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Employee Benefit Plans | 12 Months Ended
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Dec. 31, 2015
Employee Benefit Plans [Abstract] |
Employee Benefit Plans | 18.Employee Benefit Plans First United Corporation sponsors a noncontributory defined benefit pension plan (the “Pension Plan”) covering the employees who were hired prior to the freeze and others who were grandfathered into the plan. 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 Pension Plan was amended to unfreeze it 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 First United Corporation 401(k) Profit Sharing Plan (the “401(k) Plan”). During 2001, the Bank established an unfunded supplemental executive retirement plan (the “SERP”). The SERP is available only to a select group of management or highly compensated employees to provide 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. On January 9, 2015, First United Corporation and members of management who do not participate in the SERP entered into participation agreements under the Deferred Compensation Plan, each styled as a SERP Alternative Participation Agreement (the “Participation Agreement”). Pursuant to each Participation Agreement, First United Corporation agreed, for each Plan Year (as defined in the Deferred Compensation Plan) in which it determines that it has been Profitable (as defined in the Participation Agreement), to make a discretionary contribution to the participant’s Employer Account in an amount equal to 15% of the participant’s base salary level for such Plan Year, with the first Plan Year being the year ending December 31, 2015. The Participation Agreement provides that the participant will become 100% vested in the amount maintained in his or her Employer Account upon the earliest to occur of the following events: (i) Normal Retirement (as defined in the Participation Agreement); (ii) Separation from Service (as defined in the Participation Agreement) following a Change of Control (as defined in the Deferred Compensation Plan) and subsequent Triggering Event (as defined in the Participation Agreement); (iii) Separation from Service due to a Disability (as defined in the Participation Agreement); (iv) with respect to a particular award of Employer Contribution Credits, the participant’s completion of two consecutive Years of Service (as defined in the Participation Agreement) immediately following the Plan Year for which such award was made; or (v) death. Notwithstanding the foregoing, however, a participant will lose entitlement to the amount maintained in his or her Employer Account in the event employment is terminated for Cause (as defined in the Participation Agreement). In addition, the Participation Agreement conditions entitlement to the amounts held in the Employer Account on the participant (a) refraining from engaging in Competitive Employment (as defined in the Participation Agreement) for three years following his or her Separation from Service, (b) refraining from injurious disclosure of confidential information concerning the Corporation, and (c) remaining available, at the First United Corporation’s reasonable request, to provide at least six hours of transition services per month for 12 months following his or her Separation from Service (except in the case of death or Disability), except that only item (b) will apply in the event of a Separation from Service following a Change of Control and subsequent Triggering Event. In January 2016, the Board of Directors of First United Corporation approved a discretionary contribution in the amount of $63,500. 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:
|  | Pension |  | SERP
(in thousands) |  | 2015 |  | 2014 |  | 2015 |  | 2014
Change in Benefit Obligation |  |  |  |  |  |  |  |
Obligation at the beginning of the year | $ | 39,348 | $ | 28,329 | $ | 5,827 | $ | 5,084
Service cost |  | 316 |  | 258 |  | 121 |  | 115
Interest cost |  | 1,579 |  | 1,478 |  | 239 |  | 220
Change in discount rate and mortality assumptions |  | (1,207) |  | 7,216 |  | 0 |  | 0
Actuarial losses |  | 841 |  | 3,401 |  | 190 |  | 499
Benefits paid |  | (1,461) |  | (1,334) |  | (88) |  | (91)
Obligation at the end of the year |  | 39,416 |  | 39,348 |  | 6,289 |  | 5,827
Change in Plan Assets |  |  |  |  |  |  |  |
Fair value at the beginning of the year |  | 38,967 |  | 34,848 |  | 0 |  | 0
Actual return on plan assets |  | (306) |  | 2,453 |  | 0 |  | 0
Employer contribution |  | 2,000 |  | 3,000 |  | 88 |  | 91
Benefits paid |  | (1,461) |  | (1,334) |  | (88) |  | (91)
Fair value at the end of the year |  | 39,200 |  | 38,967 |  | 0 |  | 0
Unfunded Status | $ | (216) | $ | (381) | $ | (6,289) | $ | (5,827)
|  | Pension |  | SERP
(in thousands) |  | 2015 |  | 2014 |  | 2015 |  | 2014
Components of Net Pension Cost |  |  |  |  |  |  |  |
Service cost | $ | 316 | $ | 258 | $ | 121 | $ | 115
Interest cost |  | 1,579 |  | 1,478 |  | 239 |  | 220
Expected return on assets |  | (2,965) |  | (2,653) |  | 0 |  | 0
Amortization of transition asset |  | (19) |  | (39) |  | 0 |  | 0
Amortization of recognized loss/(gain) |  | 781 |  | 374 |  | 49 |  | (17)
Amortization of prior service cost |  | 12 |  | 12 |  | 20 |  | 20
Net pension (income)/expense in employee benefits | $ | (296) | $ | (570) | $ | 429 | $ | 338
Weighted Average Assumptions used to |  |  |  |  |  |  |  |
determine benefit obligations: |  |  |  |  |  |  |  |
Discount rate for benefit obligations |  | 4.50% |  | 4.00% |  | 4.00% |  | 4.00%
Discount rate for net pension cost |  | 4.00% |  | 4.75% |  | 0 |  | 0
Expected long-term return on assets |  | 7.00% |  | 7.75% |  | 0 |  | 0
Rate of compensation increase |  | 3.00% |  | 3.00% |  | 3.00% |  | 3.00%
Mortality tables |  | RP-2014 |  | RP-2014 |  | N/A |  | N/A
The accumulated benefit obligation for the Pension Plan was $3 6.1 million and $35.7 million at December 31, 2015 and 2014, respectively. The accumulated benefit obligation for the SERP was $5.4 million and $4.9 million at December 31, 2015 and 2014, 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, 2015 and 2014, the value of Pension Plan investments was as follows:
December 31, 2015 |  |  |  |  | Fair Value Hierarchy
(Dollars in thousands) |  | Assets at Fair Value | % of Portfolio |  | Level 1 |  | Level 2
Cash and cash equivalents | $ | 2,260 | 5.8% | $ | 2,260 | $ | 0
Fixed income securities: |  |  |  |  |  |  |
U.S. Government and Agencies |  | 131 | 0.3% |  | 0 |  | 131
Taxable municipal bonds and notes |  | 2,869 | 7.3% |  | 0 |  | 2,869
Corporate bonds and notes |  | 8,774 | 22.4% |  | 0 |  | 8,774
Preferred stock |  | 542 | 1.4% |  | 0 |  | 542
Fixed income mutual funds |  | 2,736 | 7.0% |  | 2,736 |  | 0
Total fixed income |  | 15,052 | 38.5% |  | 2,736 |  | 12,316
Equities: |  |  |  |  |  |  |
Large Cap |  | 16,364 | 41.7% |  | 16,364 |  | 0
Mid Cap |  | 2,775 | 7.0% |  | 2,775 |  | 0
Small Cap |  | 1,061 | 2.7% |  | 1,061 |  | 0
International |  | 1,688 | 4.3% |  | 1,688 |  | 0
Total equities |  | 21,888 | 55.7% |  | 21,888 |  | 0
Total market value | $ | 39,200 | 100.0% | $ | 26,884 | $ | 12,316
December 31, 2014 |  |  |  |  | Fair Value Hierarchy
(Dollars in thousands) |  | Assets at Fair Value | % of Portfolio |  | Level 1 |  | Level 2
Cash and cash equivalents | $ | 1,043 | 2.7% | $ | 1,043 | $ | 0
Fixed income securities: |  |  |  |  |  |  |
U.S. Government and Agencies |  | 613 | 1.6% |  | 0 |  | 613
Taxable municipal bonds and notes |  | 2,525 | 6.5% |  | 0 |  | 2,525
Corporate bonds and notes |  | 8,393 | 21.5% |  | 0 |  | 8,393
Preferred stock |  | 478 | 1.2% |  | 0 |  | 478
Fixed income mutual funds |  | 5,049 | 13.0% |  | 5,049 |  | 0
Total fixed income |  | 17,058 | 43.8% |  | 5,049 |  | 12,009
Equities: |  |  |  |  |  |  |
Large Cap |  | 15,646 | 40.1% |  | 15,646 |  | 0
Mid Cap |  | 2,743 | 7.0% |  | 2,743 |  | 0
Small Cap |  | 1,305 | 3.4% |  | 1,305 |  | 0
International |  | 1,172 | 3.0% |  | 1,172 |  | 0
Total equities |  | 20,866 | 53.5% | 0 | 20,866 | 0 | 0
Total market value | $ | 38,967 | 100.0% | $ | 26,958 | $ | 12,009
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, 2015, the 25-year average return on pension portfolio assets was 7.95%, exceeding the expected long-term return of 7.00% utilized for 2015. Based on the actual performance experience noted above and long-term returns of relevant indices, a case could be built for retaining the expected returns at the existing level. However, there are a number of reasons that would support a lowering of the expected return. For example, since the early 1980’s, there has been a general trend of lower interest rates that have supported bond market performance in a positive manner. Such support would likely be reversed in the event that the general trend in rates reverses for an extended period of time. In as much, as bond market exposure represents a significant portion of pension plan assets, weaker performance from bonds would be reflected in pension returns. Also, expectations from global economic growth continue to be muted, in spite of the efforts of central banks around the world. Further, long-term average returns of benchmark indices are impacted by favorable markets during the 1990s that may or may not be repeated in the foreseeable future. Given the potentially higher possibility that future returns may face at elevated headwinds, it is considered prudent to lower the expected return assumption to 7.00%. The Pension Plan did not hold any shares of First United Corporation common stock at December 31, 2015 or 2014. Estimated cash flows related to expected future benefit payments from the Pension Plan and SERP are as follows:
(In thousands) |  | Pension Plan |  | SERP
2016 | $ | 1,337 | $ | 141
2017 |  | 1,429 |  | 204
2018 |  | 1,473 |  | 242
2019 |  | 1,552 |  | 303
2020 |  | 1,660 |  | 301
2021-2025 |  | 10,077 |  | 1,769
First United Corporation funded an annual contribution of $2.0 million to the pension plan in the fourth quarter of 2015. 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, 2015 and 2014, net of tax, are as follows:
|  | 2015 |  | 2014
(In thousands) |  | Pension |  | SERP |  | Pension |  | SERP
Unrecognized net actuarial loss | $ | 12,641 | $ | 306 | $ | 11,375 | $ | 217
Unrecognized prior service costs |  | 20 |  | 4 |  | 28 |  | 16
Net transition asset |  | 0 |  | 0 |  | (11) |  | 0
| $ | 12,661 | $ | 310 | $ | 11,392 | $ | 233
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 |  | 0 |  | 0
Net actuarial loss |  | 848 |  | 78
| $ | 860 | $ | 98

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