	2.2%		690		0
Total equities		14,205	45.6%		14,205		0
Total market value	$	31,154	100.0%	$	20,408	$	10,746

The expected rate of return on Pension Plan assets is based on a combination of the following:

Historical returns of the portfolio of assets;

Monte Carlo simulations of expected returns for a portfolio with strategic asset targets similar to the normalized targets; and

Market impact adjustments to reflect expected future investment environment considerations.

As of December 31, 2013, the 25-year average return on pension portfolio assets was 8.42%. Monte Carlo simulations modeled against the normalized asset class targets for the pension portfolio suggest an expected long-term return average of 7.28% with a 95% confidence level. Actual and simulated returns have been impacted materially by two significant bear markets that covered four years since the turn of the millennium. Some long-term data suggests that U.S. equities may be near an inflection point to improving multi-year performance. For example, Ibbotson data from 1826 through 2009 indicates that rolling 10-year returns exhibit some cyclicality. These returns recently touched historical lows and may be turning upward. In addition, the December 2007 recession ended in mid-2009, suggesting further progress toward economic recovery and positive investment performance. The expected long-term return used for 2013 was 7.75%. Based on the above considerations, it is considered appropriate to maintain the forward expected long-term rates of return at 7.75%.

The Pension Plan did not hold any shares of First United Corporation common stock at December 31, 2013 or 2012.

Estimated cash flows related to expected future benefit payments from the Pension Plan and SERP are as follows:



(In thousands)		Pension Plan		SERP
2014	$	1,162	$	117
2015		1,224		175
2016		1,311		166
2017		1,359		224
2018		1,454		267
2019-2023		9,380		1,898

First United Corporation will evaluate future annual contributions to the Pension Plan based upon its funded status and an evaluation of the future benefits to be provided thereunder. The Bank expects to fund the annual projected benefit payments for the SERP from operations.

Amounts included in accumulated other comprehensive loss as of December 31, 2013 and 2012, net of tax, are as follows:



		2013				2012
(In thousands)		Pension		SERP		Pension		SERP
Unrecognized net actuarial loss/(gain)	$	5,088	$	(86)	$	8,278	$	13
Unrecognized prior service costs		35		22		42		39
Net transition asset		(35)		0		(58)		0
	$	5,088	$	(64)	$	8,262	$	52

The estimated costs that will be amortized from accumulated other comprehensive loss into net periodic pension cost during the next fiscal year are as follows:



(In thousands)		Pension		SERP
Prior service costs	$	12	$	20
Net transition asset		(39)		0
Net actuarial loss/(gain)		242		(18)
	$	215	$	2