FIRST UNITED CORP/MD/ New Standards Disclosure

Recent Accounting Pronouncements

Newly Adopted Pronouncements in 2023

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326):  Measurement of Credit Losses on Financial Instruments, universally referred to as CECL.  The amendments in ASU, 2016-13 among other things, requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.  Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates.  Many of the loss estimation techniques applied previously are still permitted, although the inputs to those techniques changed to reflect the full amount of expected credit losses.  In addition, ASU 2016-13 amends the accounting for credit losses on purchased financial assets with credit deterioration.  For periodic report filers that are smaller reporting companies, such as the Corporation, ASU 2016-13 was effective as of January 1, 2023.

As part of its process of adopting the CECL accounting method, management implemented a third party software solution and determined the appropriate loan segments, methodologies, model assumptions and qualitative components.  Our CECL model includes portfolio loan segmentation based upon similar risk characteristics and both a quantitative and qualitative component of the calculation which incorporates a forecasting component of certain economic variables.  Our implementation plan also includes the assessment and documentation of appropriate processes, policies and internal controls.  Management had a third party independent consultant review and validate our CECL model.

In addition, ASU 2016-13 amends the accounting for credit losses on certain debt securities.  The Corporation did not record any allowance for credit losses (“ACL”) on its debt securities as a result of adopting this ASU.

The ultimate impact of adopting ASU 2016-13, and at each subsequent reporting period, is highly dependent on credit quality, macroeconomic forecasts and conditions, compensation of our loan portfolio, and other management judgments.  The Corporation adopted ASU 2016-13 using the modified retrospective method.  Results beginning after January 1, 2023 are presented under ASU 2016-13, while prior period amounts continue to be reported in accordance with previously applicable GAAP.  We made the accounting policy election to not measure an ACL for accrued interest receivables for loans and securities.  Accrued interest deemed uncollectible will be written off through interest income.

The following table illustrates the day-one impact of adopting ASU 2016-13.

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In connection with our adoption of ASU 2016-13, we made changes to our loan portfolio segments to align with the methodology of CECL.  Refer to Note 5, Loans and Related Allowance for Credit Losses, for further discussion of these portfolio segments.  The adoption of ASU 2016-13 resulted in a Day 1 adjustment of $2.9 million to our ACL, including an increase of $2.0 million to the ACL for loans and $0.9 million to the ACL for unfunded commitments.  The Corporation did not record any ACL on its available-for-sale or held-to-maturity investments upon adoption of ASC 326.  The Corporation recorded a net decrease to retained earnings of $2.2 million as of January 1, 2023 for the cumulative effect of adopting ASU 2016-13.  

In March 2022, FASB issued ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326):  Troubled Debt Restructurings and Vintage Disclosures.  ASU 2022-02, which eliminates the troubled debt restructuring (“TDR”) accounting model for creditors that have adopted ASU 2016-13.  Due to the removal of the TDR accounting model, all loan modifications were evaluated to determine if they resulted in a new loan or a continuation of the existing loan.  The amendments in ASU 2022-02 also required that entities disclose current-period gross charge-offs by year of origination for loans and leases.  The amendments in ASU 2022-02 were effective January 1, 2023.  This change did not have a material effect on our consolidated financial statements.  Refer to Note 5, Loans and Related Allowance for Credit Losses for disclosures for debtors experiencing financial difficulty and for vintage disclosures related to gross charge-offs by loan segment by year of origination.

Recently issued but not yet effective Accounting Pronouncements

In March 2020, FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848):  Facilitation of Reference Rate Reform on Financial Reporting.”  The amendments in ASU 2020-04 provide optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting.  The amendments provide optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from the London Interbank Offered Rate (“LIBOR”) toward new interest rate benchmarks.  Modified contracts that meet certain scope guidance are eligible

for relief from these modification accounting requirements in GAAP.  The optional guidance generally allows for the modified contract to be accounted for as a continuation of the existing contract and does not require contract remeasurement at the modification date or reassessment of a previous accounting determination.  The amendments in  ASU 2020-04 are effective for all entities between March 12, 2020 and December 31, 2022.  In December 2022, FASB issued ASU No. 2022-06: “Reference Rate Reform (Topic 848):  Deferral of the Sunset Date of Topic 848.”  The amendments in ASU 2020-06 defer the sunset date for applying the reference rate reform relief by two years to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.

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The Corporation has identified all known LIBOR exposures, created a plan to address the exposures, and continues to communicate with all stakeholders to transition to alternative reference rates.   As of December 31, 2023, the Corporation has no financial instruments tied to LIBOR and does not anticipate that the transition related to ASU 2020-04 will have a significant impact on our financial statements.

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In November 2023, FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280); Improvement to Reportable Segment Disclosures.”  ASU 2023-07 expands segment disclosure requirements for public entities to require disclosure of significant segment expense and other segment items on an annual and interim basis and to provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually.  ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within the fiscal years beginning after December 15, 2024.  Early adoption is permitted.  ASU 2023-07 is not expected to have a significant impact on our financial statements.

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In December 2023, FASB issued ASU No. 2023-09, “Income Taxes (Topic 740):  Improvements to Income Tax Disclosures.”  ASU 2023-09 requires public business entities to disclose in their rate reconciliation table additional categories of information about Federal, state, and foreign income taxes and to provide more details about the reconciling items in some categories if items meet a quantitative threshold.  ASU 2023-09 also requires all entities to disclose income taxes paid, net of refunds, disaggregated by Federal, state, and foreign taxes for annual periods and to disaggregate the information by jurisdiction based on a quantitative threshold, among other things.  ASU 2023-09 is effective for fiscal years beginning after December 15, 2024. ASU 2023-09 is not expected to have a significant impact on our financial statements.